STRATEGIC MANAGEMENT Project Work

Group 7 | Section A

 INDIAN HOTELS COMPANY LIMITED (IHCL)

Introduction• Indian

• The Indian Hotels Company Limited (IHCL) and its subsidiaries are collectively known as Taj Hotels Resorts.

• Taj Hotels Resorts and Palaces comprises 93 hotels in 55 locations across India with an additional 16 international hotels in the Maldives, Malaysia, Australia, UK, USA, Bhutan, Sri Lanka, Africa and the Middle East.

• IHCL operate in the luxury, premium, mid-market and value segments of the market

• It operates in the various segnemts through Taj, Taj Exotica, Taj Safaris, Taj Vivanta etc.

THE BROAD TRENDS IN THE Hotel INDUSTRY AND THE KEY DEVELOPMENTSDomestic Travellers: The global crisis shed the light on the importance of the domestic travellers’ demand who supported the industry during 2009- 2011. In 2009 alone, India witnessed an inflow of approximately 650 million domestic tourist arrivals, compared to only about 5 million foreign tourist arrivals. The well-educated middle class segment is price sensitive, demands value for money, and expects better service and quality standards.

Outsourcing: With the rising operating and manpower costs in hotels, several hotel managers and operators started to outsource services such as laundry, housekeeping, and food & beverages outlets

Diversification into new segments: Many hospitality chains that were earlier focused only on the luxury segment are now diversifying into new product segments, such as budget hotels and serviced apartments, in order to reduce risks.

Huge spurt in international brands

Better infrastructure and air connectivity

Organisation structure of THE COMPANY

VALUE FRAMEWORK Is It valuable? Is it Rare? Is it costly? Is it Sustainable? Competitive

ImplicationEconomic Implication

Brand Perception

Yes No Yes Temporary advantage

Above normal

Quality and Taste

Yes No Yes No Temporary advantage

Above normal

Hotel Locations Yes Yes Yes Yes Long term Advantage

Above Normal

Service Yes No Yes No Temporary advantage

Above normal

Ambience and Amenities

Yes Yes Yes No Temporary Advantage

Above Normal

FINANCIAL STATEMENT ANALYSISProfitability Ratios

Year Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14NPM 16.98% 13.89% 7.11% 9.07% 12.48% 16.46% 20.91% 21.38% 14.44% 10.39% 8.44% 8.04% -14.75% -30.57%ROE 11.39% 9.08% 4.56% 6.82% 9.38% 10.72% 17.94% 18.72% 7.68% 5.68% 4.55% 4.47% -8.36% -21.89%ROCE 13.50% 11.57% 9.11% 7.19% 10.31% 12.82% 18.77% 17.88% 8.47% 8.02% 7.53% 7.22% -0.56% -6.53%ROA 6.64% 4.17% 2.09% 2.29% 4.05% 6.67% 9.58% 9.92% 4.26% 2.31% 2.04% 1.93% -3.73% -8.50%EPS 25.89 17.89 8.97 13.44 22.81 32.43 5.50 5.22 3.24 2.12 1.86 1.91 -3.43 -7.30P/E 9.70 9.81 20.32 31.31 27.68 41.87 26.56 21.50 12.19 48.32 45.17 33.28 -15.63 -9.95

Indian Hotels were doing well during the intermediate period after which the profitability has come down and has led to negative earnings in the past couple of years.

Year Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14Current Ratio 1.56 1.74 0.71 3.76 0.69 1.03 0.77 0.89 0.75 1.55 0.75 0.52 0.56 0.50Quick Ratio 1.43 1.63 0.61 3.65 0.59 0.90 0.68 0.78 0.64 1.48 0.67 0.44 0.48 0.42Cash Ratio 0.70 1.10 0.14 3.21 0.24 0.46 0.22 0.26 0.07 1.08 0.22 0.08 0.11 0.09

Year Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14Debt Ratio 31.13% 39.63% 36.47% 51.91% 38.53% 21.08% 27.98% 29.91% 32.18% 39.92% 33.83% 35.51% 34.02% 38.78%Debt-Equity Ratio53.42% 86.17% 79.76% 154.23% 89.37% 33.87% 52.41% 56.44% 57.96% 98.41% 75.42% 82.38% 76.26% 99.88%Debt-Capital Ratio34.82% 46.29% 44.37% 60.67% 47.19% 25.30% 34.39% 36.08% 36.69% 49.60% 42.03% 44.24% 43.26% 49.97%

Year Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14WC Turnover 10.05 6.75 -13.73 1.46 -13.68 172.13 -23.69 -59.56 -20.74 7.03 -16.82 -8.02 -9.37 -8.03Fixed Assets Turnover 1.26 1.26 1.19 1.29 1.12 1.41 1.22 1.34 1.10 1.03 1.03 1.04 1.13 1.19

Liquidity Ratios

Liquidity ratios of less than 1 in the recent years suggest that they are highly leveraged in the short term and it is not possible to cover the current liabilities with the available liquid assets.

