Stocks of India’s top hotel companies, namely Indian Hotels (IHCL), EIH and Hotel Leelaventure, have outperformed the Sensex in the past one week consequent to positive news flow like promoters raising stake (including conversion of warrants), rights issue by associates and restructuring of repayment plan, respectively.
Investors have welcomed these moves and accordingly stocks have jumped by as much as 16 per cent in a week. However, fundamentals of the hotel industry haven’t changed and there is little chance of a recovery in the medium term.
Says Binaifer Jehani, director, Crisil Research, in an August 2012 report, “Over the next two years, growth in room demand is expected to remain subdued due to continuing global economic downturn. On the other hand, supply will exceed demand. Thus, while occupancy rate (OR) is expected to hit decadal lows, average room rates (ARR) will dip by 10 per cent over the next two years.”
In a September 11 report, Crisil Research said profitability of premium hotels (5-star and 5-star deluxe) is expected to plunge in FY13 and FY14 with operating margins seen dropping to just over 16 per cent in FY14, the lowest in 10 years.
While the recent data from hotel.com (Hotel Price Index report) and ministry of tourism show a pick-up in ARR (up 12 per cent year-on-year in first half of 2012) and foreign tourist arrivals (6.6 per cent in January to July period), respectively, currency fluctuations and global uncertainties will continue to affect tourist arrivals.
Also, entry or expansion by foreign players like Vantage Hospitality, Marriot, Starwood Hotels, Intercontinental Hotels, Keys Hotels (Berggruen Hotels) and Carlson will only intensify competition. Since the impact of any pick up in the economy due to government’s recent reform measures will only be reflected on companies’ financial performance with a lag, analysts advise that investors stay away or be selective. Majority of analysts like IHCL’s business model and are advising to accumulate.
IHCL
Tata Sons, principal holding company of $83.5 billion Tata Group, has been accumulating shares in various group companies. Recently, it increased its stake in IHCL to 24.93 per cent through open market purchases of 4.63 million shares. In June 2012, it converted 48 million warrants into equity shares (at Rs 103.64 each), thereby, increasing stake from 19.6 per cent to 24.4 per cent. This translated into capital infusion of Rs 497.5 crore helping improve IHCL’s debt-equity ratio to little over 1 from 1.3.
| BETTER OPERATIONAL OUTLOOK | ||||||||
| In Rs crore | Net Sales | Operating Profit | Net Profit | P/E (x) FY14E | Debt-equity FY12 (x) | |||
| FY13E | FY14E | FY13E | FY14E | FY13E | FY14E | |||
| Indian Hotels | 3,846 | 4,230 | 621 | 724 | 95 | 154 | 32 | 1.3 |
| % change y-o-y | 12.0 | 10.0 | 13.7 | 16.6 | 2538.9 | 62.1 | ||
| EIH | 1,535 | 1,691 | 360 | 409 | 158 | 204 | 25 | 0.2 |
| % change y-o-y | 8.4 | 10.2 | 5.9 | 13.6 | 39.8 | 29.1 | ||
| Hotel Leelaventure | 624 | 689 | 115 | 194 | -231 | -184 | NA | |
NA
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Analysts say this is a good move as it helps improve profitability due to savings in interest cost (five per cent of sales or 43 per cent of consolidated operating profit in June 2012 quarter). Since funding of on-going projects would be done through internal accruals and there is no new major capex lined up, incremental cash generated can now be utilised to further repay debt, says an analyst. In the long-run, analysts are expecting substantial improvement in profitability led by better operational performance. However, at Rs 68 valuations are not cheap. Hence analysts are advising to accumulate on dips.
EIH Associated Hotels
Unlike its 14 per cent contribution to EIH’s consolidated revenues, EIH-A’s share in net profit (adjusted after exceptional items) in FY12 was only 9 per cent. This is because of high interest costs (47 per cent of its operating profit).
Like Indian Hotels, the company is not looking for any specific expansion plans for acquiring or developing new properties or expansion of its existing eight hotels. Though rights issue will see a 55.5 per cent increase in equity capital, repayment of loans will improve profitability. However, investors having a long term horizon can consider entering the stock or subscribing to the rights issue.
For EIH, Sumant Kumar, analyst, Elara Securities notes in his post-result report (August 7), “Sluggishness persisted in the June quarter with stagnant ARR and OR followed by pressure on margins. EIH has not invested in any project thereby stunting growth by capping ARR and OR. Thus, valuation triggers are missing.”
Hotel Leelaventure
The company has the highest debt-equity ratio among peers and interest cost formed a whopping 55 per cent of consolidated revenues in the June quarter. But recently it got shot in the arm after getting 24 month moratorium for outstanding principal amount of Rs 3,000 crore (total debt of Rs 4,300 crore) and 23 months moratorium for interest too.
The company also announced fund raising of Rs 1,100 crore, which includes preferential allotment of equity shares worth Rs 100 crore to promoters.
Going ahead, it plans to pursue an asset light growth strategy, which includes selling assets, taking back the property on management contract and paying off debt. It did the same with Kovalam property (Kerala) in 2011 wherein it realised Rs 500 crore. However, Hotel Leela is not done with its expansion plan. With the launch of ‘Essence’ (entry level five star business class hotel) in couple of months (tier-II city) and other properties in Chennai, Agra, Jaipur, Bengaluru, Noida and Kerala, the company targets to increase its total room count by over 75 per cent to 3,500 rooms in the next five years . Hence, debt levels are expected to remain high.