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Indian Hotels Company Equity Research

HomeCompanyIndian Hotels Company Equity Research

Date of Research – 22 January 2016

Price – Rs. 108.50

About the Company

Indian Hotels Company Limited (“Indian Hotels” or the “Company“), the parent company of the Taj Group of hotels is the biggest hotel chain in India. The Company operate in the luxury, premium, mid-market and value segments of the market. As of 30 June 2013, the Company operated 123 hotels across its 4 brands (Taj Luxury Hotels, Vivanta by Taj, The Gateway Hotels and Ginger hotels) with a total room inventory of 15,089. Out of these, 26 hotels are owned directly by Indian Hotel while 21 hotels are operated on management contracts for a certain management fees and/ or share of profits. 6 hotels are owned by subsidiaries of Indian Hotels, 17 hotels form part of the Taj inventory by way of joint venture companies and 11 hotels come under one of Indian Hotel’s four brands by way of Associate Companies. 18 out the 119 hotels are located overseas.

Indian Hotels has been expanding aggressively in both domestic and international markets and is expected to add 13 hotels (1,710 rooms) in FY 14.

The Consolidated financial statements include 29 Subsidiary companies (14 domestic, 15 international), 13 Associate companies (10 domestic, 3 international) and 7 joint ventures (5 domestic, 2 international).

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 3,743.36 4,066.19 4,188.64 4,590.92  4,010.26 
Expenses 3,205.72 3,506.62 3,700.06 3,974.34  3,400.64  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 537.64 559.57 488.58 616.58  609.62  
Depreciation 288.42 308.13 291.29 316.67  299.37  
Finance Costs 170.74 168.51 175.57 245.96  323.83  
Other income 60.16 59.75 98.71 115.35  54.94  
Exceptional items 430.43 554.84 352.91 67.16  10.78  
PBT (291.79) (412.16) (232.48) 102.14  30.58  
Tax 98.96 110.95 114.60 140.07  113.74  
PAT (before Minority Interest and share of Associates) (390.75) (523.11) (347.08) (37.93)  (83.16) 
Profit/ (loss) attributable to Minority Interest 40.86 17.49 30.98 25.45  – 
Share of profit / (loss) of Associates (1.37) 13.25 0.04 (2.85)  (37.56) 
Consolidated Profit / (Loss) for the year (430.24) (553.85) (378.10) (60.53)  (45.60) 

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 14.36 13.76 11.66 13.43  15.20 
Net Profit Margin Ratio (10.44) (12.86) (8.29) (0.83)  (2.07) 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 75.61 80.75 80.75 80.75 98.93 
Preference shares issued by subsidiary – 
Money received against warrants 124.37 – 
Reserves & Surplus 2,884.51 2,898.53 2,555.71 2,146.47 3,083.04 
Net worth (shareholders funds) 3,084.49 2,979.28 2,636.46 2,227.22 3,181.97 
Minority Interest 646.90 707.72 735.86 737.84 835.34 
Long term borrowings 3,082.49 3,431.18 3,023.88 4,597.67 3,684.80 
Current liabilities 1,590.39 1,277.39 2,274.60 1,432.26 2,303.21 
Other long term liabilities and provisions 824.54 772.20 682.19 640.35 567.59 
Deferred Tax Liabilities 128.79 165.58 251.64 371.66 
Total Liabilities 9,228.81 9,296.56 9,518.57 9,886.98 10,944.57 

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 5,567.78 5,804.44 6,188.89 6,126.47 6,997.10 
Noncurrent Investments 1,841.15 1,522.61 1,319.28 1,040.59 914.09 
Miscellaneous Expenditure – 
Current assets 894.27 949.32 937.38 1,722.49 1,121.65 
Long term advances and other noncurrent assets 436.10 502.91 488.84 515.88 560.72 
Deferred Tax Assets 4.45 4.09 3.10 5.00 
Goodwill on consolidation (net) 489.51 512.83 580.09 478.45 1,346.01 
Total assets 9,228.81 9,296.56 9,518.57 9,886.98 10,944.57 

Efficiency Analysis

 
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 8.01 7.55 8.75 6.46 8.01 
ROE / RONW 0.10 (14.44) (21.01) (16.98) (1.19) 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 3,743.36 4,066.19 4,188.64 4,590.92  4,010.26 
Growth (%) 9.05 % 8.62 % 3.01 % 9.60 %  (12.65 %) 
PAT (Rs. Cr.) (390.75) (523.11) (347.08) (37.93)  (83.16) 
Growth (%) (1,613.36 %) –  – 
Earnings Per Share – Basic (Rs. ) (5.40) (6.86) (4.68) (0.74)  (0.64) 
Earning Per Share – Diluted (Rs. ) (5.40) (6.86) (4.68) (0.74)  (0.64)  
Price to Earnings –  – 

Dividend History

The Company has not declared dividends over the last 3 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. IHCL’s average current ratio over the last 5 financial years has been 0.59 times which indicates that the Company has been facing liquidity problems which continue to put strain on its operations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

IHCL’s average long term debt to equity ratio over the last 5 financial years has been 0.80 times which indicates that the Company is vulnerable to economic slowdowns such as the one we have been witnessing over the last few years.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

IHCL’s average interest coverage ratio over the last 5 financial years has been 2.25 times which indicates that the Company has not been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, IHCL reported a promoter holding of 38.65 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 41.59 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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