IHCL – Winner of Taj Mansingh Hotel auction: Really?


The Indian Hotels Corporation Ltd. (‘IHCL’) or Taj Hotels & Resorts, won the fiercely contested auction last week against ITC to keep the iconic Taj Mansingh Hotel. While technically, IHCL did win the auction, the question which comes to mind is: At what cost?

Its amazing how auctions cause asinine behaviour, because people tend to over-estimate the value of the asset and thereby overpaying, primarily arising out of fear of loss. This behaviour has also been featured in Visit to a Mall during SALE – Important Investing Lessons!!!

Some basic mathematics will entail as to why it seems to be a winner’s curse for IHCL:

With 292 rooms, average occupancy rate of 70% – 75% historically, average room rate per day of INR 20,000; potential yearly revenue translates to INR 160 crs. While IHCL has commanded a higher average room rate as compared to the industry, however the average room rate has hovered in the range of INR 8,000 – INR 8,500 over the last 5 years. Also, consolidated revenue during the last 5 years has remained consistent at about INR 4,100 crores, with almost negligible revenue growth in the last 5 years.

IHCL

IHCL would end up paying license fees of INR 7.03 crores every month, as against INR 3.94 crores every month it was paying previously – to NMDC. This translates to INR 84 crores for the whole year in just licensing fees, a whopping 52% of the potential revenue from the property.

Apart from this, Employee cost and Operating costs (viz. linen and room supplies, Fuel, power and light, Repairs and Advertising) are the other major other heads of running a hotel. For both 2017-18 and 2016-17, Employee cost has constituted an average of 26% of the Operating Revenue and Operating expenses (excluding license fees) has constituted an average of 35% of the Operating Revenue.

Therefore, Total expenses as a proportion to Revenue tantamount to roughly: 113%

(License Fees: 52% + Employee Cost: 26% + Operating Expenses (excluding License Fees: 35%); leave aside the Food & Beverage cost and any Finance Cost required to run the hotel.

This clearly demonstrates that IHCL would be incurring losses, having won the auction, at least for a considerably long time.

While IHCL’s 2017-18 Annual Report talks about Re-structuring its portfolio (key driver of Aspiration 2022), with a clear focus to grow its EBITDA from 17% to 25% (growth of 8%) by 2022; with such winning (mis) adventures, it seems to be a remote possibility.

Disclaimer: Please note that these are my personal views. I am NOT a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014. All investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action. 

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