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Indian Hotels Company: The TATA Enterprise


The Indian Hotels Company Limited (The TATA Enterprise), together with its subsidiaries, engages in the hoteliering and air catering businesses. The company operates luxury full-service hotels, resorts, and palaces under the Taj brand name; Taj Exotica, a resort and spa brand; wildlife lodges under the Taj Safaris brand; Upper Upscale Hotels, which are full-service hotels and resorts; upscale/mid-market full service hotels and resorts under the The Gateway Hotel brand; and economy hotels under the Ginger brand name. It also operates Jiva Spas that provide yoga and meditation, ayurveda, and treatments, including body therapies, rituals, ceremonies, and natural products treatments; Taj Air, a luxury private jet; Taj Yachts; and the Indian Institute of Hotel Management that offers a diploma course in Aurangabad, as well as provides travel agency services. In addition, the company involves in ready to eat/ready to cook foods business. It operates 67 hotels in 45 locations in India, as well as 16 international hotels in the Maldives, Malaysia, Australia, the United Kingdom, the United States, Bhutan, Sri Lanka, Africa, the Middle East, and South Africa. The company was incorporated in 1902 and is based in Mumbai, India.



Key Points: Investors To Know, Results ahead of expectation.

Result highlights

•Results ahead of expectation: Indian Hotels Company Ltd (IHCL)?s Q1FY2012 performance was ahead of our expectation mainly on account of two key factors 1) a higher than expected other income and 2) a lower than expected interest expense during the quarter. The company posted a reasonably good operating performance with the operating profit margin (OPM) improving by 218bps year on year (YoY) to 18.4% during the quarter.

•Top line in-line of expectation: The total revenues (including other operating income) grew by 12.8% YoY to Rs369.5 crore, which is in line with our estimate of Rs370.8 crore of revenues for the quarter. The company has indicated that the improved occupancies and higher average room rentals (ARRs) on a YoY basis resulted in a double-digit growth in revenues. We believe the occupancy rate must have stood in the range of 63-65% while the ARRs must have stood higher by 7-9% on a YoY basis. Also a strong performance by the foods and beverages segment has added to the overall top line growth.

•Operating margins improve by 218bps YoY: With improved operating efficiencies, the OPM improved by 218bps YoY to 18.4% during the quarter (ahead of our expectation of 16.9%). Thus the operating profit grew by 27.5% YoY to Rs68.1 crore in Q1FY2012 (ahead of our expectation of Rs62.7 crore).

•Strong bottom line growth driven by lower YoY interest cost: The interest cost reduced by approximately 40% YoY to Rs21.1 crore in Q1FY2012 from Rs34.0 crore in Q1FY2011 on the back of a reduction in debt on the standalone books. This along with a higher than expected other income resulted in an adjusted profit after tax (PAT) of Rs21.7 crore (ahead of our expectation of Rs4.2 crore) during the quarter.

•Outlook and valuation: IHCL posted a better operating performance at the standalone level in Q1FY2012. We expect the second half of FY2012 to be much better than the first half for the standalone business. However any slowdown in the global macro environment would remain a key risk to the company's business. Also the key thing to watch out for is the performance of the US properties, which have remained a drag on the consolidated profitability of the company. 

Any improvement in the profitability of the US properties would act as a key trigger for the stock.

We like IHCL in the hotel space largely on account of its diversified portfolio of hotels catering to each segment and its thrust on improving the balance sheet. We maintain our Buy recommendation on the stock with a price target of Rs106. At the current market price the stock trades at 18.5x its FY2013E (consolidated) earning per share (EPS) of Rs4.1 and at an enterprise value (EV)/room of Rs0.75 crore.