Top hotel companies post lower profits, but fundamentals improve Despite rising occupancy rates and room tariffs, two of India’s leading hotel companies, the Indian Hotels Co. Ltd and the East India Hotels Co. Ltd, posted lower net profits for the December quarter, compared with the year-ago period.
Indian Hotels saw its net profit fall by around 23% to Rs65 crore. East India Hotels, too, posted a 32% fall in net profit to Rs22 crore. While there was no significant increase in operating expenses, both had higher interest costs, partly on account of higher borrowings to fund their expansions.
But a key point is that although the December 2008 quarter was when the slowdown really hit, the first two months of that quarter were not too bad for the hotel sector. “It was only in December 2008 that occupancy rates fell drastically,” said an analyst with a Mumbai-based broking firm.
Graphics by Yogesh Kumar/Mint
However, a comparison with the September 2009 quarter indicates a recovery in both companies. While Indian Hotels’ sales dipped by 2% from the year-ago period, sequentially it rose by around 42%. Similarly, East India’s sales rose 42% on a sequential basis even as it was marginally lower on a year-on-year basis.
Managements of both the hospitality companies confirm an improvement in the occupancy rates to around 68-70%, with higher figures reported in the premium locations. For example, analysts say that some of East India Hotels properties in the main cities are operating at 75-78% occupancy rates in the last two months. Prior to September, occupancy rates had dropped to around 50%.
There are other straws in the wind. A rise in tourist inflows augurs well for the sector. By September 2009, there were positive signals from increase in air traffic in the three major airports of Delhi, Mumbai and Hyderabad.
According to a 15 January report by India Infoline Ltd, a Mumbai-based broking house: “A strong uptick in the foreign tourist arrivals (up 21% year-on-year in December 2009), which makes up for 65-70% of the demand for premium rooms, heralds the beginning of a revival in the hotel industry that was the worst hit by the economic crisis.”
Besides occupancy rates, room rates have increased. Most hotels have increased tariffs since the third quarter of 2009 by around 15-20%. Lower costs, especially on materials and staff, have been reflected in improved operating profit margins sequentially. For example, the operating profit margin (OPM) of East India Hotels for the December quarter jumped to 35% from 14% in the September quarter. Similarly, Indian Hotels’ OPM grew from 18% to around 36%. Yet, margins are still below the year-ago period.
Analysts’ consensus is that the fourth quarter will show a further improvement in revenue and profitability for both hotel companies, with sustained improvement in domestic business and tourist traffic.
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