Room For Growth

Hotel stocks may see some action as analysts see a jump in occupancy rates in the coming months

Fiscal 2002 was miserable for the hotel industry. The reasons: the recession that had hit the world and the terrorist attacks in September 2001. The result: the international flow of tourists had almost completely halted.

For India, the effect was more pronounced. The terrorist attacks came at a time when India's tourist season begins. This coupled with the riots in February and the travel advisories that were to follow meant that there was a sharp fall in flow of tourist traffic to the country. These factors combined with the war clouds over Iraq dealt a body blow to the flow of tourists to India. However, analysts expect the tourism industry to pick up in India. Especially, the hotel chains that had borne the brunt of the downswing should be well on the growth path.

 

The reason for this is that the negative factors that had led to a decline in the fortunes of the industry are not present this year. The travel advisories have been withdrawn and the effect of the September 11 attacks has waned. Therefore, Navjeet Ahluwalia, senior associate, HVS International, says that there should be an increase in occupancy rates followed by a jump in rates in the coming few months.

To analyse the direction of growth in the industry it is important to understand the concept of revpar. Revpar is the ratio that seeks to analyse the effect of a fall in the room rates on the revenue of a hotel.

That is whether the increase in occupancy has been enough to make up for the fall in the room rate. The rate has been declining for the last two years. However, the fall this year has been far lower than the fall in the previous financial year.

For major cities such as Delhi, Goa and Bangalore, the fall in revpar has come down from way over 10 per cent to less than five per cent over the current fiscal. November-February being the period that experiences the maximum rush, there should be a jump in the revenue for the hotel industry.

Therefore, the hotel industry is one that can be favourably looked at for investment purposes.Within the hotel industry, Indian Hotels has managed to perform better than its peers on financial grounds. It has shown a profit of Rs 6.31 crore in the half year ended September 2002 as compared with a loss of Rs 2.88 crore suffered by East Indian Hotels.

The company has remained in the black due to the increase in other income that showed a 19.83 per cent rise. The revpar indicator shows that the company may achieve stability on the revenue front. This can be seen by the fact that, for quarter ended september 2002, revpar for the company has declined by 1.19 per cent on a quarter-on-quarter (QoQ) basis as compared with a decline by 7.3 in per cent on a year on year (YoY) basis. Since the best tourist season is yet to come, the company should be able to witness a rise in revenues.

Indian Hotels has been concentrating hard at cost reductions. This is vital for an industry that is in the grip of recession. The company has hired McKinsey to help it to restructure its cost structure. This will enable it to reduce its cost of operations and improve its competitiveness.

Indian Hotels is in the midst of a major restructuring exercise where separate brands will be created for luxury, leisure and business segments. The restructuring will be on the lines of the major hotels in the west where different brand names cater to different market segments.

The segmentation will Indian Hotels to service its clients better. The restructuring will bring it on par with the internationally acclaimed hotel chains such as Six Continents which have different brand names for different segments to which they cater.

The company is planning a foray into the budget hotels. This will provide the company a hedge. This is as the business for budget hotels does not decline as much as the luxury hotels in bad years.

The company has obtained a licence to run the Scindia family-owned Usha Kiran Palace in Gwalior, and a 'kothi' in Jaisalmer which they will convert into a heritage site. These hotels should give the Indian Hotels leverage when the markets pick up as its competitors have gone into hibernation in the wake of the market gloom that they have suffered.

Moreover, it has got a new hotel in north Mumbai that should do well once the Bandra-Worli sea link is constructed. Therefore, Indian Hotels is in a good position to take advantage of any increase in the tourist traffic that may take place.

The restructuring of the company and its foray into budget hotels show that it is well aware of the changing face of the industry and is preparing itself to meet it head on. The measures should improve the revenues in times that the business is growing and reduce the fall in revenues in the years that the tourism industry falters.

Indian Hotels has performed better than East Indian Hotels this year. It has managed to show a profit in a year where most hotels have shown a loss. For the current year, the East Indian Hotels has shown a loss of Rs 2.88 crore as compared with a profit of Rs 12.23 crore for the half year ended September 2001.

Additionally, it is trading at a profit-to-earning ratio (P/E) of 201 as compared with East India Hotels' P/E of 264. Since Indian Hotels has much better financials than East Indian Hotels, it would be fair to expect that the price of the former would increase.

Recently, there have been talks of ITC Hotels making an open offer to take over East Indian Hotels. ITC has been increasing its stake in East Indian Hotels over the past year. The Oberois, on their part, have also been gradually increasing their stake to prevent a hostile takeover. Given the face off between the financial institutions and grasim over the price for the open offer of L&T, the price of East Indian Hotels could be headed in the upward direction.