Investment outlook

Anup Menon

THE PERFORMANCE of the hotel industry over the last one year has not been very impressive.

But the valuation of the stocks, at least among the major ones in the recent past have been positive. But the question is, whether the uptrend will sustain. Before we look at the future outlook, it would be interesting to see what happened in the last year.

Share price performance

Among hotel companies the ones that attract market attention are the bigger players with a substantial chunk of the market share. For instance, for the year ended March, 2000, the top four players -- EIH, Indian Hotels, ITDC and ITC Hotels -- contributed close to 73 per cent of the total revenues of the industry.

Going by the market valuations, the performance of the some of the most actively traded stocks in the industry over the last one-year has not been overly impressive. In terms of returns, the best performer has been EIH, of around 42 per cent. Indian Hotels was a distant second offering return of close to 19 per cent. The other major players, ITC Hotels and Asian Hotels, another stock where there is some market interest, offered around 9 per cent and 5 per cent respectively.

Though returns may be a good indicator, the risk associated with the investment should also be considered. An analysis of the volatility of daily returns of the four major hotel stocks indicates that ITC Hotels, Asian Hotels and EIH have a daily return volatility of around 3 per cent. The stock of Indian Hotels has a daily return volatility of close to 5 per cent.

If we were to rank the companies in terms of returns per unit of risk, the best performer was the stock of EIH followed by Indian Hotels and then ITC Hotels and Asian Hotels respectively. Given this scenario, the logical question is why is there such a huge gap between EIH and the other major players both in terms of absolute returns as well as on risk adjusted returns. The answer probably lies with the performance of the company.

Earnings performance

A key indicator of the health of the industry would be the financial performance of the major companies. The earnings performance of the major players for the first nine months of this fiscal, has not been all that impressive.

For instance, in terms of sales growth, the two biggest players -- EIH and Indian Hotels -- logged growth rates of around 16 per cent and 15 per cent respectively. This was backed by growth in operating profits of 35 per cent for EIH and 13 per cent for Indian Hotels.

Similarly, ITC Hotels also posted a sales growth rate of around 5 per cent and an operating profit growth rate of around 7 per cent. In contrast, Asian Hotels posted a decline in sales by around 0.15 per cent followed by an 18 per cent fall in operating profit.

If one were to look at post-tax earnings (before adjusting for extraordinary items), the leader of the pack is again EIH which clocked a 54 per cent growth. ITC Hotels came a distant second (24 per cent) followed by Indian Hotels (4 per cent). In contrast, Asian Hotels logged a 28 per cent decline in post-tax earnings.