A Project Report on Ration Analysis of Hotel Industry

Subject: Accounting For Managers

Submitted To: Prof. AmitGodse

Table Of Content

ACKNOWLEDGEMENT

We wish to express our deep gratitude to Prof. AmitGodse, Professor of Accounting For Managers for providing his uncanny guidance, support and motivation throughout the preparation of the project report. We are also thankful to Head Librarian of SumantraGhosal Library, IBS Mumbai, for her support that triggered us for the project work We would also like to thank all the staff members and our co-students who were always there at the need of the hour and provided with all the help and facilities, which we required for the completion of the thesis.

Introduction: Current Scenario of the Hospitality Industry

Over the last decade and half the mad rush to India for business opportunities has intensified and elevated room rates and occupancy levels inIndia. Even budget hotels are charging USD 250 per day. The successful growth story of 'Hotel Industry in India' seconds only to China in Asia Pacific. 'Hotel Industry inIndia' have supply of 110,000 rooms. According to the tourism ministry, 4.4 million tourists visitedIndialast year and at current trend, demand will soar to 10 million in 2010 - to accommodate 350 million domestic travelers. 'Hotels inIndia' has a shortage of 150,000 rooms fueling hotel room rates acrossIndia. With tremendous pull of opportunity,Indiais a destination for hotel chains looking for growth. The World Travel and TourismCouncil,India, data says,Indiaranks 18th in business travel and will be among the top 5 in this decade. Sources estimate, demand is going to exceed supply by at least 100% over the next 2 years. Five-star hotels in metro cities allot same room, more than once a day to different guests, receiving almost 24-hour rates from both guests against 68 hours usage. With demand-supply disparity, 'Hotel India' room rates are most likely to rise 25% annually and occupancy to rise by 80%, over the next two years. 'Hotel Industry inIndia' is eroding its competitiveness as a cost effective destination. However, the rating on the 'Indian Hotels' is bullish.

TAJ Group Of Hotels The Indian Hotels Company Limited (IHCL) and its subsidiaries are collectively known as Taj Hotels Resorts and Palaces and isrecognised as one of Asia's largest and finest hotel company. Incorporated by the founder of the Tata Group, Mr. Jamsetji N. Tata, the company opened its first property, The TajMahal Palace Hotel, Bombay in 1903. The Taj, a symbol of Indian hospitality, completed its centenary year in 2003. Taj HotelsResorts 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. Taj Hotels Resorts and Palaces is committed to replicate its domestic success onto international shores with plans to build an international network of luxury hotels, which will provide an exemplary productservice combination and in the process create a global brand. The current international portfolio includes luxury resorts in the Indian Ocean, business and resort destinations in the Middle East and Africa, serviced apartments in the UK, the first hotel in Australia and three a top-end luxury hotels in the US.

Over the years, the Taj has won international acclaim for its quality hotels and its excellence in business facilities, services, cuisine and interiors. the Taj has pioneered innovation in fine dining across the world. Bhagwati Group was founded in 1989 by visionary thinker & entrepreneur par excellence Mr.NarendraSomani, The chairman & Managing Director who with his revolutionary business acumen and enterprising attitude created this enterprise from scratch. Bhagwati Banquets & Hotels Ltd. A renowned public limited company, listed at BSE and NSE exchange, with its vision and novel innovations has created an admired empire in the field of food and hospitality industry. BBHL is a company offering the best of both worlds. A unique understanding of the culture and communities combined with the collective expertise of an executive team contributing over 22 years of experience in the service industry. BBHL has one of its kind and unique banqueting models in India. Looking forward and creating benchmarks in the hospitality segment, the company opened first of its kind star category Banqueting hotel with best of the amenities in the year 2002 under the brand name "The Grand Bhagwati". BBHL with the above success has already chartered the future map fueling more growth. For this, company has built an exclusive Five Star hotel convention centre & Club in the city of Surat. The company now is

expanding Pan India with its Restaurants, Banquet halls & outdoor catering operations in the city of Jaipur, Bangalore, Nagpur, Pune, Mumbai, Hyderabad, Jodhpur, Indore etc.

