Indian Hotels

The Sea Rock acquisition makes Indian Hotels a dominant player in the central Mumbai market.
INDIAN Hotels Company (IHCL) recently acquired Sea Rock Hotel in Mumbai for Rs 680 crore. It has picked up 85% stake in ELEL, which holds a long-term lease of the land on which Sea Rock is built. How does this acquisition help IHCL, going forward?

Current scenario:

The domestic hotel industry has suffered in the past six months due to the global slowdown and terrorist attacks on the country’s financial capital. And it seems a tad difficult that occupancy levels would be higher in the immediate future. In FY’09, the average occupancy at Indian Hotels fell to around 66% from 73% in FY’08. The company understandably had lower average room rates (ARR) during the year, which resulted in a 38% drop in the stand-alone net profit at Rs 234 crore.

Impact of the Sea Rock deal:

IHCL is planning to demolish Sea Rock and erect a new hotel complex, which will also house a convention centre, besides commercial and retail outlets. The company plans to integrate the site with Taj Lands End in Bandra within three years. The funds for the acquisition would come from last year’s Rs 1400-crore rights issue and internal accruals. The location of Sea Rock would be the biggest advantage for IHCL. It has a better view as it is right on the seashore compared with IHCL’s other property Taj Land’s End. Now, the Taj Group would have five prime hotel properties in Mumbai. It would increase its footprint in central Mumbai as the city will see the opening of the Bandra-Worli Sea Link. After the sea link opens, the Chhatrapati Shivaji International Airport will be barely 10 minutes’ driving distance from the Sea Rock Hotel site. This augurs well for the Taj Land End’s property.

Currently, IHCL has 97 hotels and 11546 rooms, including hotels belonging to its subsidiaries, associate companies, JVs and management contracts. For FY’09, the company plans to add nearly 1800 rooms. This addition would come in the backdrop of declining revenues sales. Total revenue in FY’09 fell by over 10% to Rs 3918 crore, while the number of rooms increased by a similar percentage. IHCL’s financial appears to be a concern. The company’s profits are falling, while its interest expenses have increased. Its profit before other income, interest and taxes as a proportion of interest payments shrank from 4% in FY’08 to 1.7%. If the profits continue to fall further, the company may find it difficult to service its debt. The Sea rock deal would not increase IHCL’s debt further.

Currently, IHCL’s stock is trading at 18 times trailing twelve months earnings. This is on the higher side, given that its smaller peers including Hotel Leelaventures and Asian Hotels are trading at a P/E of over nine. IHCL’s stock price currently equals its book value. Historically, the stock has seen a strong resistance at this level of price-book value ratio. The hotel sector is likely to witness sluggish demand for the next two-three quarters. It remains to be seen whether IHCL is able to leverage its latest acqusition to improve its performance in the coming quarters.