Hospitality Industry Financial Analysis

Analysis of Hospitality Industry

Industry Background

Company Background

Year ARR Occupancy %

2011 Rs.9582 67

2012 Rs9469 65

For his unstinting efforts in environmental conservation, he received the Global 500 Laureate Roll of Honour by the United Nations Environment Program in 1999 from Emperor Akihito of Japan. Lauding him as a doyen hotelier, the American Academy of Hospitality Sciences honoured him with the Lifetime Achievement Five Star Diamond Award in 2009; the Green Hotelier Award by the Geneva based International Hotel and Restaurant Association (IH&RA) and the Maharana Mewar Foundation’s Uday Singh Award for “Outstanding Practical Achievements in the Protection and Improvement of the Environment” in 2002. In 2008, Business Week, US listed him among the 50 global octogenarians who still ‘rock the world’. Recent awards in 2010 include the Hall of Fame Award at the Hotel Investment Forum India held in Mumbai and the ‘Hotelier of the Century’ Award given by the International Hotel and Restaurant Association. Nair also received the highest Indian civilian honour – the Padma Bhushan, from Smt. Pratibha Devisingh Patil, the Honourable President of India.

Summary of Balance sheet and P/L – Indian Hotels

Resources for buying fixed assets:

Fixed assets are 60% of total assets, but equity is 33% of total liabilities.

Working capital:

Working capital is not good as current liabilities are 7% excess of current assets.

Revenue from Operations grew by 20%

Operating expenses increased by 15%

Operating profit increased from -2% in 2011 to 2% in 2012.

Net profit grew by 104%

Summary of Balance sheet and P/L – Leela Hotels

Liquidity and Leverage Ratios

Resources for buying fixed assets:

Fixed assets are 90% of total assets, but equity is only 25% of total assets.

Working capital:

Working capital is not good as current liabilities are 10% excess of current assets.

Revenue from Operations grew by 23%

Operating Expenses increased by 115%

Operating profit dropped from 3% in 2011 to -70% in 2012 (reason being increase in operating expenses especially finance costs increased by 485%)

To compensate the operating expenses, they sold Kovalam Hotels at 50 lacs which is reflected under Discontinuing operations.

Still their net profit dropped from 8% of revenue from operations to 3% of revenue from operations in 2012

Current Ratio : Leela’s current ratio has dropped compared to previous year. Whereas Indian Hotels did well in 2012

Acid Test Ratio : In Leela’s case it is worse than previous year. If the inventories do not sell and Leela has to pay its liabilities they may find it difficult to meet their obligations. In case of Indian hotels it is slightly increased.

Average collection period : In Leela’s case collection period slightly decreased which is a good sign. In the case of Indian hotels average collection period slightly increased.

Debt Ratio : Debt ratio is high and shows that lenders have financed around 75 % of Leela’s net asset. Its constant for Indian hotels.

Debt-Equity ratio : This has Increased for Leela and lenders contribution more than owners. It is almost constant for Indian Hotels.

Long term debt ratio : Leela has excessive long term debt while in the case of Indian hotels it is not very excessive

Turnover and Profitability Ratios

Fixed assets TO : Increased ratio indicates better sales with reduced fixed asset investments.

Total Assets TO : Reduced Assets,increased sales resulted in increased ratio. Better sales to investment ratio.

Net profit margin : Indian Hotels displayed better profits by managing costs. Leela has reduced profits due to poor cost management.

Operating profit margin : Indian Hotels displayed better profits compared to Leela(-ve profit due to poor cost management)

Operating cash profit margin : Indian Hotels displayed better cash profits compared to Leela, though Indian Hotels profits have reduced from 2011.

ROA : Poor asset utilization by Leela whereas Indian hotels managed to turn ROA to positive.

ROI (pre-tax) : Poor investment management by Leela whereas Indian Hotels managed to maintain the same ROI as in previous year

ROI :

ROE : Poor investment/returns out of share holder’s equity by Leela whereas Indian Hotels managed to show positive ROE by investing in subsidiaries which gained profits.

Valuation & Market ratios

EPS : Leela’s EPS dropped compared to prior year. Whereas Indian Hotels EPS is doing good.

P/E : A higher PE for Indian Hotels means that the same share of company’s profits will cost a prospective shareholder more, an indication of higher earnings growth than Leela Hotels.

Yield : It shows the relationship between cash dividends and market price. Compared to Leela, Indian hotels is doing better.

Dividend payout ratio : Leela reduced its cash dividend payment due to more operating expenses and liabilities.

DuPont

Leela : Profitability decline and inefficient use of increased debt resulted in decreased overall return. The increase seen is due to sale of asset actually.

Indian Hotels : Improved profitability, asset utilization and decreased debt has produced an improved overall return.

Observations

Leela:

http://www.business-standard.com/india/news/leela-to-reduce-debt-through-rs-700-cr-land-sale/491336/

•The company has gone for corporate debt restructuring to manage its debt of around Rs 4,000 crore

•Planning to raise Rs 700 crore by selling its non-core assets. The company is looking at sale of land parcels in Hyderabad, Pune, Bangalore and a business park in Chennai to reduce its debt burden.

•Their next cycle of growth is through management contracts. Already Kovalam and other are managed contracts.

•The company has also plans to launch Leela residences in partnership with Supertech to provide luxury service apartments.

Recommendations

•Note 1: Neither company might be in a good shape to invest right away into or to lend money. But if one of the two “HAS TO BE CHOSEN” from the different viewpoints, then this slide provides the recommendations on which one to go for. Also this analysis is purely on the quantitative measure seen through the numbers in the financial statements. Qualitative information is not considered.

•Note 2: For balance sheet and Profit-loss account, the consolidated financials are considered. But since the industry EPS and P/E value being considered are based on standalone financials, the second part of this slide (for shareholder), the values considered are from standalone financial data.

• As a lender, which of them am I more likely to lend to?

•Every critical ratio (Current ratio, Debt-equity, Gross profit, ROA) of India Hotels seems at a better position.

•While long-term borrowing hasn’t changed significantly for Leela venture, short-term borrowings have doubled. Operating cash profit margin has dropped significantly from 33% to 5% indicating there might be an issue in repaying the borrowings. For Indian hotel borrowings hasn’t changed much and operating cash profit margin has remained constant and is more stable.

•Leela sold its Kovalam hotel for Rs500 crore to raise funds is a positive step considering its strained balance sheet.

•Hence choice would be India Hotels

• As an investor(shareholder), which is better to buy/stick onto?

•P/E for Indian Hotels is lower compared to the industry average (56.88). So its undervalued at the moment and there is scope for improvement. And at the same time, dividend payout has been 100% in both years.

•For Leela Ventures, P/E is extremely low. And there has been no dividend payout for 2011-12 and very small amount for 2010-2011.

•Indian hotels paid a bigger share of their PAT as dividend back to the shareholders as dividend.

•Hence choice would be India Hotels

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