Solvency Ratios

Debt to Equity has risen sharply overly the years and clearly indicates high financial leverage which leads to high interest payments. A very high debt level may affect the solvency of the firm in the long run.

Activity Ratios

Activity ratios give a good measure of how well the resources are utilized by the management to generate revenues. Fixed Asset Turnover has been consistent over the years whereas Working Capital Turnover has turned negative. Main reasons are that the current liabilities have increased more than the current assets and also earnings have become negative in the past couple of years

Year Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14Asset Turnover Ratio 0.43 0.37 0.34 0.29 0.36 0.43 0.49 0.48 0.32 0.24 0.26 0.25 0.27 0.29Inventory Turnover 38.07 37.73 33.56 32.90 35.59 43.20 53.12 53.73 41.64 47.17 52.57 45.46 48.89 48.02Inventory Period 9.59 9.67 10.87 11.09 10.26 8.45 6.87 6.79 8.77 7.74 6.94 8.03 7.47 7.60Receivables Turnover 6.98 7.55 7.17 7.87 10.83 12.54 11.12 11.87 8.22 8.93 9.01 10.15 10.38 11.24Receivables Period 52.27 48.33 50.89 46.37 33.70 29.11 32.84 30.75 44.43 40.88 40.53 35.96 35.15 32.47Payables Turnover 1.15 1.37 0.96 0.74 0.60 0.61 0.47 0.66 0.55 0.43 0.77 0.81 0.98 0.87Payables Period 318.45 267.26 381.46 495.24 611.17 595.72 774.96 554.86 664.84 853.66 476.47 452.36 373.88 419.41

Year Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14Operating Cash Flow Ratio0.06 0.11 0.13 0.15 0.28 0.21 0.32 0.29 0.18 -0.06 0.28 0.25 0.18 0.19Asset Efficiency Ratio 0.02 0.03 0.04 0.04 0.09 0.09 0.15 0.14 0.05 -0.01 0.07 0.06 0.04 0.05Current Liability Coverage Ratio0.28 0.42 0.45 0.51 1.06 1.20 1.64 1.80 0.85 -0.21 1.13 0.90 0.69 0.72LT Debt Coverage Ratio 0.07 0.08 0.11 0.07 0.24 0.41 0.53 0.45 0.17 -0.03 0.20 0.17 0.13 0.14Interest Coverage Ratio 2.16 2.24 2.52 3.08 5.78 8.35 7.50 8.08 6.26 0.85 4.19 4.00 4.45 4.82

Efficiency Ratios

Asset Turnover has been historically on the lower side, indicating the lower utilization of assets to generate revenues. Inventory, Receivables & Payables turnover have been consistent over the years.

Cash Flow Ratios

Operating Cash Flow ratio indicates the percentage of cash received with respect to the net sales. Historically this has been on the lower side.Higher Interest Coverage ratio indicates that they are able to cover the interest payments and the default risk is on the lower side.

Jul-98 Apr-01 Jan-04 Oct-06 Jul-09 Apr-12 Dec-14

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

ROCE

Jan-01Jan-02

Jan-03Jan-04

Jan-05Jan-06

Jan-07Jan-08

Jan-09Jan-10

Jan-11Jan-12

Jan-13Jan-14

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

Net Profit Margin

Jan-01Jan-02

Jan-03Jan-04

Jan-05Jan-06

Jan-07Jan-08

Jan-09Jan-10

Jan-11Jan-12

Jan-13Jan-14

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

Interest Coverage Ratio

Jan-01Jan-02

Jan-03Jan-04

Jan-05Jan-06

Jan-07Jan-08

Jan-09Jan-10

Jan-11Jan-12

Jan-13Jan-14

0.00

0.10

0.20

0.30

0.40

0.50

0.60

Asset Turnover Ratio

Firm infrastructur

e

Human resource

management

Technology development

Procurement

Inbound logistics Operations Outbound logistics

Marketing and sales

Service

Managing manpower: The industry is witnessing the influx of international and domestic branded hotels and the challenge of managing the manpower due to the lack of well-paid and trained hotel employees.

.

