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Fra - Final Submission - Group 7
Fra - Final Submission - Group 7
Fra - Final Submission - Group 7
HOTEL INDUSTRY
Submitted By
Group 7
ABM/11/041BHAVANA PEDDI
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Table of Contents
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I. IMPORTANCE OF HOTEL INDUSTRY
The tourism and hospitality industry is one of the largest segments under the services sector of
the Indian economy. In India, the sector's direct contribution to gross domestic product (GDP)
is expected to grow at 7.8 per cent per annum during the period 2013-2023.
The tourism sector in India is flourishing due to an increase in foreign tourist arrivals and a
larger number of Indians travelling to domestic destinations. According to statistics available
with the World Travel and Tourism Council (WTTC), revenues gained from domestic tourism
rose by 5.1 per cent in 2013 and is expected to increase by 8.2 per cent this year. The Indian
hospitality sector has been growing at a cumulative annual growth rate of 14 per cent every
year, adding significant amount of foreign exchange to the economy.
1. Huge market
The total market size of the tourism and hospitality industry in India stood at US$ 117.7 billion
in 2011 and is anticipated to touch US$ 418.9 billion by 2022. According to the analysis of
tourism ministry, 4.4 million tourists visited India last year and has risen to 10 million in 2010
- to accommodate 350 million domestic travelers. The Hotel Industry in India is at the verge of
making 150,000 rooms fueling hotel room rates across India. There is tremendous opportunity
for India as a destination for hotel chains looking for growth.
2. Investments
The foreign direct investment (FDI) inflows in hotel and tourism sector during the period April
2000–March 2014 stood at US$ 7,348.09 million, as per the data released by Department of
Industrial Policy and Promotion (DIPP).
The hospitality sector in India expects 52,000 new hotel rooms to be added in five years (2013-
17), according to a survey by Cushman & Wakefield. This will lead to a rise of over 65 per
cent in total hotel inventory in India. The National Capital Region (NCR) is expected to
contribute around one-third to the total expected hotel rooms supply during the period.
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3. Employment Opportunities
Career's diversity of experience in hotel management is greater than in any other profession.
The Hotel industry involves combination of various skills sets like management, food and
beverage service, housekeeping, front office operation, sales and marketing, accounting. The
rise in corporate activity today like travelling for business and even a holiday has made the
hotel industry a very competitive one.
The Indian hotel industry has a share of 2.8% by value in the Asia-Pacific region. Hotel industry
can be broadly segmented as having the following constituents:
Size
Hotel industry contributes approximately 1.5% to the GDP in the services sub-sector. The hotel
industry value is expected to reach approximately US$10 billion by 2018.
Growth Rate
As per the data from the Central Statistics Office, the hotel industry has seen a declining growth
rate in the past decade. The dint in growth rate in the period 2008-10 has been the consequence
of global economic crisis and more importantly due to the threat of terrorism looming in the
country. Of major relevance is the terrorist strike on the Taj Mahal hotel in November 2008
which was timed during the peak tourist season.
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% Contribution to GDP Growth Rate Linear (Growth Rate)
20
17.4
15
14.4
13.0
10.8
10
7.0
5
1.6 1.7 1.5 1.9
1.7 1.5 2.8
1.3 1.5
0 1.4
2000-01 2005-06 2006-07 2007-08 2008-09 2010-11 2011-12 2012-13
-5 -3.3
Figure 1.The contribution of Hotel Industry to the GDP and the growth rate of the industry
There has been decent growth in terms of number of additional units over the period 2009-
2013.Compounded annual growth rate (CAGR) stood at 4.4%.
Number of foreign tourist arrivals (FTAs) had been impassive in the year 2013-14.However,
the demand is expected to see a rise and consequently an increase in the occupancy rates
(current rate is 59% for the period 2013-14) is predicted.
Distribution
About 80% of the approved hotels are in eight major states of Kerala, Uttar Pradesh, Haryana,
Maharashtra, Rajasthan, undivided Andhra Pradesh, Punjab, and Tamil Nadu and in Delhi.
Mumbai, NCR, Bangalore, Pune, Chennai, Hyderabad, Goa, Kolkata, Kochi are the key cities
with a significant number of luxury hotels.
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Major Players
By market capitalization, some of the top domestic players in the industry are the Indian Hotel
Company Ltd, EIH, Hotel Leela Venture Ltd, ITC Ltd, Oriental Hotels and the Kamat Hotels.