Kamat hotels limited

Kamat Hotels (India) Limited was incorporated on 21st March, 1986 in the State of Maharashtra by Late Mr. Venkatesh Krishna Kamat and his associates with the main object of setting up and running of hotels and related business. The Company obtained the Certificate of Commencement of Business on 31st March, 1986. The Group Kamats had a humble and modest beginning. A clear vision along with determination and hard work, have gone a long way in helping the Group achieve successful results and has laid the foundation of the most successful Restaurant Chain in India, which of course had gained a strong foothold in the hospitality Industry. The brand equity Kamats has also gone up substantially over the years and the name is synonymous with value for money and represents a philosophy of best quality of service at the most affordable prices.

KHIL has firmly established four hotel brands viz. The Orchid An Ecotel Hotel in the 5-Star segment and VITS Luxury Business Hotel in the 4-Star segment, Gadh Hotels and Lotus Resorts. The focus of the Company is in positioning its hotels to the business segment in the upscale , full service category. In addition, the

Company consciously follows the policy of environment conservation in the operation of its hotels in all aspects viz. design, construction and operations. This environment positioning gives a dual advantage to the Company in terms of marketing & visibility coupled with lower cost of operations.

 Types of Ratios:Ratios

Profitability Ratios a) Gross Profit Ratio b) Net Profit Ratio c) Operating Profit d) Proprietary Ratio d) Operating Ratio e) Return On Capital Employed f) Return on Equity g) Return On Total Assets

Financial Ratios

Turnover Ratios

a) Current Ratio a) Working Capital b) Liquidity Ratio Turnover c) Debt-Equity Ratio b) Debtors Turnover c) Creditors Turnover e) Current Assets to d) Stock Turnover Fixed Assets Ratio e) Fixed Assets Turnover f) Sales to Capital Employed

PROFITABILITY RATIOS

1) Gross Profit Ratio:

This ratio shows the margin left after meeting the purchases and various manufacturing Costs. Higher the ratio higher the Profitability and a high margin for covering the other expenses like Administration, Selling and Distribution expenses. The gross profit ratio represents the gross margin. It is important for the business to maintain this ratio on higher side otherwise it will be difficult to cover other expenses. Gross Profit Ratio: Taj Cr.) Gross Profit (rs.) 1673.50 Net sales (rs.) Gross Ratio 2914.90 (in Kamat Lacs) 5697.53 12327.84 46.22 (In Bhagwati(In Lacs) 6989.57 12104.99 57.33 53.65 Industry Average

Profit 57.41

INTERPRETATION The total income of the TAJ hotels has increased by 13.46% and so has the Gross profit ratio. The reason for the increase in the revenues is the boom in the hospitality sector. The gross profit ratio of the hotel, of 57.41%, is quite reasonable, indicating the control of the inventories department. The

ratio also indicates that the costs of production amounts to Rs.42.39. It is also near the industry average, indicating a comfortable position of the hotel. On the other hand, Kamat is having a gross profit ratio of 46.22%, which is a bit low compared to the industry average of 53.65%. This means that the costing department of the company needs to reduce costs and other operating expenses otherwise their distributable profits will suffer. Bhagwati Group of Hotels, has a reasonable profit earning of 57.33%, near to the industry average. This indicates that the costs of the hotel are under control of the costing department. The hotel has reasonable profits to satisfy their operating and non operating expenses.

2) Net Profit Ratio:

It establishes relationship between the Net Profit and Net Sales. Higher the ratio higher is the Profitability to the company. It measures overall efficiency of the functions of a business firm like production, administration, selling, financing, pricing, tax management, etc., A firm with high net profit ratio would be in an advantageous position to survive in the face of falling sales prices, rising costs of production or declining demand for the product.

Taj (in Cr.) Net Profit (rs.) 141.25

Kamat (in Lacs) 137.32

Bhagwati (in Lacs) 957.64

Industry Average

Net Sales (Rs.) Net Profit Ratio

2914.90 4.85

12327.84 1.11

12104.99 7.91 4.62

INTERPRETATION The net profit ratio of Kamat Hotels Ltd. of 1.11 is really low compared to the industry average of 4.62. This indicates that the expenses of the hotel are really high and they are not able to retain enough profits. On the other hand, Taj group of Hotels and the Bhagwati group of Hotels and banquets are able to save their portion of profits. This indicates that the expenditures of the Taj and bhagwati group are low compared to the Kamat hotels Lmt. and it needs to control its expenditure. The Bhagwati Group of Hotels are earning good profits compared to TAJ and Kamat group of hotels. This indicates that Bhagwati is having more distributable profits, compared to the other 2 hotels.

