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No comfort

Ram Prasad Sahu  |  Mumbai 

High debt and weak demand may keep the IHCL scrip under pressure over the near term.

India’s largest hospitality company, Indian Hotels (IHCL), which recently acquired the Mumbai-based and erstwhile Sea Rock Hotel, is having a tough time due to a dip in tourist arrivals and a business downturn.

With global world tourism likely to witness a 3.5 per cent decline in growth for CY09 according to World Travel and Tourism Council, expect revenues per available room (RevPAR) for the sector to dip by about 10-15 per cent.

This will have a negative impact on companies such as Indian Hotels grappling with losses from overseas properties, higher leverage and increased operating expenditure. Though liquidity conditions have eased partly, tourist arrivals in India are down by three per cent in April while RevPAR across 10 key cities is down by 42 per cent year-on-year indicating that the slowdown continues to dog the sector.

in Rs crore FY08 FY09 FY10E
Net Sales 2,984 2,711 3,389
Operating profit 956 583 779
Net profit 354 12 315
*P/E (x)          --    381 15
* EPS for FY09 includes foreign exchange currency loss
E: Analyst estimates
Source: Company, analyst reports

Sea Rock acquisition
The company acquired the 480-room Sea Rock property for Rs 680 crore from ELEL, a subsidiary of the Claridges chain. This hotel chain had purchased the property from the original owners for Rs 330 crore in 2005. Indian Hotels which has a property, Taj Land’s End, across the road from Sea Rock intends to bring down the existing structure and put up a high end luxury hotel with a convention centre over the next two years at a total cost of Rs 500 crore.

The company intends to fund the cost of acquisition and construction from the Rs 1,447 crore it raised from a rights issue recently and internal accruals. The management believes that proximity to the existing property and to the recently constructed Bandra-Worli Sea link are the twin benefits of the acquisition.

Expansion plans
The company has been increasing its room inventory over the last few years with the current capacity at 11,546 rooms up 45 per cent since 2003-04. The company plans to add 1,794 rooms in 2009-10 taking its capacity to 12,722.

Of this, in addition to the 468 room additions in the budget category, new room additions in the luxury space includes expansion at Taj Land’s End (120 rooms) and new properties at Hyderabad (60 rooms) and Yeshwantpur (333 rooms). For 2009-10, the company plans to invest Rs 300 crore in upgrading its existing assets. Its 565-room flagship (The Taj, Mumbai) is likely to be reopened towards the end of the year.

US operations
While the domestic operations were hit by the terror attacks last year, the company’s international operations which contribute about a third to the revenues have also been going through a rough patch.

This is due to the business downturn and losses on its US properties, which include the Campton Place (San Francisco), Taj Boston and The Pierre. Higher overhead costs over the last one year has been an issue as The Pierre, a 184-room hotel in New York operated by the Taj on a 30-year management contract, has been undergoing renovation at a cost of Rs 500 crore.

In addition to these properties, its Rs 1,300 crore investment for an 11.5 per cent stake in the Orient Express Hotels, a New York-listed hospitality company is also quoting below the cost price. The stake (now reduced to 9.3 per cent after a fresh issue) picked up in 2007 has lost 87 per cent of its value due to sharp fall in the Orient’s share price. Going ahead, while the revenue streams is likely to improve with the opening of the The Pierre in August, business conditions are unlikely to improve in the near term.

The terror attacks on the Taj Mumbai had an impact on the revenues of the company as the hotel contributes about a fifth of Indian Hotels’ revenues.

Though the company received Rs 82 crore in insurance refund due to the loss of business, the dip in overall occupancy to 62 per cent in 2008-09 from 73 per cent in the previous fiscal, a 2 per cent dip in average room rents to Rs 10,504 per day saw revenues come down by 8 per cent on a standalone basis.

While revenues on a consolidated basis were down 9 per cent y-o-y, earnings were lower by 96 per cent due to higher interest costs (up 14 per cent to Rs 230 crore) and a forex translation loss of Rs 51.6 crore. In a way, 2008-09 was an extra-ordinarily tough year for the company.

However, increasing debt due to acquisitions currently pegged at Rs 4,600 crore, higher operating expenses and interest costs have meant that the profitability ratios have been on the downtrend.

Analysts at Citi estimate that while EBIDTA margins will drop by 600 bps to about 23 per cent in 2009-10 from 29 per cent in 2006-07, return on equity and capital employed are also expected to drop to 9.5 per cent (18.6 per cent) and 7.3 per cent (9.6 per cent) over the same period. Although these are relatively better as compared to 2008-09, these numbers don’t excite and are also visibly lower as compared to previous years.

While the opening of key hotels over the fiscal should improve cash flow to about Rs 500 crore for 2009-10, the need to fund expansions and higher interest costs means that the current fiscal will be a tough mountain to climb.

Even as the company’s earnings are likely to spurt in 2009-10 (due to low base in previous year) and considering that the stock price has dropped over 20 per cent since its June highs, it is still in expensive territory as the business environment and tourist traffic have not shown signs of picking up yet.

First Published: Mon, June 29 2009. 00:26 IST