If past events are any indicators to go by, the Mumbai attacks on two iconic luxury hotels, which left 300 dead including foreign nationals, will have a short to medium term impact on the Indian hospitality and aviation sectors. The impact on both, however, is different. According to Siddharth Thaker, executive director, HVS, a hospitality consulting firm, “In volume terms, international leisure visits as a per cent of annual hotel demand accounts for less than five per cent of the Indian travel and tourism market.” On the other hand, analysts believe that it is much more significant for the aviation sector, as international traffic accounts for a much larger proportion of total demand.
What is more worrying is the slowdown in the Indian economy with GDP forecasts of 6.3 per cent for year ending December 2009. Even though Indian economy would grow at robust rates vis-à-vis flat to negative growth in developed economies, cash-starved Indian corporates are trimming their workforce, shutting down factories and delaying expansions. A slowdown will result in a cut in both corporate travel as well as leisure travel budgets. With international air passenger growth recording its worst performance in five years and most economies in a slowdown mode, industry body World Travel and Tourism Council has reduced its CY10 growth forecast to 2 per cent, below its trend rate of 4 per cent. We look at two sectors that are most affected by macroeconomic trends – hotels and aviation and the implications for the companies in the sector.
Hotels
With the top four feeder leisure travel markets of US, UK, Germany and Japan in recession or a severe slowdown and the recent events leading to cancellations, there will be a drop in arrivals and subsequent impact on industry revenues in the current fiscal. HVS forecasts that there will be a softening of occupancies and average room rates by about 5 percentage points (FY08- 69.5 per cent) and 10-12 per cent (Rs 7,915), respectively in FY09 over the previous fiscal across the branded markets (3, 4 and 5 star categories). The impact of foreign markets in recession is already visible with growth in tourist arrivals slowing down to 9.3 per cent in April to October period in CY08 as compared to the 14 per cent growth seen in CY07.
Since the October to March period accounts for about 70 per cent of leisure travel volumes (domestic and foreign) and December to March is the inbound tourist peak season, the focus for hotel companies is likely to shift to the domestic market going forward. Hotels are likely to drop prices by up to 20 per cent and introduce travel packages to entice the price-conscious domestic tourists as well as those eyeing overseas destinations. Analysts say that hotels are likely to aggressively pitch to host conferences and events (though high on volume, they generate lower margins and are not encouraged during peak season) to make up for the absence of inbound tourists. The mix of a slowdown and terrorist attacks is likely to result in a dip in revenues (lower volumes) and margins (fall in ARRs, higher wage costs) for Indian hotel stocks. Here is a look at the three largest listed players in the Indian market.
Indian Hotels : The company’s flagship property, the 565 room Taj Mahal Palace and Tower in Mumbai, which was damaged in the terrorist attack, accounts for about 13 per cent of the consolidated revenues of Rs 2,920 crore. Though the management has said that the Tower wing would be opened on priority it seems unlikely to open in the current fiscal. While the company is insured for loss resulting from such incidents, the cost of renovation could be upwards of Rs 100 crore.
Though the company’s properties are experiencing the effects of a slowdown (occupancies for the first half of FY09 were down 300 bps y-o-y to 65 per cent), its presence across geographies (91 hotels including 16 overseas), market segments (Taj, Gateway (midmarket), Ginger) and asset light strategy (owns less than 35 per cent of its hotels) make it the most derisked play in the hotel segment. The uncertainty regarding the cost and reopening of its Taj Mumbai property and the business slowdown has had its effect on the stock price, which has tanked 22 per cent since November 26 to Rs 39.65. The stock trades at just 8.3 times its FY09 revised EPS estimates of Rs 4.75 and should offer returns between 15-20 per cent over the next 15 months.
EIH: EIH gets about 40 per cent of its revenues from its 888-room property in Mumbai. While the 541 room Trident hotel is expected to open on December 21, the renovated Oberoi, which has 347 rooms, is likely to start operations in the first quarter of FY10. The news of the reopening pushed up the stock price by 20 per cent to Rs 124.40 on Friday. While the damage to the property has been much less as compared to the Taj, the two properties are ensured against such incidents to the tune of Rs 1,500 crore. While a major part of its Mumbai property will be opened for business, the company will have to grapple with the drastic decline in occupancies (over 400 bps y-o-y to 60 per cent) in H1FY09.
This is likely to impact its 436-room Bandra Kurla property (expected launch in the first quarter of CY09), and its luxury villas (about 15 per cent of revenues this fiscal). A positive trigger for the stock, which has risen almost 34 per cent from its lows on September 26, could be the sale of land in Kolkata, Bangalore, Goa and Pune among other cities. At the current price, the stock is expensive, trading at 25 times its FY09 EPS estimates of Rs 5.