3) Operating Ratio:
This ratio indicates the ratio of operating costs to the sales. It measures Profitability. Higher the ratio indicates Lower efficiency because a major part of sales is eaten-up by operating costs and vice-versa. This ratio can be further analyzed to find out the percentage of each type of Expenses to the Sales.

Taj Cr.)

(in Kamat Lacs)

(in Bhagwati Lacs)

(In Industry Average

Operating (Rs.)

Profit 474.54

3875.26

6009.38

Net Sales (Rs.)

Operating Profit Ratio

2914.90 16.28

12327.84 31.44

12104.99 49.64 32.45

INTERPRETATION The operating profit ratio indicates that the Bhagwatigroup of hotels are earning nearly half of their sales as their operating profits. The operating ratio should always be minimum as it indicates that the company is earning good returns on the operations front. The Taj group of hotels has a really low operating ratio. The management should consider decreasing their operating expenses and increase returns. The kamat hotels ltd. is near the average, indicating that the operating expenses of the hotel are under control.

4) Interest Coverage Ratio

This ratio indicates whether the company is able to service its interest obligations out of the current years profits. A ratio of less than 1 would indicate that their promoters would have to increase their contributions in the business in order to meet their interest obligation. A higher interest ratio would indicate that the company is in a better position to negotiate for lesser rate of interest with the bankers.

Taj Cr.) Profit After Tax (Rs.) Interest Depreciation Interest Paid Interest Ratio

(in Kamat Lacs) 137.32 2437.00 8704.41 3242.84 3.48

(in Bhagwati Lacs) 957.64 676.14 1342.99 599.71 4.96

(in Industry Average

141.25 122.85 879.44 169.59

Coverage 6.74

5.06

Interpretation The interest coverage ratio of TAJ group of hotels shows an optimum position of the group amongst the bankers. The taj group is in a position to bargain really well on the interest grounds with the banks. The ratio indicates that all the companies are in a position to clear their interest obligations with ease. Still, the Kamat Hotels Ltd. needs to work on their revenues front to bring their ratio up to the industry level. Nevertheless, they are in a position to clear their interest obligations.

 The Bhagwati Group of Hotels, is doing well on the interest coverage front. They are close to the industry average, indicating their better position in the industry and their bargaining power with the banks.

5) Earnings Per Share

This indicates the earnings made by the shareholders on every equity they hold. Thus higher earning is always desired. The earnings per share is used by the investors to interpret the earnings of the company. A higher EPS attracts more investors to the company, resulting to large investor base.

Taj(in Cr.)

Kamat Lacs)

(In Bhagwati Lacs) 957.64

(in Industry Average

Net Profit After Tax 141.25 (Rs.) No. Shares Earnings Per Share 1.93 Of

137.32

Equity 733237171 14303681

29286400

0.96

2.93

1.94

Interpretation

 The EPS of TAJ group of 1.93 is appreciable. It indicates that the company is providing returns to the investors on the investments made. But investing in Bhagwati group of Hotels would be a right choice. The Shareholders of Bhagwati Group are earning around Rs.2.93 per share, which is quite above the industry average of 1.94 and the TAJ group of hotels. Investing money in Kamat Hotels Ltd., of all the 3 companies, would yield less returns. So of the 3 companies, as per the EPS, it is recommended to invest in Bhagwati Group of hotels and secondly in TAJ group.

6) Fixed Assets Turnover Ratio:

This ratio indicates the amount of Sales realized per rupee of investments in the Fixed Assets. Fixed Assets are those which are utilized in the business for purpose of improving its earning capacity. A high ratio indicates that a higher amount of Sales generated per rupee of investment in the Fixed Assets and Vice-Versa.

TAJ (in Cr.) Net Sales 2914.90 Fixed Assets 1725.74 Ratio 1.69 times

KAMAT (in Lacs) 12327.84 30372.96 0.41 times

BHAGWATI (in Lacs) 12104.99 23561.79 0.51 times

INDUSTRY AVERAGE

0.87 times

Interpretation: It can be interpreted from the above table that on an average industry utilizes 0.87 capacities of fixed assets for generating its sales.

