Improving economic conditions should boost volume growth in the hospitality and aviation sectors.
The recovery for the hotel and aviation sectors has been slow. While still not there yet, these two are the last off the blocks as spends on them are considered discretionary. However, the early signs of activity are visible. The airline data for August 2009 shows a 26 per cent jump in passenger volumes year-on-year to 36 lakh, the third month of double digit growth over the previous year.
The news in the hospitality sector too is encouraging. Reeling under the global economic slowdown, the onslaught of the Mumbai attacks in late November last year and the swine flu outbreak over the last couple of months, the sector got a boost with tourist arrivals touching 4.32 lakh for the month of July, marginally higher than last year but 27 per cent higher than in June 2009.
The stocks in both sectors have been buzzing of late. While the hotel space is up on increase in occupancies and room rents, the airlines space has caught the investors’ fancy due to higher demand and plans of airlines to raise funds mainly to repay debt.
Going ahead, airline passenger volumes are expected to jump by 12 per cent for the current fiscal.
Says Sridhar Chandrasekhar, head, CRISIL Research, “Domestic demand is expected to grow by 12 per cent in 2009-10 driven by low ticket prices offered by carriers, improved economic environment resulting in increasing business and leisure travel.”
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Analysts estimate a further 13.5 per cent increase in passenger volumes in 2010-11. The sector has also been improving its operational performance thanks to the reduction of aviation turbine fuel costs by half from a peak of Rs 72 per litre in August, 2008.
For the hospitality sector, while tourist arrivals are expected to grow, supply is also expected to rise significantly. Crisil estimates that supply in the premium segment will move from about 33,000 rooms in 2009-10 to about 47,000 rooms in 2013-14, demand in this period will move up from 17,000 rooms to about 30,000 rooms. Increase in supply is likely to hamper growth in room rates.
Says Manav Thadani, managing director, HVS India, a hospitality consultancy, “The introduction of new supply will prompt significant rate correction as operators lower rates in response to the increased competition in the market and try to maintain market share.”
We review the performance of the key players in both these sectors and the outlook for them going ahead. Jet Airways
India’s largest airline has been going through a tough phase in the recent past. A five-day strike by a section of its pilots in September is estimated to have left an Rs 100 crore hole in its revenues.
While the airline has been able to resolve the dispute and recover quickly, the strike and subsequent cancellations not only caused revenue loss, but also disgruntled customers which could impact it in the short term.
In order to arrest a fall in market share, ensure higher loads and lower cost, the company has been expanding the services of its no frills all-economy class offering, Jet Konnect.
From a third, the company is expected to deploy two-thirds of domestic fleet on Jet Konnect from October this year. Ever since the launch of Jet Konnect in May 2009, domestic load factors have improved to 70 per cent from 64.9 per cent in April.
Overall, in the domestic operations, from losses at the operating profit level in June quarter of last year, cost cutting, reduction in aviation fuel costs and higher loads have helped boost operating profit margins to about 9 per cent in June 2009 quarter. On a consolidated basis, these stood at 16.5 per cent for June 2009 quarter against losses in the same quarter last year.
The company is planning to raise $400 million (about Rs 2,000 crore) from an equity issue of which half will be used to retire a part of the Rs 15,000 crore debt (Rs 3,500 crore short-term debt), while the rest will be used for working capital requirements.
A reversal of industry fortunes should help Jet improve its financial and operational parameters. The stock is trading at 18 times its 2010-11 estimated earnings and should fetch about 20 per cent over a one year period from these levels, if the macro factors don’t turn adverse.
Kingfisher Airlines
The Kingfisher stock was the biggest gainer among airline scrips last week spurting 10 per cent on plans to raise additional capital. The airline wants to raise $175 million (Rs 875 crore) through a GDR and rights issue to repay a part of its Rs 6,000 crore debt.
The company has been facing problems on the operational front and as of July owed about Rs 950 crore in unpaid jet fuel bills. The decline in fuel costs, a 23 per cent cut back in capacity and improving demand has helped the company increase its realisations.
Operating profit (EBITDAR) improved to Rs 254 crore in the June quarter as compared to a loss of Rs 324 crore in June quarter last year. However, higher start up costs for the international operations has meant that the company incurred a loss of Rs 107 crore at Ebidta level. Though the company trails Jet Airways in market share for the month of August, for the June quarter it flew the largest number of passengers with a market share of 25.3 per cent.
