Both foreign tourist arrivals and domestic travel have been increasing at a steady pace since the last one year. That has reflected in the performance of the Indian Hotels Co. Ltd (IHCL), which reported a healthy 13.6% increase in revenue and a 36.7% jump in profit before tax and exceptionals for its stand-alone operations (mainly domestic).
The company’s fiscal 2010 (FY10) results included income from an insurance claim attached to the Taj Mahal Palace hotel in Mumbai. Excluding this income, the jump in pre-tax profit is as much as 122%.
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On a consolidated basis, the company returned to the black at the pre-tax level in FY11, reporting a profit of Rs38.3 crore compared with a loss of Rs98.8 crore in FY10.
Even so, the company’s shares fell by 1% on Wednesday, in line with the fall in the broader market, suggesting that investors weren’t really impressed. Although things are improving, IHCL’s overseas subsidiaries are still wiping out all the gains made by the parent company.
As the chart shows, the parent company reported a pre-tax profit of Rs228 crore, while all subsidiaries and associate companies reported a cumulative loss of Rs190 crore in FY11. Of course, this is better than the performance in FY10, but the losses of overseas units, especially those in the US, are too large to be ignored. The company told analysts that its US operations incurred cash losses of $22 million (around Rs100 crore today) last year.
Considering the fact that IHCL is heavily laden with debt, the large losses in the US are a continuing worry. At the end of March, the company’s net debt stood at Rs3,249 crore, which is an improvement from the previous year’s debt of Rs3,702 crore, thanks to a preferential allotment of shares and warrants to the promoter group worth Rs500 crore. But even while the debt level reduced, the net debt to Ebitda (earnings before interest, tax, depreciation and amortization) ratio continues to be high at around 6.5 times.
That’s an uncomfortably high leverage and it is imperative the company cuts losses in the US and increases cash flow. Thankfully, things are improving in the domestic sector, with both occupancy rates and room tariffs increasing gradually.
Because of the overhang of IHCL’s US operations and high debt, the company’s shares have underperformed the broader market indices in the past one year. The scrip is still lower by about 55% compared with its highs in 2008, even while the broader markets are only about 15% lower.
Graphic by Sandeep Bhatnagar/Mint
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