 The Taj hotel is generating 1.7 sales on its fixed assets which is almost double of the industry avg. The Kamat Hotel is Generating less sales on its fixed assets as compared to industry average which is half of the industry average. This also indicates that fixed assets are not utilized by the hotel. In case of Hotel Bhagwati it is generating 0.51 times of sales on its fixed assets which is less as compared to industry average.

7) Stock turnover Ratio:

This ratio establishes a relationship between the COGS during given period and the average amount of inventory held during that period. Higher this ratio, the better it is because it shows rapid turnover of stock and consequently shorter holding period. The indication given by this ratio is the number of time the finished stock is turn over during a given accounting period. It shows the efficiency in inventory management.

COGS

TAJ (in Cr.) 1241.40

KAMAT (in Lacs) BHAGWATI (in Lacs) 6630.31 5165.42 1411.51 3.66 (100 Days)

AVG. STOCK 31.54 370.59 RATIO 39.35 17.89 (9 days) (20 days)

Interpretation: On an avg stock of Taj is rotated 9 days, where as the Avg stock of Kamat and Bhagwati are rotated 20 days and 100 days.

 This indicates that the capital is less blocked in case of Taj as compared to Kamat and Bhagwati. The Kamat Hotel is also blocking its capital for less number of period. The Bhagwatis Stock is more blocked as compared to other two hotels and this is not good sign for the company because most of the time the stock is kept for longer period. This indicates improper management of inventory by the hotel. Due to this short term solvency position of the Hotel is also affected. This also indicates increase in burden on working capital.

8) Total Asset turnover Ratio:

This ratio indicates the effectiveness with management uses its assets to generate sales. A relatively high ratio tends to reflects intensive use of assets. This ratio measures the effectiveness and profit earning capacity of the concern.

NET SALES TOTAL ASSETS RATIO

TAJ (in Cr.) KAMAT (in Lacs) 2914.90 12327.84 2261.10 70133.51 1.29 times 0.18 times

BHAGWATI (in INDUSTRY AVG Lacs) 12104.99 30543.02 0.40 times 0.62 times

Interpretation: It can be interpreted from above table that on an average industry generates 0.62 times of sales on its total assets.

 The taj hotel generates 1.29 times of sales on its total assets which is a good indicator for the company and it double of the industry avg. It is also an indicator that it is efficiently utilizing its total assets. The kamat hotel is generating 1/3 of the total sales as compare with the industry standards which indicates that the hotel is not efficiently utilizing its total assets. As far as hotel bhagwati is concern it is generating 0.40 times of sales on its total assets which is less than the industry average.

9) Debt Equity Ratio:Debt equity ratio suggests the proportion of total debts to the shareholders funds employed in the business. It is used to analyze the amount of debts borrowed by the company against the total equity available with the company. A debt equity ratio of above 1 suggests that the company has borrowed more funds compared to the equity actually available to discharge the debts. The debt to equity ratio should always be less than 1.

Taj Cr.) Total Long Term Debts Proprietors Funds Debt Equity Ratio

(in Kamat (in Bhagwati Lacs) 8422.37 19139.75 0.44:1 (in Lacs) 1608.21 14291.75 0.11:1

Industry Average

1838.73 3228.91 0.56:1

0.37:1

INTERPRETATION The debt to equity position of Bhagwati Group Of Hotels is appreciable. They can easily borrow funds from the market, compared to the other companies. But their debt equity ratio is quite low compared to the industrys acceptable ratio of 0.37:1. The position of all the 3 companies in terms of the debt equity ratio is quite comfortable. They have surplus funds available as equity to discharge the debts of the company. The firms can increase their debts to a level of 0.37 times their equity as it is the standard acceptable rate for the industry.

10) Proprietory Ratio:This is a primarily the ratio between the proprietors Funds and Total Assets. This ratio indicates the proportion of Proprietors Funds used for financing the Total Assets. It indicates the Long term financial Solvency. Higher the ratio shows lesser dependency on External Source of Funds and sound financial position and vice-versa.It indicates the strength of the funding of the company.