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Indian Hotels Company Ltd is India’s largest hotel chain, but the uncertain economic environment is against it…

This century-old company is India’s premier hotel company. Long before the Marriotts and the Hiltons of the world saw India as an attractive destination, Indian Hotels (IHCL) was the place to be – and it still is. The Taj group now has around 112 hotels with 13,606 rooms under its wings.

Why does Indian Hotels feature here? Two key numbers determine profitability. First the average room realisations (ARRs) and second the occupancy rate – both of which have been sluggish since 2008. Ever since, there has been much talk (and praying) for both to increase – without much effect. The December 2011 quarter saw ARRs flat with occupancies in only Mumbai showing improvement. Impeding recovery is the flurry of supply additions, especially in Delhi, Chennai, Hyderabad, Bangalore and Pune.

IHCL has also been unable to raise prices at key properties – indicative of tough competition. Keep in mind that this is a very cyclical business – hotels in India typically do better only in the 3rd and 4th quarters while the remaining two quarters remain subdued.

Where does it go from here? At the standalone level, management contracts is likely to drive revenue growth. But again, pricing power could play the party pooper. The supply glut and uncertain economic environment could ensure that. International operations too are yet to show sustainable improvement and will require more attention in turning around. What should you do? With the economies in the Eurozone and the US still far from recovery, this blood-letting could continue. This is a high working capital business with a low historical returns (ROCE averaged 9 per cent in the last three years with a downward trend) – as more properties are concurrently developed. Check out.