AoFS Final 1 (1)
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ANALYSISOF
FINANCIALSTATEMENTS -
HOTELS
Abhijeet Shinde (91) Shikhar Singla (96)
Shishir Shirbhate (92) Sriram Krishnan (97)Mandar Shirodkar (93) Srinath Subramanian (98)
Nikhil Shenoy (94) Pranit Surana (99)
Lovkush Singh (95) Hitesh Suri (100)
INDIAN HOTELSAND EAST INDIA
HOTELS
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INDIAN HOTEL INDUSTRY The international travel and tourism industry is currently
on a recovery path and on their way to return to the pre-crisis peak levels.
Indian travelers have emerged the sixth biggest spenderswhen travelling abroad1; even as they remain highlyprice-conscious when travelling within the country
NCR and Mumbai are two of the busiest hotelconstruction markets with 14000+ rooms under pipeline
India occupies the sixty-eighth position among the toptourist destinations in the world
Government of India increased spend on advertisingcampaigns like 'Incredible India' and 'Athithi Devo Bhava'
Foreign Tourist Arrivals in India during 2011 were 6.29million with a growth of 8.9%
Domestic traveler now accounts for nearly 74% of thetotal demand (across all segments) and 53% of the luxurysegment.
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STRUCTUREOF HOTEL INDUSTRY
Comprises the high-end 5-Star deluxe and 5-starhotels
Cater to business and upmarket foreign leisuretraveler
Premium andLuxury Segment
Palaces and forts built prior to 1950 converted
into hotels The Ministry of Tourism classified these hotels
as Heritage Hotels
Heritage Hotels
Comprises of 4-Star and 3-Star hotels
Cater to average foreigners and domestic leisure
traveler
Mid-Market
Segment
Comprises of 1-Star and 2-Star hotels
Provides inexpensive accommodation to priceconscious people
Budget Segment
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The Indian Hotels Company (The TajGroup)
EIH Limited (The Oberoi Group)
ITC Hotels Limited
Indian Tourism Development
Corporation (ITDC) Hyatt International Corporation
Hotel Leela Venture
Bharat Hotel
Marriott
Starwood
Berggruen Hotels
Major Players
Foreign Tourist Arrivals into IndiaClassification of Indian Hotel
Industry
International Hotel ChainsLarge Hotel ChainsSmall ChainsPublic Sector ChainsLocalized Hotel Companies
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DEMAND SUPPLY COMPARISON
Source: HVS Research
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A healthy increase in demand across the country hasbeen observed
The industry will also see an infusion of supply overthe next few years from domestic and internationalbrands
Foreign tourist arrivals to India are forecasted togrow at a rate of 9% - 10% in the next few years.
DEMAND SUPPLY COMPARISON
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TRENDSIN REVENUESAND PROFITSFOR
THE INDIAN HOTELS INDUSTRY
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EXPECTED SCENARIOIN PREMIUM HOTEL SEGMENTIN SELECTINDIAN MARKETS (SOURCE: INDUSTRYANDICRASESTIMATES)
Market Demand Drivers Prospects Outlook
Mumbai Gateway city andfinancial capital
Supply likely to beabsorbed
being a gateway city and the countrysfinancial centre, demand is likely to berobust
NCR Gateway city Oversupply likely inthe near term
expecting to add around 5,000 rooms overthe next three to four years , this is likely tosuppress pricing power
Bangalore Foreign IT/ITESbusinesstravelers
Oversupply likely inthe near term
Bangalore has seen significant roomadditions in 2009-11 and is likely to seemore over the next few years
Pune Foreign IT/ITESbusiness
travelers
Heavy oversupplylikely
the outlook for the next two years issubdued, saw occupancies and ARRsdecline in Q1, 2010-11 because of supply
addition
Chennai Manufacturingand servicessectors
Oversupply likely inthe near term
strong supply pipeline for 2012 and 2013,the city is likely to experience significantpricing pressure over the next two years
Kolkata Business
travelers
Supply likely to be
absorbed
relatively small market, also has limited
additions in the immediate term
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INDIAN HOTELS COMPANY LTD
IHCL owns and operates76 hotels, 7 palaces,serviced apartments, 6private islands and 12resorts and spas
Presence across 52destinations in 12countries
Operating across the
market segments: Luxury
Premium
Mid-market
value
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Taj
Flagship brand of traditional luxury full-service hotels, resorts and palaces
Two speciality brands: Taj Exotica and Taj Safari
Vivanta
Contemporary-luxury hotel brand that is building a more cutting-edge, modern-chic esthetic
Caters to an upscale market, it is positioned a step below the flagship Taj brand.