International hotel companies include the Marriott International, Inc., Accor, Hyatt Hotels
Corporation and the Hilton Hotels.
COST STRUCTURE
Higher occupancy levels do not escalate the fixed costs of running a hotel which include the
salary paid to the employees and housekeeping staff and the like.
However, variable costs such as food, stationary, administration expenses rise when the
occupancy is high. A representative breakup of the cost structure for the industry is as follows:
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COST STRUCTURE FOR HOTELS
12%
40% 10%
30%
8%
Revenue structure
Room revenues (50-55%) and Food &Beverages (35-40%) industry are the major revenue
sources. Other revenue sources (~15%) are constituted by the laundry services, transport and
other ancillary services.
Business model
1. Full Ownership Model: The owner is completely in charge of the pricing and controlling
operating expenses. A huge capital investment is needed and fixed costs are usually high.
2. Franchise: A brand is licensed to a hotel owner with a contract to run the hotel as per the
brand expectations. International hotels like the Marriott with operations in India fall under this
category.
3. Management Contract: In this model, the owner hires an operator to manage the hotel daily
operations. The operators are compensated commensurately as the profits earned.
4. Lease: The owner leases the property on rent for a fixed time period. Usually, a fixed portion
of the gross revenue needs to be paid to the owner.
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III. PORTER’S FIVE FORCES ANALYSIS OF HOTEL INDUSTRY IN INDIA
These forces determine the intensity of competition and thereby the profitability
and attractiveness of an industry. The objective of corporate strategy should be to alter these
competitive forces in such a way that it results in improving the position of the organization.
The analysis of these five forces for the hotel industry in India is as follows:
The top tier hotels are operated by few hotel chains like Taj, EIH, ITC and The Leela
Palace. So, they have a control over the industry.
There are hardly any or no substitutes for spas and five star hotels.
The Taj, ITC and Oberoi have various rates and tariffs because they have their own
brand image.
The hotel chains are operating for different services like Spas, Boatels, Resorts, City
Centers, Heritage Hotels, etc.
The hotel customer market is fragmented, so hotels have to reduce their bargaining
power to attract the customers.
The hotel industry gets maximum investment for its fixed assets. So they try to recover
their amount as quickly as possible.
The suppliers provide better information about them in order to attract the customers.
Here the buyers are highly informed.
If the hotel price changes are moderate, the customers have low margins and are price-
sensitive.
On some unseasoned timings the hotels offer discounts and incentives in order to reduce
the bargaining power of buyers.
The higher the competition in an industry; the easier it is for other companies to enter
the market. In such a situation, new entrants can change major determinants of the
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market environment at any point of time. For example market shares, prices, customer
loyalty, etc. There is always a scope of latent pressure for reaction and adjustment for
existing players in this industry.
The foreign hotel chains are tied up with Indian hotels to reduce the initial cost and to
use the latter’s brand name.
Brand loyalty of customers like TAJ, ITC, and LEELA PALACE affects the growth
and prospects of new entrants.
Access to raw materials and distribution channels are majorly controlled by the
existing players like TAJ, ITC, and LEELA PALACE.
The cost of land in India is as high as 50% of the total project cost as against 15%
abroad. This acts as a major deterrent in the development of the Indian hotel industry.
In India the expenditure tax, luxury tax and sales tax inflate the hotel bills by over 30%.
Effective tax in the South East Asian countries works out to only 4-5%.
4. Threat of substitutes
A threat from substitutes exists if there are alternative products with lower prices
of better performance parameters for the same purpose.
Brand loyalty of customers (TAJ, ITC, LEELA PALACE, etc.) dominates and prevents
customers from using the substitutes.
The relationship of hotel with the customer and related costs are also a few reasons why
customers switch to substitutes
The price variation of same class hotel services from various brands is one of the
reasons why customers get to choose among substitutes.
The present demand and supply of hotel rooms is one of the reasons to choose a
substitute.
More fixed cost and switching costs affect the business
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5. Competitive rivalry among the existing players
This force describes the intensity of competition among existing players (companies) in
an industry. High competitive pressure leads to pressure on prices and margins. Hence,
it affects the profitability of every single company in the industry.
The top competitors in the hotel industry are have similar kind of services like five star,
spas, boatels and motels, heritage hotels and palaces.
