2009-10 was not a good year; but rising occupancies could now boost revenues and profits.
ITC’s recent move to hike its equity holding in rival Hotel Leela, which follows a similar exercise earlier to up stake in EIH, could trigger investor interest in hotel stocks. What’s more important is that underlying fundamentals are improving, pointing to better days for the hospitality industry. Although the March quarter results of India’s largest hotel companies have been a mixed show, analysts believe a strong pick-up in demand and the expected rise in occupancies should improve future numbers.
Demand improvement
While the sector was struggling since the second half of 2008-09 due to negative travel advisories and security concerns, there has been a strong pick-up in foreign tourist arrivals (FTAs) since December 2009. Given the recent increase in arrivals, analysts estimate FTAs will increase from 5.1 million in calendar year 2009 (CY09) to about 5.8 million and 6.6 million in CY11 and CY12 respectively. Further, domestic tourist flow, which is growing 12 per cent annually, will touch 760 million by CY11.
| CHECKING OUT A TOUGH YEAR | |||
| in Rs crore | Indian Hotels | Hotel Leela | EIH |
| Net Sales | 2,516 | 436 | 1,038 |
| % change y-o-y | -7.0 | -3.5 | -13.4 |
| Ebitda | 393 | 127 | 293 |
| Ebitda margin (%) | 15.62 | 29.13 | 28.23 |
| Net profit | -137 | 40.4 | 66.31 |
| EV/Ebitda* (x) | 13.5 | 16.7 | 14.2 |
| EV/Room* (Rs cr) | 1.05 | 1.64 | 1.29 |
| *Analysts’ estimates based on FY12 financials | |||
Both domestic and international tourism will also be boosted by events such as the Commonwealth Games, the ICC World Cup, Formula One and the Fifa World Cup over the next one year.
Supply mismatch
Elara Securities estimates India has about 1,14,000 rooms across all categories, with the shortfall pegged at 1,56,000 rooms. While hotel majors had announced the development of about 1,00,000 rooms (five- and four-star categories), only about 60,000 are likely to come up. Developers are going slow due to credit issues, high land prices and construction delays.
Due to this demand-supply mismatch, the firm expects average occupancy rates to move up from 72 per cent in CY2012 to 81 per cent in CY2015, boosting average room rates (ARRs). This is akin to what happened between the financial years 2004-05 and 2007-08, when ARRs doubled and occupancies were up 700 basis points to 70 per cent. Analysts expect companies that have a diversified presence, in terms of geography and category, stand to gain the most. EIH
Lower occupancies on account of travel advisories and the economic slowdown (in the first half of the year) saw EIH’s 2009-10 sales fall 13.4 per cent. Operating profit margins, too, suffered a 750-basis point hit at 28 per cent. Going ahead, in addition to its recently commissioned 440-room Bandra-Kurla project in Mumbai, the company plans to launch another 520 rooms till 2011-12 in Gurgaon, Hyderabad and Bangalore. This will take its room count to about 4,000. Though the addition of rooms is at a slower pace compared to peers, the company continues its focus on the luxury segment. The company will benefit from the uptick in occupancies that is likely to come about. The stock could see some action if ITC, which has just under 15 per cent in the company, increases its stake.
Hotel Leela
While the hotel’s March quarter revenues jumped 30 per cent due to a low base effect, sequential growth was muted at 4 per cent. The low base effect also meant margins and net profits for the quarter more than doubled year-on-year. While occupancies and average revenue rates were down 100 basis points to 63 per cent and 18 per cent to Rs 9,500 for the year, operational metrics have improved in the second half.
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Edelweiss estimates opening of Hotel Leela’s Delhi property and leasing out of a Chennai business park will raise operating profit margins over 600 basis points to 35.4 per cent in 2010-11. However, higher interest costs and depreciation are likely to affect net profit.
The upsides from the launch of the Delhi property are already factored into the stock price, which is the most expensive among larger peers.
Indian Hotels
India’s largest hotel company has had a good March quarter, registering a 1,200-basis point jump in its occupancies to 76 per cent. Though average room rates were down, the high occupancy levels helped increase its revenue per available room to Rs 7,359, about 10 per cent more year-on-year.
The company, which added 822 rooms in 2009-10, plans to add another 1,647 rooms in 2010-11, taking the total room count to about 14,000.
Restructuring of its debt (Rs 4,400 crore, currently) and fund raising in the last fiscal will mean lower interest outgo and no liquidity pressures in the near term. On the operations front, while domestic metrics are looking good, the pace of recovery in the US, where it has three properties, will be crucial.
At Rs 103, the stock is cheapest among its peers on 2011-12 estimates, and should fetch about 20 per cent from these levels.