1. Long road to recovery: Much room for improvement

Long road to recovery: Much room for improvement

IHCL needs to overcome mounting debt, oversupply and stagnating revenue if its two-year comeback plan is to materialise.

By: | Published: May 11, 2015 12:03 AM

If you tell patrons at The Taj — the hotel brand with five properties among India’s 10 priciest — that the company is weighed down by debt, it’s unlikely they will believe you. But that’s a fact. A string of acquisitions, many gone bad, has left the hotel chain highly indebted and its finances in shambles. Nevertheless, the Indian Hotels Company (IHCL), which had accumulated losses of Rs 1,295 crore at the end of 2013-14, plans to return to profitability by FY18; the gameplan is to pare debt, recharge operations, build more hotels and resolve any legal issues.

The expectations of a revival in two years were revealed by the company’s new managing director Rakesh Sarna, formerly development head at Hyatt Hotels, at a recent media briefing. Sarna said IHCL would strengthen its balance sheet, build hotels and resolve legal issues over the period. Tata Group chairman Cyrus Mistry had also told IHCL shareholders at last year’s August AGM that the hospitality major will be back in black in two years. “We are at least two years away from being profitable because we need to make sure that we have taken account of all our liabilities, defined and undefined,” Sarna had observed.

ihclFollowing the appointment of Sarna in August 2014 — and of several others to senior management since then— IHCL has embarked on an internal restructuring exercise wherein individual hotels’ general managers drive the overall strategy, much like at American hotels. The strategy is to have a geographical focus rather than a brand-led one, analysts say, adding this should help improve market response, driving up the current occupancy levels of under 65%. IHCL currently manages 130 properties of which it owns 26, across four brands including the budget brand Ginger. “Individual hotels and regions henceforth will have their own P&Ls and flexibility around pricing and promotions,” a recent JP Morgan report noted.

However, the decision to buy Mumbai’s Sea Rock hotel, likely to be completed in FY16, could delay the recovery. The purchase will add to its debt, which is already a staggering R4,000 crore. Including the debt at the holding company Lands End Properties (LEPPL), IHCL’s consolidated net debt will reach a peak of R4,400 crore (net debt-to-equity 1.2x), the report observes. The study also expects a commitment of over R1,000 crore for Sea Rock’s construction capex.

IHCL recently received board approval to acquire the remaining 80.1% in LEPPL for up to R17 crore ($2.7 million); the current holding is 19.9% in LEPPL.

IHCL, which has reported an annual profit just once in the last five years, is faced with the challenge of oversupply, which is denting its profits. Besides, over 80% of its operating income has been going towards servicing debt. Fourth quarter revenue is expected to grow a modest 6-8% and margins are likely to decline given the subdued domestic market, says an ICRA report on the sector.

“Revenue per available room across key domestic markets except Mumbai is expected to drop due to pressure on average room rates. International subsidiaries and joint ventures (are expected) to report flat performance compared to 2013-14,” said the report adding margins may decline 150-22 basis points due to inflationary impact on domestic operations.

To pare debt, IHCL will likely sell its remaining 6.9% in Bermuda-based Belmond, formerly called Orient-Express . Belmond had recently announced a share repurchase scheme. In November 2014, IHCL, which is the second-largest individual shareholder in the company, had backed away from a $1.6-billion bid to acquire Orient Express.

Since 2001, IHCL has made 12 acquisitions and sold stakes in eight companies, Bloomberg data says. Sixteen of these deals have been completed, three are pending and one—Belmond—was terminated.

The key challenge for IHCL would be to balance expansion with its plans to pare debt. However, bankers are willing to lend to the sector.

An official at a public sector bank pointed out that while initially, loans to hotels were restricted to five years, that timeline was unreasonable since it was difficult for hotels to break even that quickly. “About a year-and-a-half ago, loans to hotel projects were classified under the infrastructure category, which extended the loan tenure to 10 years and reduced the strain on companies. So, banks don’t have any concerns while lending to the sector now,” he explained.

Sarna isn’t complaining. But IHCL has never wanted for money; it’s the wrong decisions that the management took to acquire a slew of properties across the globe, just before the global financial crisis broke out, that has left the company in such poor shape.

Hopefully, Sarna will be able to put the company back on track.

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