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Subdued sales growth; ARRs jump, but ORs disappoint
The Indian Hotels Company (IHCL) registered sales of INR 4.85 bn, up 47.7% Qo-
Q and 10.8% Y-o-Y, in Q3FY11. ARRs increased 15% Y-o-Y to ~INR 11,000
against our expectations of 5%. ORs disappointed with ~68% growth against our
expectation of 75%. For 9mFY11, the company reported ORs and ARRs of 64%
and INR 8,975, respectively, a rise of 7% in ARRs and an improvement of 300bps
in ORs. Due to lower–than-estimated ORs, we are revising down our FY11 and
FY12 ORs estimates to 64% and 70% from 68% and 72%, respectively. We are
also revising down our FY12 ARRs increase estimate to 5% from 10% earlier. Due
to reduced ARRs estimates, we are revising down our FY11 and FY12 sales
estimates 5.8% and 5.2%, respectively.
Improvement in international operations was encouraging as Pierre (NYC), London
and Sydney recorded substantial improvement in RevPARs.
Higher overheads impact EBIDTA margin; improvement going ahead
The company reported 29.7% EBIDTA margin for the quarter against 34.5% in
Q3FY10 and 11.2% in Q1FY11. Margin was under pressure due to higher staff
costs and other expenditure. In 9mFY11, IHCL recorded EBIDTA margin of 21.2%
and we expect FY11 EBIDTA margin of 23.2%. Due to the downward revision in
sales, we are revising down our EBIDTA estimates ~20% for both FY11 and FY12.
Preferential allotment to promoters; balance sheet improvement in FY12
IHCL, during Q3FY11, raised INR 5 bn by allotting shares and warrants on
preferential basis to promoters. The company will use the funds to retire
debentures of INR 6 bn in May 2011. It will further raise ~INR 3.7 bn in
FY12/FY13 post conversion of 48 mn warrants. With limited capex of INR 3 bn in
FY12, we expect D/E to improve to 1.0x from 1.8x in FY10.
Outlook and valuations: Positive; maintain ‘BUY’
With improvement in ARRs and ORs, cost containment exercise and dedicated
efforts to turnaround the US portfolio, we believe IHCL is on a revival path. With
limited capex and equity infusion of ~INR 3.7 bn by promoters over the next 12-
15 months, we anticipate the coverage ratio to improve, going forward. We
continue to value the stock at 13x FY12E EV/EBIDTA with a target price of
INR 120. We maintain ‘BUY’ recommendation on the stock.
Company Description
IHCL is the largest hotel operator in India with presence in luxury, business and leisure
hotel segments. The company manages 12,243 (103 properties) across India and
international locations. The company has also entered into the budget hotel segment
with a new brand, ‘Ginger’ and has also gone into the adventure business with wildlife
lodges. IHCL also runs airline catering business under the brand of Taj SATS, which
contributes 6-7% of the total sales. The company has aggressive plans of expansion,
both in India and international by using ownership and asset light model of management
contract.
Investment Theme
With the revival of ARRs and ORs across India, hotel industry is looking for better times
ahead. With India emerging as one of the fastest growing economy, FTAs of both
business and leisure is expected to pick-up. Domestic tourism is also on a great revival
path and with more Indians ready to take holidays, is expected to perform well in the
years to come. We expect IHCL’s Indian portfolio (forming almost 80% of total sales) to
post healthy growth with the revival of domestic ARRs and ORs. We also expect the
international operations to turnaround and start contributing significantly to the overall
margins.
Key Risks
Economic slowdown is the biggest risk for the company as travel and tourism takes the
first knock in uncertain times. Unexpected events like terrorist attack or swine flu also
affects the industry badly as many countries advises its citizens against traveling to
those affected parts. The company can continue to earn negative returns on its
international investments due to longer than expected turnaround of international
operations and the stake of Orient Express (OEH).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Subdued sales growth; ARRs jump, but ORs disappoint
The Indian Hotels Company (IHCL) registered sales of INR 4.85 bn, up 47.7% Qo-
Q and 10.8% Y-o-Y, in Q3FY11. ARRs increased 15% Y-o-Y to ~INR 11,000
against our expectations of 5%. ORs disappointed with ~68% growth against our
expectation of 75%. For 9mFY11, the company reported ORs and ARRs of 64%
and INR 8,975, respectively, a rise of 7% in ARRs and an improvement of 300bps
in ORs. Due to lower–than-estimated ORs, we are revising down our FY11 and
FY12 ORs estimates to 64% and 70% from 68% and 72%, respectively. We are
also revising down our FY12 ARRs increase estimate to 5% from 10% earlier. Due
to reduced ARRs estimates, we are revising down our FY11 and FY12 sales
estimates 5.8% and 5.2%, respectively.
Improvement in international operations was encouraging as Pierre (NYC), London
and Sydney recorded substantial improvement in RevPARs.
Higher overheads impact EBIDTA margin; improvement going ahead
The company reported 29.7% EBIDTA margin for the quarter against 34.5% in
Q3FY10 and 11.2% in Q1FY11. Margin was under pressure due to higher staff
costs and other expenditure. In 9mFY11, IHCL recorded EBIDTA margin of 21.2%
and we expect FY11 EBIDTA margin of 23.2%. Due to the downward revision in
sales, we are revising down our EBIDTA estimates ~20% for both FY11 and FY12.
Preferential allotment to promoters; balance sheet improvement in FY12
IHCL, during Q3FY11, raised INR 5 bn by allotting shares and warrants on
preferential basis to promoters. The company will use the funds to retire
debentures of INR 6 bn in May 2011. It will further raise ~INR 3.7 bn in
FY12/FY13 post conversion of 48 mn warrants. With limited capex of INR 3 bn in
FY12, we expect D/E to improve to 1.0x from 1.8x in FY10.
Outlook and valuations: Positive; maintain ‘BUY’
With improvement in ARRs and ORs, cost containment exercise and dedicated
efforts to turnaround the US portfolio, we believe IHCL is on a revival path. With
limited capex and equity infusion of ~INR 3.7 bn by promoters over the next 12-
15 months, we anticipate the coverage ratio to improve, going forward. We
continue to value the stock at 13x FY12E EV/EBIDTA with a target price of
INR 120. We maintain ‘BUY’ recommendation on the stock.
Company Description
IHCL is the largest hotel operator in India with presence in luxury, business and leisure
hotel segments. The company manages 12,243 (103 properties) across India and
international locations. The company has also entered into the budget hotel segment
with a new brand, ‘Ginger’ and has also gone into the adventure business with wildlife
lodges. IHCL also runs airline catering business under the brand of Taj SATS, which
contributes 6-7% of the total sales. The company has aggressive plans of expansion,
both in India and international by using ownership and asset light model of management
contract.
Investment Theme
With the revival of ARRs and ORs across India, hotel industry is looking for better times
ahead. With India emerging as one of the fastest growing economy, FTAs of both
business and leisure is expected to pick-up. Domestic tourism is also on a great revival
path and with more Indians ready to take holidays, is expected to perform well in the
years to come. We expect IHCL’s Indian portfolio (forming almost 80% of total sales) to
post healthy growth with the revival of domestic ARRs and ORs. We also expect the
international operations to turnaround and start contributing significantly to the overall
margins.
Key Risks
Economic slowdown is the biggest risk for the company as travel and tourism takes the
first knock in uncertain times. Unexpected events like terrorist attack or swine flu also
affects the industry badly as many countries advises its citizens against traveling to
those affected parts. The company can continue to earn negative returns on its
international investments due to longer than expected turnaround of international
operations and the stake of Orient Express (OEH).
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