Indian Hotels pares losses, cuts debt under outgoing chief Rakesh Sarna

Asset sales and capital raising help lower debt, improve debt-equity ratio

Rakesh Sarna, outgoing managing director and chief executive officer of the Tata group-owned Indian Hotels Company (IHCL), has managed to reduce the company’s debt, debt-equity ratio and losses during his tenure.  

IHCL, owner of the Taj Group of Hotels, shed Rs 1,143 crore gross debt in financial year 2016-17 as it sold Taj Boston for Rs 839 crore ($125 million) and divested its entire holding in Belmond (Orient Express) for Rs 455 crore ($68 million). In 2015-16, conversion of debentures into equity helped the company reduce its debt by Rs 1,000 crore, which was added to its net worth. 

Both moves helped Indian Hotels reduce its debt-equity ratio from 2.3 times in FY15 to one at the end of March 2017. 

For the past eight years, the company has been making losses at the net level, except for a tiny profit in one year. In FY14, its loss peaked at Rs 554 crore, and in September that year, Sarna took over as managing director and chief executive officer. Since then, the net loss has come down consistently and fell to Rs 63 crore in 2016-17. 

Sarna had a three-pronged strategy when he joined: to recalibrate its three US hotels and plug cash outflows, exit Orient Express, and start the Sea Rock property in Bandra, Mumbai. Sale of the US property and the exit from Orient Express have taken place but Sea Rock is not operational. 

While his target of making the firm profitable in two years hasn’t happened, he leaves it in much better health than when he took over. The company’s earnings before interest, depreciation and tax have gone up 10 times from Rs 64 crore in FY14 to over Rs 650 crore, both in FY16 and FY17. The company’s stock price has gone up 40 per cent under Sarna's tenure, twice that of the Sensex. 

Sarna, selected by former Tata group chairman Cyrus Mistry, resigned from the company last Friday, citing personal reasons. A veteran of the hospitality business, Sarna had worked with the Hyatt Hotels Corporation for about 30 years. He would step down from his position at the end of September.

The worst could be behind IHCL. “The management has indicated that the company’s gross debt has peaked out and will focus on debt reduction. The divestment of Taj Boston is one such step in the direction of debt reduction,” said Rashesh Shah, analyst at ICICI Securities in his note to investors. 

Further, the firm has created a 100 per cent offshore subsidiary consisting of eight owned hotels (1,584 rooms) across the US, the UK, Sri Lanka and Maldives that could be used as a channel to improve the liquidity position in future. IHCL also has about 900 acres of land that could be used to reduce debt. “IHCL is going to follow an asset-light business model by undertaking more of management contracts, thereby keeping debt under check,” said Shah. 

To be fair, the Tata Group had begun making efforts to revive the fortunes of the hotel company before Sarna came on board, by selling loss-making overseas properties and the convertible debenture issue, which gave the company immediate funds and improve its debt-equity ratio after the conversion into equity.  

The firm sold off its 100-room property in Sydney, Australia, for Rs 180 crore in July 2014 under the leadership of previous MD & CEO, Raymond Bickson, who left in August 2014. Sarna inherited the loss-making hospitality business, and focused on managing costs and improving operating performance. However, the firm’s revenue has reduced from Rs 4,188 crore in 2014-15 to about Rs  4,010 crore, partly because of the asset sales.  

“The divestment of loss-making international businesses, the auction of Taj Mansingh, and faster approvals from the ministry of environment and forests for Hotel Sea Rock's expansion will be key triggers in the medium term,” said Rahul Veera, analyst with domestic brokerage Elara Capital. “The domestic business will continue to deliver healthy performance, backed by favorable macro environment and demand-supply mismatch in the overall premium hotel market.”