Hotel Leela Venture : With plans to add seven new hotels including the 330 room Delhi venture to be launched in FY10, Hotel Leela will be able to more than double its room count to 2,800 by FY12. Notably, it will reduce the company’s dependence on the Mumbai and Bangalore properties, which currently account for over three quarters of its Rs 514 crore topline. The company is hoping that the upcoming Commonwealth Games and the shortage of rooms in the NCR region would help boost its occupancies and ARRs.
| LOW ON TRAFFIC | |||||||||
| Rs crore | Indian Hotels | EIH | Hotel Leela | Jet | Spicejet | Kingfisher | |||
| FY09E | FY10E | FY09E | FY10E | FY09E | FY10E | FY09E | FY09E | FY09E | |
| Net Sales | 3,055 | 3,284 | 1,241 | 1,266 | 566 | 623 | 12,950 | 1,594 | 5,440 |
| EBIDTA | 751 | 920 | 409 | 380 | 226 | 249 | -1,222 | -674 | -1,283 |
| Net Profit | 372 | 432 | 197 | 169 | 106 | 94 | -220 | -653 | -1,282 |
| P/E (x) | 8.4 | 7.2 | 24.9 | 28.9 | 6.8 | 7.6 | - | - | - |
| E: Estimates, The figures for aviation companies are annualised based on H1FY09 | |||||||||
However, its dependence on the Bangalore market, where room rates are likely to trend down, limited room inventory and no presence in markets such as Chennai and Hyderabad, means that there are no short to medium triggers. For the first half of FY09, higher staff costs and operating expenses led to sharp drop in EBIDTA margins from 58.51 per cent to 45.68 per cent and this trend is likely to continue. The Hotel Leela stock has not been impacted as much as the other two hotel majors and has moved up by five per cent since November 26. At Rs 18.90, the stock is trading at 6.75 times its FY09 estimated earnings of Rs 2.8 and is adequately priced.
Aviation
Higher prices and the economic slowdown have led to a 13 per cent y-o-y drop in passenger traffic in October this year. Airlines have been curtailing their operations to improve yields resulting in a 17 per cent dip in seat capacity in September to 1.64 lakh seats as compared to April 2008. To stay afloat and battle high ATF prices, airlines have been hiking fares since the September quarter last year. After reaching a peak of Rs 71 a litre, ATF prices have come off 46 per cent (includes December reduction) to about Rs 38. With domestic load factors sharply falling from 65 per cent in the first quarter FY09 to 56 per cent in the second quarter, lower ATF prices (account for 30 per cent of costs) will come as a relief to the sector.
Says Mark Martin, senior advisor, KPMG, “If crude oil prices stay in the $47-$55 band to a barrel and airlines are able to optimise efficiencies by route rationalisation and staff reorganisation, then things should look up for the sector from March 2009.” While airline companies have limited flexibility to tinker with direct operating costs (fuel, rentals, terminal handling, crew salaries and route navigation charges), it is the indirect costs such as network operations, sales, distribution (ticketing) and marketing costs that are increasingly coming under radar.
Ratan Shrivastava, director - Aerospace & Defence Practice at Frost & Sullivan believes that with ATF prices at March-April 2007 levels and no significant changes in operating costs (except maintenance), airlines would grow at robust rates in the forthcoming quarters. While the sector cannot achieve the 60 per cent y-o-y growth in passengers traffic in FY08 to 1.16 crore, lower ticket prices (Air India and Jet Airways have already cut fuel surcharge by Rs 400) and aggressive cost cutting efforts should improve yields and help the industry post growth rates of about 10 per cent in FY10.
Jet Airways: Seat load factors have been dropping for the country’s largest airline (33 per cent market share) from nearly 75 per cent in April this year to about 69 per cent in October. The company believes that it will be able to breakeven at lower loads (it required 81 per cent load capacity to breakeven in Q2), as ATF prices cool off and its cost cutting measures (bringing down salary bill, alliances with airlines on sales and ground handling), doing away with distribution costs (5 per cent commission to travel agents) and route rationalisation kick in.
The company has also deferred the purchase of wide bodied Boeing aircraft by a year and will be phasing out four 747s after the expiry of the lease in the fourth quarter of FY09. With seat loads on the back of a price cut expected to improve in Q4FY09 and better numbers expected in Q3, the airline would be able to reduce its losses considerably. The stock has slumped to a fifth of its value from its September highs and is currently trading at Rs 135.85. Considering that the airline expects to turnaround Jet Lite, has cut unprofitable international routes and expects higher loads in the coming quarters, an entry at these levels should fetch decent returns over the next one year.
Spicejet: The management of low cost carrier Spice Jet, which got a fresh lease of life from the $100 million investment from venture fund investor Wilbur Ross in August this year, has said that while initial cancellations due to Mumbai blasts have been in the region of 25 per cent, it was temporary and it expects load factor to move up going ahead. On the back of an Rs 197 crore loss in the second quarter, the company’s first half FY09 losses mounted to Rs 328 crore. With the reduction in fuel prices, the company may drop prices helping improve load factor to around 68 per cent in FY10. A positive for the company is that average revenues per seat are unlikely to touch Rs 2,500 levels recorded 2007 and will settle at around Rs 3,500 going ahead improving the company’s yields. This is for those with higher risk appetite.
Kingfisher Airlines : India’s second largest airline (27.5 per cent market share) recently got the go ahead to fly to nine foreign routes most of which are in South and South East Asia and plans to start operations to London from Mumbai from January 2009. For the first half of FY09, the company has reduced flights by 21 per cent and is targeting a reduction in non-fuel costs by up to 10 per cent going ahead. The company has returned two aircraft and plans to return another 8 in the current fiscal, which will help it keep a control over rental costs. The company, which had entered into a network rationalisation agreement with Jet Airways, saw its first half losses move up to Rs 641 crore. Higher operating expenses including tripling of its fuel costs saw its second quarter loss at Rs 483 crore. Going ahead, the company might follow Jet in cutting out unprofitable domestic and international routes, improve its load factors and significantly improve its average fares per seat. Investors looking for an exposure in aviation would be better off with Jet.