While Kingfisher is likely to gain from operational efficiencies, turning around international operations, tackling debt, and high interest costs (which jumped by half y-o-y to Rs 170 crore in the June quarter) will be its biggest challenges going ahead. The stock could be a long term bet provided the company is able to maintain its profitability at the operating level over the next two quarters.
Spicejet
With the share of domestic passenger volumes shifting to low-cost carriers, Spicejet, the second largest in terms of market share of 12.3 per cent among low cost carriers (LCCs) would be a key beneficiary. From 46 per cent in 2007-08, LCCs have increased their market share to 52 per cent in 2008-09.
| BANKING ON VOLUMES | ||||||
| FY10 estimates in Rs crore | EIH Ltd | Indian Hotels | Hotel Leela | Jet Airways | Kingfisher* | Spicejet |
| Sales | 1,122.0 | 2,839.0 | 450.0 | 12,920.0 | 5,185.0 | 2,023.0 |
| % change y-o-y | -6.0 | 9.0 | -2.0 | -1.2 | 74.7 | 20.0 |
| Operating profit | 314.0 | 625.0 | 147.0 | 1,421.0 | -1,398.0 | 91.0 |
| Net profit | 150.0 | 114.0 | 81.0 | 145.0 | -1,680.0 | 60.0 |
| % change y-o-y | -11.5 | -- | -44.0 | -- | -- | -- |
| P/E FY10 E | 32.1 | 40.3 | 17.5 | --- | ---- | 13.2 |
| FY11 E | 23.9 | 21.9 | 16.0 | 18.3 | --- | 12.3 |
Equity infusion and dip in fuel costs have helped the company keep its costs under control and turn profitable. The company made a net profit of Rs 26 crore for June 2009 quarter against a loss of Rs 129 crore in the June quarter last year.
A relatively strong balance sheet (helped by funds raised last year) has not only helped it cut down on interest costs but also hedge its fuel requirements for 2009-10. Going ahead, the company will be launching its international operations in May next year and could benefit from the likely improvement in the economic environment.
Analysts believe that better yields on the international routes should help the company improve its financial performance in 2010-11. At Rs 33, the stock is trading at 13 times its 2009-10 estimated EPS of Rs 2.5 and should fetch good returns over a two year period.
Indian Hotels
The improvement in tourist arrivals in July ahead of the busy season should help the largest hotel company in India which has been struggling with declining occupancies and average room rates.
For the June 2009 quarter, the company reported a 24 per cent dip in revenues to Rs 284 crore (lower occupancies on account of renovation of 287 rooms at Taj Mahal Hotel, Mumbai) and a 16 per cent fall in operating profit due to higher staff costs and other expenditure.
However, the company is expected to see an improvement in occupancy levels to 70 per cent in the current fiscal from 66 per cent in 2008-09. While the topline is expected to improve by about 10 per cent in 2009-10, ARRs are likely to be under pressure due to increased supply for the sector.
Profit from sale of investments to the tune of Rs 39 crore helped boost the bottom line in the absence of which the company would have shown a loss of Rs 22 crore. High debt to the tune of about Rs 4,400 crore saw interest costs jump 60 per cent to Rs 37 crore eating into its profitability.
The opening of a renovated Pierre, New York in June this year and expected opening of the renovated Taj in the last quarter of 2009-10 and the addition of 1,800 new rooms should help the company take advantage of an upturn in demand. At Rs 76.65, the stock is trading at 22 times its 2010-11 estimated earnings, and may be considered on dips with a 2-3 years perspective.
EIH
As with other hotel players, EIH too, witnessed a 14 per cent y-o-y decline in revenues to Rs 219 crore in the June 2009 quarter on lower occupancies and room rents. Higher food and beverage expenditure and employee costs saw Ebidta drop 24 per cent to Rs 68 crore. While the management believes that though the future outlook does not look too bright, there are signs of recovery which will gather strength in 2010-11. Higher interest costs and depreciation saw net profit half to Rs 19 crore.
Considering the improvement in tourist arrivals and business conditions, the restoration of its largest property based in south-Mumbai, The Trident Oberoi and its planned reopening in the March quarter of 2010 coupled with launch of its new hotel, The Trident (based in western suburbs of Mumbai) should help improve volumes. The increased supply in the city could however, keep room rates under check. At Rs 122, the stock is trading at an expensive 24 times its 2010-11 earnings estimate.