With the global economy still weak, it could be a while before occupancies rise and room rates move up.
With the economy in a downturn, Indian Hotels was not really expected to turn in good numbers for the June 2009 quarter. But occupancies, estimated at 40-45 per cent, were lower than estimated and coupled with low average room rates (ARR) resulted in the stand-alone top line coming off by 24 per cent, way below the Street’s expectations.
Since fixed costs, such as expenses on employees, remained high, the operating profit margin crashed to 12.1 per cent from 31 per cent in the June 2008 quarter. Had it not been for extraordinary income, the company would have reported a loss of Rs 27 crore. The second half of the year could see business picking up, though it’s likely to be a while before ARRs and occupancies move up meaningfully because neither foreign businesspeople nor tourists are likely to travel to India in large numbers anytime soon.
Moreover, since Indian Hotels has several overseas properties, consolidated numbers could stay weak till the global economy recovers. The average occupancy at Indian Hotels was around 66 per cent in the year to March 2009 but is likely to be lower this year. A couple of the chain’s overseas properties could remain in the red. The Pierre in New York, however, will be soon re-opened after being renovated and much depends on how it performs. After all, the US is a key geography for Indian Hotels as it accounts for about a fifth of its revenues. It’s not simply that the business is dull.
The company remains fairly highly-leveraged with a debt of Rs 4,600 crore at the end of March 2009, implying a debt to equity ratio of around 1.4. Revenues are expected to rise just about 15 per cent this year over the Rs 2,712 crore posted last year while net profits are expected to be in the region of Rs 100 crore. The Indian Hotels stock has rallied about 18 per cent since May while the Sensex has gained 27 per cent. Given that the earnings growth will be weak, at least in the first half of the year, the stock could continue to underperform.