• Booking Services

• Communication• Promotional

campaigns• Public relations• Customer

database

• Reception Service• Hall Service• Room Service• Additional Services

like bar, restaurant etc.

• Improvement of structure and facilities

• Maintenance work

• PurchasingOutsourcing of services

• Staff training and development

• Quality Control

• Supply schedule

• Raw materials for restaurants

• Maintaining adequate supply of all hotel requirements

• Deep Dive assessment is carried out to improve supply chain activities

Supplier management in place. Most of the subcontracting is done in order to increase the efficiency o the hotels supply chain

Investment in smaller cities: Rising business and leisure travel to smaller cities such as Udaipur, Thiruvananthapuram, Bhubaneswar, Pune, Kochi and Chandigarh

Value Chain Analysis

Prim

ary

Acti

vitie

sSe

cond

ary

Acti

vitie

sIncreased use of Technology: Indian hotel industry uses new technology in almost every function to increase efficiency and standardize operations.

EXTERNAL ANALYSIS

Strengths

• Employee strength over 13000 people• Considered to be the most premium hotel chain in India• Top-of-the-mind brand recall• First mover advantage

Weaknesses

• Limited market share due to tough competition from international and domestic players means• Terrorist attacks left a question over the security• Customer positioning not clear• Complex ownership structure

Oppurtunities

• Improve hygiene standards• Upgrade to international methods of work• Expansion in Aviation industry to boost growth in the hotel industry• Increase in foreign tourist arrivals• New business from commercial zones in tier-II and tier-III cities

Threats

• Competitors upgrading to international standards of work ethic• Expectation of clients in terms of technological development• Dependency on foreign tourist arrivals

Macro issues affecting Indian Hotels Company Limited

• Increased competition and new entrants• Implementation of a Unique Customer Value Proposition• Use of technology• Expansion and diversification of products

Economic Issues

• Motivating and retaining the workforce• Generation of employment throughout the value chain• Adapting its strategy to the geopolitical scenario of the country

Social Issues

• Waste, electricity and water management• Planning and management of land resources• Conservation of biodiversity• Sustainable mountain development

Environmental Issues

Porters Five ForcesBuying power

• Buying Power is less. It is attracted by Price, Quality and differentiation

Supplier power

• Suppliers are property owners, developers and real estate companies

• Third-party systems facilitate collaborations with partners.

• High Supplier Power.

Threat of new entrants

• It is possible to enter the industry in a relatively low-key way by opening a small independent hotel or motel

• The industry is capital intensive, and for a large-scale entrance, upfront investment in buildings, décor and furnishings etc proves costly.

Threat of substitutes

• Substitutes to hotels and motels include alternative forms of leisure accommodation, such as camping facilities or informal accommodation with friends and family.

• Major threats are ITC Grand Maratha, Le Meridien and Hyatt.

Degree of rivalry

• There are a large number of independent players present in the industry which increases competition.

• Exit barriers in the industry are fairly high because most of the major tangible assets are highly specific to their industry

COMPETITOR ANALYSIS

Indian Hotels Limited leads the industry in terms of Market capitalization. Put simply, market capitalization is the amount of money it would cost if you were to buy every single share of stock a company had issued at the current market price.

The biggest that market capitalization does not factor into consideration is the company’s debt. It is 2nd in terms of debt that it has taken. This is one of the reason behind low net profits.

What should the company do?• It can work on its weaknesses. It has several weak points such has:• Complex ownership structure(Hindrance from property owners)• Confused customer perception.• Only NRI’s know about it.• Non users positioning was not clear.• Building their brand. Due to Terrorist attack rebuilding brand proved difficult. Many security issues

raised up.• Company should improve on their brand. There is some sort of brand dilution and competitor are

gaining advantage. It has lost customers due to many foreign competitors entering the market. • There are 41% middle affluent class in India. It is predicted that Luxury market is to expand in India so

the company should target this segment.

Recommendations• To improve its market share the company can:

• 1. Introduce better membership plans.

• 2. Improve hygiene standards.

• 3. Upgrade to international methods.

• 4. Strict compliance to the SOPs

• 5. Improvement in knowledge & skill set of employees.

• 6. Customer centric vis-à-vis profit centric approach

• 7. Stopping unethical practices especially in seasons

• 8. Treat all the customers equally

• 9. Taking feedback not only from external customers but also the internal customers i.e., the employees.

• 10. Proper check on the hotel staff’s and processes’ efficiency by the management, say by employing Mystery Customers.

• 11. Keeping regular track of the sales data for further leads.