Healthy competition among all the players is helping to increase the growth in the hotel
industry.
Competitive rivalry is intense in metro cities. It is slowly picking up in secondary cities
too.
The ministry of tourism is playing a huge role in development of the industry by starting
“Incredible India” and other campaign which are bringing more tourists to India. Government
initiatives and support to finance major infrastructure projects, easing of visa norms and raising
FDI limits for investments in this sector has risen up to 100% which have given a boost to the
hotel sector.
100% FDI is permissible in the hotel sector on the automatic route. This includes restaurants,
resorts, and other tourist complexes providing accommodation, catering and food facilities to
tourists. The sector has been seeing an increase in number of premium hotels in different parts
of the country, along with smaller ones that cater the need for the lower class and middle class
domestic tourists.
Inflation rate
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in excessive demand not only by tourists but also by native residents. Inflation results in
expanding hotel industry in the respective tourism destination.
Exchange rate
The destination’s currency is not convertible overseas and under capital restrictions, tourist’s
expenditure in hotels, food and others are all cashed in by foreign currencies and primarily
through exchange in national banks of the destination country. This allows the country to
extract profit by officially fixed exchange rate.
Taxation
Service tax and luxury tax/VAT in hotel industry are exorbitant which is a major constraint for
growth.
GDP
Since 2008-2009 the share of the hotel industry started to decline. These have been due to the
impact of recession. Though India recovered quickly from recession, the government fiscal
policies did not facilitate further expansion of the sector.
Government policies
The sector needs incentives in Tier 2 and Tier 3 cities for making investments attractive. The
sector needs relief from double taxation through service and luxury tax/VAT at the state and
central levels which budget 2014 failed to deliver.
V. FUTURE TRENDS
Indian Hotel Industry's room rates are most likely to rise 25% annually and occupancy to rise
by 80%, over the next two years. 'Hotel Industry in India is gaining its competitiveness as a
cost effective destination. The 'Hotel Industry' is likely to add about 60,000 quality rooms,
currently in different stages of planning and development.
In 2013, the tourism and hospitality industry contributed ₹ 2.17 trillion or two per cent to the
country's gross domestic product (GDP). This figure shows the importance of this sector toward
Indian service sector. Hotels are an important part of tourism and hospitality sector and have
helped Indian hotel industry to record a cumulative annual growth rate of 14 percent.
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The major future trends identified in this sector are:
Due to increase of foreign visitors, the contribution of hospitality sector is expected to
rise to ₹ 4.35 trillion (US$ 72.17 billion), by 2024.
Due to the increase in disposable income the industry will experience strong growth.
The market is estimated to reach US$ 30 billion by 2015.
From the reports of Federation of Hotel and Restaurant association of India (FHRAI),
India currently has 2,00,000 hotel rooms. The increasing demand has exceeded the
supply and India will require around additonal1,90,000 hotel rooms by 2017.
Huge foreign investments are also required and the industry is expected to get an inflow
of USD 12.17 billion over the next two years.
To attract more foreign visitors the quality of service will also need improvement. This
will require setting up of more catering colleges with the help of foreign collaborations.
The government has allowed for 100% FDI through the automated route, to help
stimulate domestic and international investments in this sector. As a result the
hospitality division is expected to see an additional US$11.41 billion in inbound
investments over the next two years.
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VI. MAJOR ACCOUNTING POLICIES IN THE HOTEL INDUSTRY
a) Convention
The financial statements in hotel industry are prepared under the historical cost convention. It
is in accordance with the applicable Accounting Standards and provisions of the Companies
Act, 1956.
b) Use of Estimates
The preparation of financial statements in this industry requires the management to make
estimates and assumptions like provisions for bad debts, employee benefits, income taxes
provisions, useful life of depreciable fixed assets and provision for impairment. Disclosures
relating to the contingent liabilities are also included.
c) Fixed Assets
Tangible fixed assets are stated at cost less depreciation. Cost includes expenses to bring the
asset to its intended use. Revalued fixed assets are stated based on the revaluation and all other
fixed assets are stated at cost. Additions done on the account of valuation are credited to the
Revaluation Reserve.
(ii) Intangible fixed assets include the costs of acquired software and designs along with the
costs incurred for development of the Company's website. Certain contract acquisition costs
are also included. Intangible assets are initially measured at the cost of acquisition including
any directly attributable costs of bringing the asset to its intended use.
