FINANCIAL ANALYSIS OF

HOTEL INDUSTRY

FINANCIAL REPORTING AND ANALYSIS

​Submitted by: - Submitted to: -

Prof. Prakash Singh

Aman Sharma (PGP35058)

Arushi Jindal (ABM16013)

Manish Anand (PGP35070)

Ritika Saini (FPM20011)

Shikha Thakur(PGP35092)

Yajurv Algoter (PGP35098)

Contents

Introduction 3

Motivation: 4

Hotel Industry – Business Model 4

Hotel Industry – Cost Structure 6

Porter's 5 forces Analysis 8

Macro-Economic factors affecting Industry 10

GDP of the Nation: 10
Unemployment: 11
Consumer Price Index (CPIs): 12

Recently in NEWS 13
Hotel & Tourism: Foreign tourist arrivals growth to India eases in July 2019 13
GST Rates for Hotels slashed 14
Police probe seek by Hotel body against OYO 14
Expedia given exclusive wholesale rate rights by Marriott 14
Owner of Marriott-operated Hotels files for IPO 15

Accounting Principles used in the industry 16

a) Use of estimates 16
b) Tangible Fixed Assets 16
c) Depreciation on fixed assets 17
d) Impairment 17
e) Intangible assets 18
f) Investments 18
g) Inventories 19
h) Revenue recognition 19
k) Borrowing Costs: 20
m) Employee benefits: 21

Financial Ratio Analysis 24

Solvency Ratio 26
1.Debt Equity Ratio 26

Turnover/Efficiency Ratios 26

Profitability ratio 29

References 34

Annexures: 34
Introduction

Hotel industry is a subpart of hospitality industry. Hospitality industry is concerned with

accommodation, leisure, travel & tourism, bars, restaurants, night life, café., and lodging.
Whereas hotel industry concerned with provisionally accommodating guests and providing
the services related to them.

Hotel industry is the most important constituent of the service industry as it provides
accommodation and catering to the customers. Also, this industry has a close association with
hospitality and travel industry.

Since the hotel industry deals with the services that relates to accommodation of guests. It is
worth to note that a variety of accommodation types are concealed under this.

Hotel industry is considered as a high revenue generating industry for the country. With
increasing demand with improved economic activities and lower room additions, the major
market in industry to sustain Average Room Rate (ARRs) increased at an average of
3.5-4.5% p.a. Also, occupancy is expected to increase to an average of about 68-70% by the
end of FY’23 as compared to FY’18 (66.66%). Accordingly, the hotel industry is expected to
see an increase in room revenue at the rate of 10-12% CAGR over 5 years.
Motivation:

Choice of industry

Hotel industry is expected to fall short for meeting long term demand at about 7% p.a. There
is an increasing demand depending on the business travelers and also tourism (mainly
increase in medical tourism). Demand normally surges in the peak season between November
and March.

Metro cities are facing an intense competition, slowly tier-2 and tier-3 cities are entering into
it. Also, due to penetration of internet, competition from online/startups industry is being
indulged.

Twenty-five percent ​of the Indian hotel industry falls under the branded category. Due to
higher disposable income, increase in depth of technology, reach and awareness, the flight of
customers have been to the branded segment rather than unbranded segment globally. Major
hotel chains have aimed to capture this branded segment of the economy. This industry is
considered as a high revenue generating industry for the country.

Indian hospitality industry contributes to the nation’s economic growth. Room demand has
faced a growth rate of about 6.8%, and supply has a 3% growth in recent years. Overall, the
industry expects to have a healthy growth in revenue thus contributing to economic growth.

Choice of players

The industry has a wide portfolio of the hotels and has small as well as big hotels operating in
the country. The choice of players is factor that those hotels having a lead in the hotel
industry. Domestic hotels have been considered amongst which Bharat Hotels Ltd is among
the top brands of the country followed by EIH Ltd. The third one considered is ITDC.

​Hotel Industry – Business Model

The use of modern information technology, especially the Internet, has favorably
influenced the development of the tourism sector, e-tourism today being one of the most
important sectors of the business world as it revolutionizes the distribution of tourism
information and products. The tourism industry is heavily influenced by technological and
social factors, as new ICTs and the emergence of the Internet have turned customers into
active customers, directly involved in creating the tourism product and supporting the value
proposed through the adopted business model.
 Information technology offers the possibility of improving tourism and travel activity,
being an interesting field of application but also of research-innovation to create new
business opportunities. Electronic commerce is the process of buying and selling or exchange
of products, services and information through communication networks. E-commerce and
e-tourism are now considered to be the most important business sectors. E-Commerce studies
in the tourism industry have emerged as a "frontier zone" for information technology. In
E-Commerce is being implemented new and efficient business models on the Internet.

Business models Model characterization

It is the most popular model in E-Commerce, based

on the direct sale by the provider of tourist services
to the client and the communication is made
Business to client model (B&C) directly with the tourists.

