BackIs the worst over for Indian Hotels?
The improvement in performance is not expected to be dramatic, and it looks like investors are getting carried away
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Indian Hotels Co. Ltd (IHCL), the owner of the Taj group of hotels, has made a ₹ 500 crore provision for impairment of its investments due to depressed market conditions. The firm’s shares, however, are anything but depressed—they have risen by nearly 80% from the lows in August 2013.
The impairment is a statement largely based on historical facts, and was more or less accounted for in IHCL’s shares. Investors are now betting that things have bottomed out in the domestic business and that the international business will contribute to overall growth.
Rashesh Shah from ICICI Securities Ltd says regarding the impairment, “There will be a balance sheet hit in the near term, but the return on capital will increase in the long term as they are cleaning up their book."
But the improvement in performance is not expected to be dramatic, and it looks like investors are getting carried away. After all, occupancy levels have remained low and even average room rate (ARR) continues to show a declining trend in India because consumers have cut back on lavish spending.
Analysts at JPMorgan Chase and Co. said in a note to clients on 12 February, “An increase in ARRs is likely still some time away as the market will probably take 1-2 years to clear excess inventory. With peak supply being over in the domestic market, rupee depreciation and visa-on-arrival possibility by second half of next fiscal, we believe the fundamentals are coming together for the company but it will likely take 1.5-2 years for it to start reflecting in earnings."
Another analyst said that IHCL’s operating profit margin will remain around 15% and not improve materially next fiscal year, unless occupancy levels improve.
In the December quarter, the company’s consolidated net sales rose 10% to ₹ 1,167 crore, buoyed by improving occupancy levels and ARRs at its international properties—mainly The Pierre at New York and Taj Boston. Occupancy at The Pierre rose to 76% in the first nine months of this fiscal year from 66% in the previous year and at Taj Boston to 79% from 77% last year.
In the domestic market, growth in foreign tourist arrivals was 4.8% in the December quarter and this was reflected in stand-alone net sales, which grew at 4% to ₹ 564 crore. After the recent rally, the IHCL stock is trading at about 2x price-to-book ratio and gains may be capped unless tourist arrivals increase and occupancy levels rise. Growth in foreign tourist arrivals continues to be sluggish at 5% in January and February of 2014.
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