Depreciation on fixed tangible assets and amortization on fixed intangible assets are done by
straight-line method as per the rates mentioned in Schedule XIV to the Companies Act, 1956.
e) Investments
Current investments are carried at lower of cost and quoted or fair value whereas the long-term
investments are carried at cost.
f) Inventories
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Inventories are valued at lower of cost or the net realisable value. Cost is determined on First
in first out (FIFO) basis.
g) Employee benefits
The short term employee benefits expected to be paid in exchange for services rendered by
employees is recognised during the period when the employee actually renders the service.
Compensated absences which are not expected to occur within a year after the end of the period
in which the employee renders services are recognized as liability on balance sheet.
h) Revenue Recognition
(i) Income from guest accommodation is recognised on a day to day basis only after the guest
checks into a hotel. Income from Food and Beverages is recognised at the point of serving them
to the guests. Income stated is always exclusive of the amount recovered towards Sales, Luxury
and Service Tax.
(iii) Interest income is recognised on the basis of time proportion taking into account
outstanding amount and the rate applicable.
(iv) All insurance claims are recognized when they are settled or admitted.
i) Borrowing Costs
Borrowing costs that are directly attributable to the acquisition and construction of the
qualifying assets are capitalised and added to the asset on balance sheet.
j) Taxation
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Tax expense comprising of the current and deferred taxes are considered in the determination
of net profit/loss.
k) Impairment of assets
The carrying amounts of assets are reviewed to see if there is any indication of impairment. If
any such indication is found, the recoverable amount of such assets is estimated. Impairment
loss is recognized wherever carrying amount of assets exceed recoverable amount. After
impairment, depreciation is provided on the revised carrying amount of the assets over their
remaining useful life.
Indian hotel industry follows the Indian Generally Accepted Accounting Principles (GAAP)
whereas international industry follows IFRS. IFRS is different from Indian Generally Accepted
Accounting Principles (GAAP) in certain respects.
Fixed assets are recorded at cost or revalued amounts in IFRS whereas as per Indian GAAP,
they are recorded at historical costs or revalued amounts.
b) Depreciation
IFRS records depreciation over the asset’s estimated useful life. The residual value and the
useful life of an asset and the depreciation method is reviewed at least at each financial year-
end. In Indian GAAP depreciation is recorded over the asset’s useful life. Schedule XIV of the
Companies Act and Banking Regulations prescribe minimum rates of depreciation. These are
used as the basis for determining useful life.
IFRS recognises intangible assets if the specific criteria are met. Assets with a finite useful life
are amortised over their useful life on a systematic basis. An asset that has an indefinite useful
life and is not yet available for use is tested for impairment annually. As per the Indian GAAP,
intangible assets are capitalised if specific criteria are met and are amortised over their useful
life, generally not exceeding 10 years. The recoverable amount of an intangible asset which is
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not available for use or is being amortised over a period exceeding 10 years is reviewed at least
at each financial year-end even if there is no indication that the asset is impaired.
1. Property, Plant, and Equipment - Cost or revaluation model will be used to value plant,
property and equipment under IFRS. As per the revaluation model, Plant Property & equipment
asset class is revalued at fair value recurrently only when there is reliable measurement of fair
value. The fair value of the asset at the date of revaluation less any incurred accumulated
depreciation and accumulated impairment charges is the new revaluation amount. Revaluation
surplus is generated by the addition of revaluation amount which is credited to equity. The
conflict here will be in deciding which class of assets to be valued using the revaluation model.
Some hotels may choose to include land and buildings but may not use machinery, furniture
and fixtures under this system. This will have an impact on depreciation calculation because
decrease in fair value of the asset will trigger a decrease in the yearly depreciation. There is no
major impact of IFRS for this asset class.
2. Depreciation - IFRS uses a component approach for depreciation in the case of assets that are
separated into individual components and depreciated over useful lives. The components of a
hotel building may include the building, flooring, roof, furnishings, pools and parking lot. Each
of these components could denote a distinct depreciable asset with dissimilar useful life or
depreciation methods. Subsidiary ledgers are needed to ensure that asset components are
properly recorded as individual components. Useful life and residual value estimates, and the
method of depreciation are reviewed yearly. The residual value may be adjusted, and any
changes that result in differences in anticipations from previous estimates, shall be accounted
for as a change in an accounting estimate. These changes have a direct effect on the
depreciation taken on the asset and higher values would result in higher depreciation. If there
is a substantial change in the expected pattern of consumption of the future economic benefits
of the assets, the method shall be changed to reflect the changed pattern.
