Stock Review: INDIAN HOTELS

 

THE third-quarter performance of Indian Hotels Company may have disappointed investors, especially with the marginal one-time 'other operating expense' of . 134 crore invested on prelaunch marketing and advertising of its Hyderabad-based Taj Faluknama and its Mumbai-based Taj Palace. In the quarter to December, the company's net profit declined to . 50 crore as against . 64 crore in the last year's December quarter.

   But over the next few quarters, it could reap benefits from its overhauling (pruning of debt and re-branding of its hotels) exercise and the expansion it undertook in the nine months ending December quarter. Analysts have upgraded their recommendations on the stock to a 'buy'.

   Among the positives is the fact that the company is funding its expansion from its internal accrual. Given the capital-intensive nature of the hospitality business, many hotels over-extend their balance sheets in expanding their reach and enhancing their services. Indian Hotels is also cutting its debt by about 18% of its total consolidated debt by issuing warrants to its promoters Tata Sons. As of FY10, the company had a debt of . 4,482 crore, considering its consolidated operations.

   The business prospects for the industry are looking up with an improvement in occupancy levels and average room rates. Indian Hotels Company's net sales from operations have shown an improvement of over 10% on a quarter-on-quarter basis, in contrast to the decline in net profit. This suggests continued momentum in the business and leisure travel segments. For the 9-month period ended December 2010, the company's average room revenues were up 7% to . 8,975 and its occupancy rates rose 3% to 66% compared with the 9-month period of last fiscal. The management has said that locations such as north Mumbai and Goa have registered improved occupancy and average room rates, while cities such as Pune, Chennai and Bangalore are holding out. The company is the only player in the hospitality industry to have expanded across all segments of hotels, from upscale to premium, and this gives it an advantage over its peers. This fiscal, the company would add 1,219 rooms spread over various properties. The impact of this should be seen in the first half of FY12.