Indian Hotels Company Ltd (IHCL) has reported a disappointing set of numbers for Q1FY2010. While we had expected year-on-year (y-o-y) decline in both revenues and profits, the decline has been far more than our expectations.

The net sales declined by 24.4% (y-o-y) to Rs284.9 crore (below our expectation of Rs337.4 crore) in Q1FY2010, which also includes Rs22.5 crore claims (for the quarter) towards loss of profit for business interruption of Taj Mahal Palace caused by 9/11 terrorist attacks.

The lower-than-expected top line suggests that the average occupancy for the quarter was lower than 60% anticipated by us. Further the decline in average room rate (ARR) seems to be more than 12% y-o-y that we had anticipated.

Subdued occupancies and decline in ARR led to a steep decline in the operating profit margin (OPM), which stood at mere 12.1% in Q1FY2010 (below our expectation of 23.8%) as against 31.0% in Q1FY2009.

Thus the operating profit declined by 70.4% y-o-y to Rs34.5 crore in Q1FY2010 as against Rs116.7 crore in Q1FY2009.

A lower other income coupled with higher interest expenses resulted in net loss before exceptional items to the tune of Rs17.6 crore in Q1FY2010 as against the adjusted net profit of Rs65.3 crore in Q1FY2009 (and below our expectation of Rs34.8 crore for the quarter).

The post tax exceptional gains of Rs34 crore (that includes profit from the sale of investments and foreign currency gains) led to a reported profit after tax (PAT) of Rs16.4 crore in Q1FY2010.

Post a bad Q1FY2010, we will review our estimates and recommendation on the stock after interaction with IHCL management.

At the current market price the stock trades at 18.6x its FY2010E earnings of Rs3.7 and 15.1x its FY2011E of Rs4.5.