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3. Exceptional items as a term is not reflected in the IFRS accounting system but disclosure of
the same is necessary.
4. Extraordinary items are prohibited under IFRS
5. Statement of change in shareholder`s equity is required under IFRS.
6. There is no change in the format and method of cash flow statements
7. It may include bank overdrafts in cash equivalents in the cash flow statements
8. Assets and liabilities cannot be offset, except where specifically permitted by a standard
9. There is no hotel industry specific format for income statement.
Analysis of the financial statements of major players in the hotel sector such as Leela
Hotels, EIH (Oberoi hotels), Taj hotel group, Kamath hotels etc was done based on the rate of
last five years. The financial statements most of the groups followed the same accounting
policies as specified under the Companies Act, 1956. Major deviations were not observed.
Most of the hotels calculated fixed rate of amortization but few players calculated amortization
over a certain time period. These include the calculation of license fee and franchise fee.
Only Oberoi hotels valuated inventories using the lower of FIFO (First in first out) method or
net realisable value. The rest of the players used lower of either cost (weighted average) or net
realisable value.
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X. RATIO ANALYSIS
1) Current Ratio
The current ratio indicates the company’s ability to meet short term debt obligations. It
measures whether a firm has enough resources to pay its debt over the next 12 months.
0.9
0.8
0.7
0.6
0.5
Taj
0.4
Jaypee
0.3
EIH
0.2
0.1
0
2014 2013 2012 2011 2010
Years
Interpretation
The trend of current ratio for last 5 years of Taj and EIH is less than 1 which signifies that it is
very difficult to pay their debts with the available assets in the short run. Current ratio of EIH
is increasing from 2012 indicating to reach safe position in the next few years. Current ratio of
Taj is decreasing from 2011 the reason for this is the current liability is increased by 200%
from 2010 but the current assets remaining the same.
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2) Quick Ratio
The quick ratio is a measure of company’s ability to meet its short term obligations using its
most liquid assets. It is viewed as the sign of a company’s financial strength or weakness. It
tells the creditors how much of the company’s short term debt can be met by selling all the
company’s liquid assets at a very short notice.
Interpretation
The quick ratio trend of 3 hotels for the past 5 years is less than 1 (except for Taj in 2014)
which indicates the companies are not in position to pay their financial obligations in the short
run. But there is change in the trend by Taj hotels as their quick ratio is increasing from last 5
years and in 2014 it reached a safe position of paying its debts quickly.
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3) Cash Ratio
The cash ratio of a company is the ratio of a company’s cash and equivalent assets to its total
liabilities. It measures the ability of business to repay its current liabilities by only using its
cash and cash equivalents.
Interpretation
By observing the cash ratios of 3 hotels for past five years it is observed that Taj hotels is
having an increasing amounts of cash assets. It can be inferred that Taj is able to easily pay its
debts by using only cash and cash equivalents. EIH is fluctuating in terms of their cash
availability.
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4) Interval Measure
Interval measure is the measure of the approximate number of days a company could operate
simply on the cash it currently has on hand. it is equal to quick assets divided by daily operating
expenses and the value it returns is the number of days that company could use those assets to
meet all its expenses.
Interval measure = Cash + Cash equivalents/ Average daily expenditure from operations
Interpretation
Interval measure of all three hotels are observed to have an increasing trend over the past five
years. In 2014 Taj hotel is in comfortable position to run its business for more than 2/3rd of the
year with its current availability of cash resources. The other two hotels are able to run their
business for a quarter with their financial resources. Overall interval measure of all the hotels
are increasing mostly because of increase in cash and cash equivalents.
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Leverage ratios
It is a measure of a company's financial leverage. It is a long term solvency ratio that indicates
the soundness of long-term financial policies of the company. A ratio of 1 means that creditors
and stockholders equally contribute to the assets of the business. A higher value than 1.00
indicates that more assets are financed by debt that those financed by money of shareholders'
and vice versa. A less than 1 ratio indicates that the portion of assets provided by shareholders
is greater than the portion of assets provided by creditors.
