While the September-end results for India’s largest listed hotel firms were muted, strong inbound traffic and coming tourist season should lead to better numbers.
EIH, which runs the Oberoi chain of hotels, gained 1.5 per cent on Tuesday, a day when the broader markets were down 1.2 per cent. The stock was up over five per cent intraday on the induction of additional (prominent) directors on its board, including Nita Ambani and Manoj Modi (of the Reliance group) and Renu Sud Karmad (of HDFC). Also, in a seasonally weak quarter, the company reported a net profit of Rs 16.6 crore, as compared to a Rs 15 crore loss in the year-ago quarter. Its larger peer, Indian Hotels (IHCL), too, last week reported an improvement in bottom line, with profit of Rs 8 crore. However, a large part of the profit came from one-offs for both companies.
Analysts expect operational parameters to improve, given that the second half is seasonally stronger and this should rub off on the performance of both companies. While the companies should see improved performance in 2011-12 and their stocks are trading at similar P/E valuations of 31-32 times 2012-13 estimates, Himani Singh of Elara Securities prefers EIH due to its lower exposure to cities with higher expected supply and the impact of global uncertainty on IHCL’s international properties.
| ONE-OFFS BOOST PROFITS | ||
| In Rs crore | Indian Hotels | EIH |
| Net sales | 357.0 | 237.0 |
| Change (%) | 8.8 | 9.3 |
| Ebitda | 38.0 | 29.0 |
| Change (%) | 6.0 | 140.0 |
| Ebitda (%) | 10.8 | 12.4 |
| Change (bps) | -33.0 | 674.0 |
| Net profit | 8.0 | 16.5 |
| Adj. net profit | -1.5 | 5.4 |
| Change (%) P/E FY12E (x) | 63.0 | 53.0 |
| All figures are standalone and for September quarter % change is year-on-year; Both companies had reported a loss in the year ago quarter E: Estimates Source: Elara, ICICI Direct | ||
ONE-OFFS, INTEREST SAVINGS
Other factors that helped increase profits were the Rs 12 crore income from sale of property and tax reversals. Adjusted for these, net profits were at Rs 5 crore, much below estimates of Rs 13 crore, says an Elara Securities report.
For IHCL, the extraordinary item included interest income of Rs 13.7 crore on the refund of deposit received on surrender of a leased land-lot. Adjusted for this, the company would have reported a loss of Rs 1.5 crore, estimate analysts. After reporting a loss for FY11, both companies are expected to log net profits in the current financial year.
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IMPROVING METRICS
Given the seasonality and additional supply of rooms in the quarter, revenue growth for both companies was muted, at nine per cent. Indian Hotels grew its top line on the back of a seven-eight per cent increase in the average number of rooms sold, while room rates were up by a mere two per cent year-on-year. Edelweiss Securities’ analyst, Manav Vijay, says despite an increase in supply by almost 11 per cent over the past year, the company has been able to maintain occupancy ratios of 62 per cent.
Compared to the 28 per cent growth recorded in the year-ago quarter, EIH grew at a slower pace due to flattish average room rates and marginal increase in occupancies. While business destinations recorded higher revenues per room, leisure properties for both companies were impacted by a seasonally muted quarter.
MARGINS: MIXED BAG
Lower revenue growth, coupled with higher employee and other costs, especially due to new properties, led to a fall in operating profit margins for IHCL. For EIH, a lower base for the September quarter meant a jump in operating profit and margins. Additionally, margins jumped sharply due to decline in staff costs and other overheads. Consequently, against last year’s Ebitda (earnings before interest, taxes, depreciation and amortisation) of Rs 12 crore, this was Rs 29 crore for the September quarter.
OUTLOOK
While additional supply has impacted occupancies, things are set to change for the better. Seventy per cent of the hotels business comes in the second half of the year. Against a nine per cent increase in inbound tourists in the first half of 2011-12, partly aided by the low-base effect, tourist traffic is expected to grow at a robust 10 per cent in the second half and benefit both companies.
The strong demand in the busy season can be gauged from the price increases taken and estimated occupancies in the December quarter. IHCL has increased average room rates by seven to 13 per cent across properties from September, while occupancies are likely to be in the 70-75 per cent range in the third quarter of FY12. While IHCL’s consolidated revenue is expected to grow by 14 per cent annually to Rs 3,200 crore, EIH is expected to post a top line growth of 17 per cent to Rs 1,515 crore.