With the economy on an uptrend, resulting in higher disposable incomes and more business and leisure travellers, the hotel companies are in the throes of a boom.
Insight
With the economy on an uptrend, resulting in higher disposable incomes and more business and leisure travellers, the hotel companies are in the throes of a boom. This is discernible from the numbers posted by them in terms of higher occupancy rate and average room rates (ARR), leading to improved financials, viz., higher revenues and operating profits.
For Indian Hotels (IHCL), the standalone net sales for Q4 2007 stood at Rs 505.20 crore, up 39.2%. The operating profit at Rs 245.80 crore translated into a margin of 42%, which is a jump of 590 basis points as compared to Q4 of previous year. Indian Hotels’ net profit at Rs 134.50 crore reflects a growth of 70.6% y-o-y.
This was on the back of high occupancy rate for the quarter at 83% (79% in Q4 last year) and average room rates stood at Rs 11,082, up 27% y-o-y; both were at their respective highest in more than eight quarters. The overall trend for these parameters on a sequential basis was also encouraging and clearly indicates good pricing power with the hotels, in view of increased demand, which can be satisfied without incremental capital expenditure. This is again underlined by the increased revenue per available room to Rs 9,194, up by 31%.
For FY’07, Indian Hotels’ consolidated income stood at Rs 2,665.87, up 39%, and operating profit at Rs 637.93 crore, up 78%. The company merged five subsidiaries with it last year and acquired a hotel in Boston (now Taj Boston) in Q4. Also, the share of revenues from overseas hotels was higher during 2006-07. All this restricted margins expansion to an extent. Besides, net profit was also subdued on a consolidated basis on account of higher interests and depreciation. Thus, consolidated net profit at Rs 370 crore was up 49% y-o-y.
In terms of expansion, in the near-term, Indian Hotels will see five new properties being added to its current tally of 81 hotels (9,901 rooms); of this, two are owned and three under management contracts. Expansion at its six domestic and three international hotels is also underway and expected to be operational between April 2008 and April 2009. Lastly, its budget-hotel, viz. Ginger, will see about 2,000 rooms being added through over 20 new properties. All this will ensure that room inventory does not fall short, if demand remains robust. Going forward, its strategy of geographical diversification and increasing the contribution of fee-based income through managed properties should stand it in good stead.
EIH, another leading player, reported total income of Rs 315.70 crore, up by 21%, for Q4 2006-07. The operating profit at Rs 122.34 crore was up 25% and margins improved by 30 basis points to 41%. The net profit of Rs 59.30 crore was up 59%. It would have been higher but for the loss from foreign currency swap transactions.
Notably, 60% of EIH’s revenues accrue from its hotels in Mumbai and Delhi, which makes IHCL a better bet, although EIH’s strategy of management contracts and air catering business provided the boost.
For the full year, EIH’s income at Rs 939 crore, up 24%, was fuelled by higher ARRs at Rs 10,700 and occupancies at 71%. The Air catering business posted a 25% rise in revenues at Rs 125, clearly reflecting the buoyancy in the airline industry. The black spot was EIH’s Mashobra Resort, wherein its poor performance impacted EIH’s consolidated numbers.
Overall, the sector appears to be on an upswing backed by strong ARRs and occupancy levels and companies focusing on fee-based income should outperform the sector. This bullish trend has seen companies earmarking Rs 4,500 crore of investments, which will result in more than 6,500 rooms being added, over the next couple of years.
At an estimated PE of 18 for FY 2008, the companies may be market performers provided the economy continues its forward march. For investors looking at this sector, IHCL appears to be a better bet, although one needs to keep an eye on the demand-supply gap in the industry over the longer term, which will determine their pricing power and, also profitability.
Contributed by Devangi Bhuta
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