The direct suppliers of tourist services (airlines,

hotels) sell their products to tour operators
(expedia.com) and offer tourist packages to
Business to Business model (B&B) individual customers.

It is based on virtual tourists' communication

(forums, blogs, and email groups) and on the
creation of packages of tourist services as a result
Client to client model (C&C) of community support.

It consists in selling products, travel services by

direct providers to other companies who in turn sell
to the consumers via the internet. Essentially, it's
Business to Business to Customer about selling a product or a tourist service using
model (B&B&C) another business as an intermediary.

The tourism service providers / tour operators play

the central role. The Government provides the
necessary support to tourism service providers /
Government-operator in operators (B) in order to work smoothly (security,
tourism-client model (G&B&C) promotion, visa issuance, etc) and, furthermore,
 service providers promote tourism and offer better
services to tourists (C).

​Hotel Industry – Cost Structure

In the industry of boutique hotel, hotel rooms are rented mostly ​attaching various types of
services ​such as food, spa, and business activities’ space provision. Some regular hotels can
only provide their clients with basic room services. Hotels are service providers as well as
consumers of human labor, services, supplies, and other essentials to ensure spontaneous
provision of good hotel services.

The main cost structure for hotels can be broken down into sunk costs, fixed costs,
variable costs, scale economies and scope economies. Hotel’s ​sunk costs are the construction
cost and attainment of business certificate’s cost. Hotel owners tend to be very cautious about
expansion in the hotel industry, so the cost of construction is indeed sunk. ​Fixed costs
include 24 hours per day, 7 days a week front desk services, frequent equipment warranty
check (for example, fire alarm), competitors information searching expense and workers’
insurance. Direct wages of employees and expenses related to occupancy volume (soap,
shampoo and laundry costs for the rooms) are ​variable costs​. In large boutique hotels, labor
costs share almost 26% of the expenses while regular hotels spend 32% on the labor costs.
Such number indicates that main players in the industry has the general incentive to improve
their service quality by largely investing in other services sectors in order to improve their
reputation in the hotel industry. For larger boutique hotels, variable costs also include the cost
of sales (for example hotel spa, massage, restaurant and items sold inside the hotels).

“​Scale ​economies”​ is effective when the scale of production increases, the costs will
go down. In hotel industry, scale economies are mostly depending on the rate of room
occupancy. Once the occupancy rate increases, the average costs will decrease. However, in
boutique hotels, economics of scale also rely on other services. For example, a 5 star boutique
hotel in a prominent location. Except the room occupancy rate, the hotel has accessorial
restaurant and SPA services. The hotel can hold business meetings and events. The optional
services increase the efficiency of production.

“​Economies ​of ​scope​” specify that the total cost of production is lower when two
products are produced together than that of producing separately if there is a ​joint cost​. In the
case of large hotels, consumers are not only purchasing the comfortable room services, but
also likely experiencing other qualified services inside the hotel. The joint cost would be the
expense of location. One location with various types of enjoyments, both customers and
service provider are benefited. Hotels lists a number of choices for their clients. There are
bed-addition, breakfast-provision, celebration-management, cultural events management,
family-party, golf program, and spa. All the high quality services and packages attract more
customers to their hotel, and the hotel itself can lower its average costs.

Fixed Costs:​ Fixed costs are normally not affected by changes in occupancy or sales volume.
They are said to have little direct relationship to the business volume because they do not
change significantly when the number of sales increases or decreases. The term fixed should
never be taken to mean static or unchanging,but merely to indicate that any changes that may
occur in such costs are related only indirectly or distantly to changes in volume.

Examples of Fixed costs are:

● Land, Building Taxes to government.
● Wages to employees.
● Hotel employees health premium.
● Outsourced services contracted for fixed amount in a month eg:- security services.
● Yearly maintenance contract fees (AMC) for all equipments, machineries and Hotel
Management software.
● Fixed internet, telephone plans.
● Advertising cost.
● Yearly external auditing cost.
● Payroll.
● Provision.
● In house moves / satellite TV.
● Music entertainment.
● Reservation expenses.
● Subscription - Newspaper, magazine etc.
● Human resources.
● Sales & marketing.
● Interest on loan.
● Other fixed charges etc.

Variable Costs: ​Variable costs are clearly related to hotel occupancy and business
volume. As business volume or occupancy increases, variable costs will increase; as hotel
occupancy decreases, variable costs should decrease as well.

Examples of variable costs are:

● Food, beverages, housekeeping cleaning supplies.
● Flower arrangements.
● Guest room amenities.
● Guest room, restaurants and banquets linen.
● Banquet HVAC costs.
● Stationeries used in Front desk and restaurants.
 ● Chemicals for laundry and water treatment plants.
● T/A commission.
● Flower & decorations.
● Guest supplies -amenities.
● Guest relations.
● Laundry operations.
● Laundry Uniform.
● Printing supplies.
● Entertainment.
● Telephone & Fax.
● Transportation.
● Other operating supplies.
● Administration & General.
● Human resources.
● Sales & Marketing.
● Management Fees etc.

