Indian Hotels Set to Report 40% Rise in Profits, Say Analysts

The Indian Hotels Co Ltd, the company that runs the Taj Group of hotels in India and abroad, is likely to report net profit for the year ended March, rose a healthy 40% from a year-ago period, based on analysts’ expectations.

A booming hotel and tourism industry, and a gap between demand and supply of hotel rooms drove up average room rates for the company, according to a survey of four analysts conducted by Mint.

The average estimate from the analysts for net profit for the 12 months ended March was Rs349.1 crore, compared with Rs248.7 crore a year ago. The analysts said sales likely rose 28.7% to Rs2,364.5 crore.

Indian Hotels will report earnings on 19 June.

“Slow development of projects by competitors has allowed Indian Hotels to continue to capitalize on the persistence of the gap, particularly in major cities such as Mumbai and Delhi which contribute 40-45% of the revenue of the company, said Amol Rao, research analyst, Pioneer Intermediaries Pvt Ltd. “With interest rates going up,” he said, “developers are going slow on the projects, waiting for more favourable rates.”

As a result, Rao predicted, “A lot of projects, which were announced 2004-05 and were to be completed in 2007, have been pushed back to 2008-09 and 2009-10.”

Indian Hotels has also embarked on a major overseas acquisition spree, as a part of their strategy to become a global brand. In the last few months, Indian Hotels acquired properties in international markets such as The Campton Place, San Francisco for $58 million (Rs237.8 crore) and Ritz-Carlton in Boston—renamed the Taj Boston—for $170 million (Rs697 crore), according to thecompany.

These acquisitions are not likely to reflect in company revenues, say analysts, as the acquisitions are through special purpose vehicles.

Occupancies and average room rates in the Indian hotel industry were the highest in a decade in fiscal 2006, according to global hospitality consultants HVS International. Occupancy rates increased 19.2 percentage points from fiscal 2002 to fiscal 2006 to 70.8% while average rates were up about 53% over the same period to Rs5,318 per night.

The gap between supply and demand will continue to drive average room rate growth up by anywhere between 5% and 12%, depending on the destination, say analysts who believe that firms, including Indian Hotels, will try and make the most of revenue per available room during this time.

Analysts expect this trend to continue till 2008-2009 and 2009-2010, which is when they say additional capacity will enter the market. Analysts say that from 2009 there is likely to be a huge supply in major cities, and the biggest challenge for players in the luxury segment will be to maintain average room rates and occupancy rates. Operating margins may take a hit because major players may not be able to justify such high rates when more supply comes in, they say.

That aside, factors such as the rising cost of real estate, the dearth of qualified professionals—which suggests employee costs may go up—will continue to put pressure on profitability for large firms.

On Friday, shares for the Indian Hotels Company Ltd closed at Rs142.85, up 1.60%.

The company’s strategy to acquire properties internationally is likely to increase profitability in the long run, said several analysts.

While the properties may not be as attractive as an investment in India, said Pratik Dalal, an analyst with Emkay Share & Stock Brokers Ltd, the acquisitions would go a long way in creating brand value and awareness for the group in the international market.