Long term Debt equity ratio = Long term Debt / Equity
1.2
0.8
0.6
0.4
0.2
0
2014 2013 2012 2011 2010
Interpretation
A higher debt / equity ratio shows a more leveraged company. Jaypee Hotels has a low D/E
ratio, so most of their assets are financed by the shareholders. Companies with high D/E ratio
are more aggressive while those with low D/E ratio are more conservative. For Taj hotels, an
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increasing trend in of debt-to-equity ratio is alarming because it means that the percentage of
assets of a business financed by the debts is increasing.
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2014 2013 2012 2011 2010
Interpretation
The higher the ratio, the more leveraged the company and the greater its financial risk. Both
for Jaypee and EIH hotels the ratio for is decreasing means company has more assets than debt.
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EFFICIENCY RATIOS
Efficiency Ratios are the ratios that are typically used to analyze how well a company uses its
assets and liabilities internally. Efficiency Ratios can calculate the turnover of receivables, the
repayment of liabilities, the quantity and usage of equity and the general use of inventory and
machinery.
Interpretation
This ratio measures how favourably a company uses its assets to generate sales.A high value
is of this ratio is a good indication of efficient use of the available assets.All the companies
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have an asset turn over ratio of less than one across all the years.However,EIH is closing on to
a ratio of 1 for the year 2014.
Inventory Turn Over Ratio is the A ratio showing how many times a company's inventory is sold
and replaced over a period.
Interpretation
Jaypee has a higher inventory turnover ratio which is an indicator of its ineffective buying.It
indicates frequent purchases by the company.Taj and EIH have comparable inventory ratios
across the years.
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3. Debtors Turn Over Ratio
Debtors Turnover Ratio indicates the number of times average debtors are turned over during
a year. Debtors Turnover Ratio indicates the speed at which the sundry debtors are converted
in the form of cash.
Interpretation
Taj has a faster recovery of debt than EIH and Jaypee.It has a higher debtors turnover ratio in
comparison to all other hotels across the 5 year period.
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Profitability ratios
Gross margin ratio represents the proportion of each dollar of revenue that the company retains
as gross profit.
30
25
20
15
10
0
2014 2013 2012 2011 2010
Interpretation
The gross profit margin ratio of Taj was higher than that of Jaypee and EIH in 2010 and 2011.
But from 2012 to 2014, the gross profit margin ratio of Taj has been declining and is lesser
than both Jaypee and EIH. Jaypee’s gross profit margin ratio was highest in 2012 and 2013 and
lowest during 2010. EIH has most consistent profit margin ratios compared to other hotels.
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2) Net Profit Margin Ratio
Net profit margin measures how much of each dollar earned by the company is translated into
profits.
25
20
15
10
0
2014 2013 2012 2011 2010
Interpretation
The net profit margin of Taj has decreased significantly from 2012 to 2014. The net profit
margin of Jaypee touched heights in 2012 and a significant decrease in the subsequent year
2013. The net profit margin of EIH has been growing from 2010 to 2014.
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3) Return On Assets
An indicator of how profitable a company is relative to its total assets. ROA gives an idea as
to how efficient management is at using its assets to generate earnings. Calculated by dividing
a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes
this is referred to as "return on investment". The formula for ROA:
Return on assets
70
60
50
40
30
20
10
0
2014 2013 2012 2011 2010
Interpretation
The ROA of EIH has been consistently higher than Taj and Jaypee for the past 5 years. Jaypee’s
ROA has been the lowest compared to EIH and Taj in the last 5 years.
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4) Return On Equity
The amount of net income returned as a percentage of shareholders equity. Return on equity
measures a corporation's profitability by revealing how much profit a company generates with
the money shareholders have invested. ROE is expressed as a percentage and calculated as:
Return on equity
16
14
12
10
0
2014 2013 2012 2011 2010
Interpretation
ROE of Taj has decreased significantly from 2011 to 2014 whereas Jaypee’s ROE has
increased significantly from 2010 to 2014. EIH’s ROE on the other hand has been more or less
consistent from 2011 to 2014 though there has been decline recently in 2014 compared to 2013.
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5) Return On Invested Capital
A calculation used to assess a company's efficiency at allocating the capital under its control
to profitable investments. The return on invested capital measure gives a sense of how well a
company is using its money to generate returns. Comparing a company's return on capital
(ROIC) with its cost of capital (WACC) reveals whether invested capital was used effectively.
