Feb. 13, 2013--The Indian Hotels Co. Ltd stock gained 1.63% on Tuesday after the company reported better-than-expected net profit at the standalone level. But do the numbers hint at a sustainable turnaround?

Net sales grew just 4.42% from a year ago, the poorest in at least eight quarters. Over the first nine months of this financial year, room sales -- the biggest contributor to revenues -- grew just 3%. In a presentation on its web site, the company said that "room revenue growth (was) driven by 1% increase in average daily rooms sold and (a) similar increase in ARR (average room rates)."

That shows demand is not keeping pace with the increase in supply, a fact borne out by other numbers as well. For example, foreign tourist arrivals in the first nine months of this fiscal grew just 3% compared with the 9% growth in the year-ago period. But the supply of hotel rooms has increased by 23% in the same period, according to hotel tracker STR Global. As a results, across the country, room rates and occupancies are falling for hotel companies.

So, how did Indian Hotels boost its standalone net profit to Rs.64.62 crore, up by 28% from a year ago, the best in six quarters? After all, ebidta (earnings before interest, taxes, depreciation and amortisation) or operating profit grew at a more sedate 7.8%. That led to an improvement in operating margins as well.

At the bottom-line level, however, profit grew to that extent because of two reasons. One, the company has restructured/reduced its debt and hence, finance costs decreased by one-fifth from a year ago. Secondly, there were one-off expenses in the December 2011 quarter. Adjusted for these exceptional items, net profit grew just 1.3% from a year ago.

But what's worse is that the company's international business continued to be a drag on earnings. At the consolidated level, profits after tax grew just 2% to Rs.49.77 crore. But that means the international subsidiaries would have made losses of roughly Rs.15 crore in the third quarter.

The outlook for the company and the industry is none too cheery despite the near-term likely pickup in demand in the fourth quarter, traditionally the best season. Room supply will continue to grow while there is no indication that demand might catch up soon. Moreover, with Indian Hotels saying that it is keeping its options open on the Orient Express acquisition -- where its bid got rejected -- the stock is unlikely to go anywhere soon.

___

(c)2013 the Mint (New Delhi)

Visit the Mint (New Delhi) at www.livemint.com

Distributed by MCT Information Services