The Indian Hotels Co. Ltd stock gained 1.63% on Tuesday after the company reported better-than-expected net profit at the stand-alone level. But do the numbers hint at a sustainable turnaround?
Net sales grew just 4.42% from a year ago, the poorest in at least eight quarters. Over the first nine months of this fiscal, room sales—the biggest contributor to revenue—grew just 3%. In a presentation on its website, the company said “room revenue growth (was) driven by a 1% increase in average daily rooms sold and (a) similar increase in ARR (average room rates).”
That shows demand is not keeping pace with the increase in supply, a fact borne out by other numbers as well. For example, foreign tourist arrivals in the first nine months of this fiscal grew just 3%, compared with the 9% growth in the year ago. But the supply of hotel rooms has increased 23% in the same period, according to hotel tracker STR Global. As a results, across the country, room rates and occupancies are falling for hotel companies.
So, how did Indian Hotels boost its stand-alone net profit to Rs.64.62 crore, up 28% from a year ago, the best in six quarters? After all, ebidta (earnings before interest, taxes, depreciation and amortization), or operating profit, grew at a more sedate 7.8%. That led to an improvement in operating margins as well.
At the bottom line-level, however, profit grew to that extent because of two reasons. One, the company has restructured/reduced its debt and, hence, finance costs decreased by one-fifth from a year ago. Second, there were one-off expenses in the December 2011 quarter. Adjusted for these exceptional items, net profit grew just 1.3% from a year ago.
But what’s worse is that the company’s international business continued to be a drag on earnings. At the consolidated level, profits after tax grew just 2% to Rs.49.77 crore. But that means the international subsidiaries would have made losses of roughly Rs.15 crore in the third quarter.
The outlook for the company and the industry is none too cheery despite the near-term likely pick-up in demand in the fourth quarter, traditionally the best season. Room supply will continue to grow while there is no indication that demand might catch up soon. Moreover, with Indian Hotels saying that it is keeping its options open on the Orient Express acquisition—where its bid got rejected—the stock is unlikely to go anywhere soon.