Located at both business and vacation destinations
The Gateway
This is a mid-market brand positioned below the Vivanta by Taj brand, andcontains properties in both business and vacation destinations.
Ginger
Ginger is the Tata Groups economy hotels brand across India.
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EIH LTD.
Founded in 1934 Operates 28 hotels and 3
cruisers in 5 countries
Also operates airportrestaurants, flightcatering services, travelsand tours services,corporate air chartersand printing press
Operating across marketsegments:
Luxury
5-Star
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The Oberoi
Caters to luxury segment Operates 28 hotels and 3
cruisers in 5 countries
Trident
Falls in 5-star segment Operates 9 hotels in India and
a hotel in Jeddah, Saudi Arabia
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OPERATIONSRESEARCH
Major revenues fromoperations in India
Catering to luxury,premium, mid-marketand budget segments
Revenue concentration
on Indian luxurysegment
Increased outboundtraffic is a key risk
More diversifiedportfolio
Catering to luxury and5-star segment
Revenue concentrationon super premium and
premium segments
Crude oil prices mayaffect travel and tourism
IHC Ltd. EIH Ltd.
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11,166.20
15414.3 17651.7 16202.6 14740.516744.2
7,563.909389.7
11235.69432.9
823410275
0.00
5,000.00
10,000.00
15,000.00
20,000.00
Jan/06 Jan/07 Jan/08 Jan/09 Jan/10 Jan/11
IHEIH
Reasons for moderation in sales:- Competition from InternationalHotel Chains
Mumbai terror attacks Air Catering business continues tobe under pressure
CAGR IndianHotels
EIH
2006 to2011
8.44% 6.32%
2008 to2011
-1.74% -2.94%
Sales (Rs. Million)
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Mar 09 Mar 10 Mar 11
Distribution
of total
expenses
100 100 100
Operating
expenses75.6 76 77.7
Financial
charges9.6 12.3 9.8
Non-cash
charges5.8 6.9 6.4
Others 9.0 4.8 6.1
9%
33%
8%
6%
44%
Components of Operating
Expenses, IH 2010-11
Power, fuel & water
Compensation to Employees
Royalties
Advertising
Others
Expenses Indian Hotels
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Mar-09 Mar-10 Mar-11
Operating
Expenses 73.1 76 71.9
Financial
Charges9.1 11.9 14
Non-Cash
Charges6 8 7.9
Provision11.3 3.7 1.7
Others .6 .4 4.6
40%
8%9%5%
38%
Split up of operatingexpenses
Employee Cost
Repairs & Maintenance
Power & Fuel
Raw Material
Others
Expenses East India Hotels
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70.0075.00
80.00
85.00
90.00
95.00
100.00
Jan/06 Jan/07 Jan/08 Jan/09 Jan/10 Jan/11
IH
EIH
Expenses as % of sales have increased to above 90% of sales for both companieseroding its profit margins
Operating expenses accounts for more than 75% of total expenses
Industry with high operational leverageHigh payroll costs, higher provisioning of retirement benefits Operating cost of new hotels opened
Depreciation for the last year increased due to capitalisation of new properties
Expenses as % of Sales
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1837.8
3223.9
3774.6
2340.3
1531 1412.5
1888 2003.52172.3
1704.4
572.3 645.4
0
500
1000
1500
2000
2500
3000
3500
4000
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
CAGR has been -5.12% over last five years The fact that low revenue growth is coupled with rising costs is being reflected
in the falling PAT and PAT Margins
Over last three years CAGR has been -9.6% Last three years have seen a drastic fall in PAT
PAT (Rs. Million)
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15.5
19.5 20.5
13.4
9.58
20.8
19.218.5
15.8
6.3 5.5
0
5
10
15
20
25
IH
EIH
Mar 06 Mar07 Mar 08 Mar 09 Mar 10 Mar 11
PAT Margins are falling for both the companies Slow growth in revenue coupled with low PAT margins make the company
unattractive for investors EIH has seen a higher erosion in PAT margins compared to IH which
shows lower cost efficiencies for EIH
PAT Margins
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2010 0ver 2009
Increased borrowings by issue of secured and unsecured NCDs to fundthe Companys expansion projects
Net cash from operating activities was higher
Investments have increased due to renovation of existing propertiesand replacement/up-gradation of existing fixed assets