The general equation for ROIC is as follows:
(Net Income –Dividends) / Total Capital
25
20
15
10
0
2014 2013 2012 2011 2010
Interpretation
ROIC of EIH has been increasing since 2010 till present year whereas ROIC of Taj has been
declining since 2010 till present year. ROIC of Jaypee has been more or less increasing since
2010. But its ROIC has significantly increased from 2013 to 2014.
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XII. DUPONT ANALYSIS
The DuPont equation is an expression which breaks return on equity down into three parts:
profit margin, asset turnover, and leverage.
The three-step DuPont analysis breaks up ROE into three important components:
ROE = (Net profit margin)* (Asset Turnover) * (Equity multiplier)
These components include the following-
Operating efficiency: it is measured by profit margin.
Asset use efficiency: it is measured by total asset turnover.
Financial leverage: it is measured by equity multiplier.
DuPont Calculation:
ROE = net income / shareholder's equity
On multiplying the equation by (sales / sales) we get:
ROE = (net income / sales) * (sales / shareholder's equity)
ROE is therefore broken into two components, the first is net profit margin and the second is
the equity turnover ratio.
On multiplying (assets / assets):
ROE = (net income / sales) * (sales / assets) * (assets / shareholder's equity)
This equation for ROE breaks it into three widely used and studied components:
ROE = (Net profit margin)* (Asset Turnover) * (Equity multiplier)
By splitting ROE into three parts, companies can more easily understand changes in their
returns on equity over time.
As profit margin increases, every sale will bring more money to a company's bottom line,
resulting in a higher overall return on equity.
As asset turnover increases, a company will generate more sales per asset owned, resulting
in a higher overall return on equity.
Increased financial leverage will also lead to an increase in return on equity, since using
more debt financing brings on higher interest payments, which are tax deductible.
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Components of the DuPont Equation:
Profit Margin
Profit margin is a measure of profitability. It is an indicator of a company's pricing strategies
and how well the company controls costs. Profit margin is calculated by finding the net profit as
a percentage of the total revenue. As one feature of the DuPont equation, if the profit margin
of a company increases, every sale will bring more money to a company's bottom line, resulting
in a higher overall return on equity.
Asset Turnover
Asset turnover is a financial ratio that measures how efficiently a company uses its assets to
generate sales revenue or sales income for the company. Companies with low profit
margins tend to have high asset turnover, while those with high profit margins tend to have low
asset turnover. Similar to profit margin, if asset turnover increases, a company will generate
more sales per asset owned, once again resulting in a higher overall return on equity.
Financial Leverage
Financial leverage refers to the amount of debt that a company utilizes to finance its operations,
as compared with the amount of equity that the company utilizes. As was the case with asset
turnover and profit margin. Increased financial leverage will also lead to an increase in return
on equity. This is because the increased use of debt as financing will cause a company to have
higher interest payments, which are tax deductible. Because dividend payments are not tax
deductible, maintaining a high proportion of debt in a company's capital structure leads to a
higher return on equity.
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industries, such as those in the financial sector, chiefly rely on high leverage to generate an
acceptable return on equity. While a high level of leverage could be seen as too risky from
some perspectives, DuPont analysis enables third parties to compare that leverage with other
financial elements that can determine a company's return on equity.
Taj:
Taj Hotels
60
50
40
30
20
10
0
2014 2013 2012 2011 2010
ROE ROA
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Jaypee:
Jaypee
30
25
20
15
10
0
2014 2013 2012 2011 2010
ROE ROA
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EIH
EIH
80
70
60
50
40
30
20
10
0
2014 2013 2012 2011 2010
ROE ROA
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XII. REFERENCES
1. http://www.capitaline.com/user/framepage.asp?id=1
2. http://www.readyratios.com/reference/liquidity/
3. http://www.investorwords.com/6845/interval_measure.html
4. http://www.investorwords.com/6845/interval_measure.html#ixzz3EM042jDv
5. http://profit.ndtv.com/stock/taj-gvk-hotels-&-resorts-ltd_tajgvk/financials-historical-ratio
6. http://www.moneycontrol.com/financials/tajgvkhotelsresorts/ratios/TGV
11. Media Reports, Ministry of Tourism, Press Releases, Department of Industrial Policy and
Promotion (DIPP)
12. www.crisilresearch.com
13. www.insight.dionglobal.in
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