R&S has decreased primarily due to a provision for premium onredemption ofNCDs
In short the company has strained its short-term liquidity position byhigh borrowings to cater to its expansion plans, as indicated by thelower current ratio, lower interest coverage ratio and an increase indebt to equity ratio
Fund Flow Analysis Indian Hotels
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2011 0ver 2010
Current assets have significantly declined and NWC has decreased substantiallyfor 2 consecutive years which doesnt augur well for an industry which needsan effective WC mgmt for its high operating costs
Restoring one of the Tajs hotels might have reduced the capital WIP andincreased the net block
R&S has increased substantially due to issue of shares and warrants at apremium; indicating the company is moving from owed funds to owned funds
The company paid a lot of its debts and increased its investments in mutualfunds with the cash raised from equity
In short the company is undertaking steps to financially deleverage itselfbecause for an industry with a high operational leverage it is necessary toachieve a balance between the financial and operational leverage to minimizerisks
Fund Flow Analysis Indian Hotels
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ShareCapital
Reserves &Surplus
Total DebtTotal
Liabilities
East India Hotels 1143.14 24,734.84 9738.72 35616.7
Indian Hotels 200.32 3028.59 2379.21 5608.12
0
5000
10000
15000
20000
25000
30000
35000
40000
Sources of Funds (2010-11)
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Application of Funds (2010-11)
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1.77 1.31
3.81
1.99
0.950.480
1
2
3
4
2008-09 2009-10 2010-11
Current Ratio
East India Hotels Indian Hotels
1.67 1.23
3.68
1.90
0.92 0.450
1
2
3
4
2008-09 2009-10 2010-11
Acid Test Ratio
East India Hotels Indian Hotels
Liquidity Ratios
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0.14
0.05
2.16
0.05
0.410.090
0.5
1
1.5
2
2.5
2008-09 2009-10 2010-11
Cash Ratio
East India Hotels Indian Hotels
0.06 0.06
0.03
0.04
0.03
0.06
0
0.01
0.020.03
0.04
0.05
0.06
0.07
2008-09 2009-10 2010-11
Inventory to GWC Ratio
East India Hotels Indian Hotels
Liquidity Ratios
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0.35
0.29 0.30
0.340.29 0.31
0
0.1
0.2
0.3
0.4
2008-09 2009-10 2010-11
Total Assets Turnover
East India Hotels Indian Hotels
31.90
25.62
30.39
43.86 44.34
54.69
0
10
2030
40
50
60
2008-09 2009-10 2010-11
Inventory Turnover
East India Hotels Indian Hotels
Turnover Ratios
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10.51
8.098.58
16.78
13.615915.2932
0
5
10
15
20
2008-09 2009-10 2010-11
Debtors Turnover
East India Hotels Indian Hotels
34.74
45.1342.54
21.7526.81
23.87
0
10
20
30
40
50
2008-09 2009-10 2010-11
Average Collection Period
East India Hotels Indian Hotels
Turnover Ratios
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0.7216
0.7912
0.3184
0.5796
0.9856
0.7243
0
0.2
0.40.6
0.8
1
1.2
2008-09 2009-10 2010-11
Debt Equity Ratio
East India Hotels Indian Hotels
3.5237
2.1677 1.9801
6.0741
2.7398 2.8613
0
2
4
6
8
2008-09 2009-10 2010-11
Debt Service Coverage Ratio
East India Hotels Indian Hotels
Leverage Ratios
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4.68
2.332.86
3.52
2.17 1.98
0
1
2
3
4
5
2008-09 2009-10 2010-11
Interest Coverage Ratio
East India Hotels Indian Hotels
1.941.72
2.65
1.02 0.73 0.88
0
0.5
1
1.5
2
2.5
3
2008-09 2009-10 2010-11
Fixed Assets Coverage Ratio
East India Hotels Indian Hotels
Leverage Ratios
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0.44
0.32
0.18
0.320.28
0.27
0
0.1
0.2
0.3
0.4
0.5
2008-09 2009-10 2010-11
Gross Profit Ratio
East India Hotels Indian Hotels
12.02
4.04
2.49
7.68
5.694.37
0
2
46
8
10
12
14
2008-09 2009-10 2010-11
Return on Net Worth
East India Hotels Indian Hotels
Profitability Ratios
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14.58
7.09 7.419.29
5.89 6.32
0
5
10
15
20
2008-09 2009-10 2010-11
Return on Capital Employed
East India Hotels Indian Hotels
67.33 67.32
42.7137.23
44.11
0
20
40
60
80
2008-09 2009-10 2010-11
Book Value per Share
East India Hotels Indian Hotels
Profitability Ratios
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EARNINGSPER SHARE
0
12
3
4
5
6
7
8
9
2008-09 2009-10 2010-11
East India Hotels
Indian Hotels