​Porter's 5 forces Analysis

One of the most popular methods of Macro-economic analysis, it was given by Michael
Porter in 1980. Also known as the competitive forces model, it seeks to know how the forces
of the industry affect pricing, investing and costing. The model considers 5 different forces,
namely
1. Threat of new entrants
2. Threat of Substitutes
3. Bargaining power of Suppliers
4. Bargaining power of Buyers
5. Industry Rivalry
We shall be discussing each of these points with respect their application in the Hotel
Industry.
1. Threat of New Entrants
The first one among forces listed by Kotler, this one depends on the barriers faced by new
firms which are trying to enter the industry. These barriers can be of various types such as,
the benefits derived from economies of scale enjoyed by existing players, the gestation period
and amount investment required to start business, existing supply chain and logistics of
current players, goodwill and brand recognition of existing players, and such others. These
can be observed in the Hotel Industry. Typically, Hotels require more investment as
compared to other businesses as a considerable amount of Properties need to be bought,
rented or leased. This poses a barrier to new firms. Further, existing hotels might form chains
so as to hedge losses during off seasons and display presence at multiple locations, while
creating an image in the minds of customers about the kind of service they provide and create
loyal customers that prefer to stay at their properties despite a change in location. These
benefits are enjoyed because of experience, something that new entrants lack. Also,
Government regulations required to be fulfilled, and licenses needed often prove to be a
cumbersome task for new players. Hence, there is relatively less threat of new entrants as
compared to many other industries.
2. Threats of Substitute Products
Another important force to be considered arises from the availability and existence of closely
related substitutes to the product in question. The reason for use of substitutes can be many,
including cheaper price, better quality or easy availability. Traditionally, there has been no
close substitute to the service provided by Hotels. However, emerging trends during recent
times suggest otherwise. For example, apps such as Oyo Rooms and Air BnB make it
difficult for players to command a profit margin as before and maintain costs. They provide
the same services as Hotels do, with an added advantage of personal touch and interaction by
locals. Also, there are other options such as staying in hostels, staying with relatives,
Dharamshalas​ and Motels. These are also very cost effective as compared to Hotels,
although the same quantity and quality of services may not be available. Except these, there
is no major threat of substitutes to the Hospitality industry as a whole.
3. Bargaining Power of Suppliers
In any industry, according to Porter, suppliers also command a significant amount of
bargaining power, especially If the customer are fragmented and don’t affect the demand for
goods much. This gives power to the suppliers with regard to pricing, supply etc. Further,
their power also increases if the product they supply is key to the industry. In the Hotel
industry, the demand from suppliers is very fragmented, especially when it comes to
products. But as with most industries, the demand or skilled labour and trained personnel is
also there in the Hospitality business. Also in today’s times, data is necessary for Hotels
about booking, customers, etc. Apart from these, no pressure is faced by hotels due to the
bargaining power of suppliers. They have to rely on cost-cutting and further differentiation of
their services for gaining an edge over their competitors.
4. Bargaining Power of Buyers
In an industry, the concentration and number of buyers if adequate, can actually affect the
pricing of products and services. The producers or suppliers will have to rethink their
offerings based on demand. The margins earned by industry may even go down if the buyers
are keen on it. Hospitality industry caters to a variety of buyers. Among them, there are
certain bulk purchasers who hire rooms by the block. These include travel agencies,
large-scale event organisers, corporate houses, airlines and such others. Hence, their
importance to the Industry is huge, and it is imperative that their demands are taken care of in
order to increase competitiveness and profits. However, when it comes to individual
travellers, there is not much threat. This is because the purchase made is not so much, or
when it comes to business travellers, they are not very concerned with the money spent on the
Hotel. Thus, in hospitality, the bargaining power of buyers depends heavily on the target
market of the particular Hotel. 5 stars near Airports aim to please airlines, and budget hotels
at popular tourist destinations aim to please tour operators.
5. Industry Rivalry
This describes the kind of competition normally existing among active players in the industry
and the extent to which it affects their survival in the market. If we take an example of the
airline market in United States, there is intense competition among all domestic players. All
of them survive on negligible margins and yet continue to operate, due to the simple fact that
if they do not, they shall be forced to go out of business. Even in the Hospitality business,
there are many exit barriers faced ow in to the amount of money invested, On the other hand,
Luxury fashion labels face no such hassle. They can charge the price they want without
worrying about competitors. Thus, it depends on product differentiation and switching costs.
In the Hotel industry, considering the fixed costs faced, rivalry becomes intense especially
among the urban properties. Price-cutting is often resorted to, for not operating under
capacity. Among peak-seasons and holidays however, this is never seen as all Hotels charge
an increased fare.
Hence it is clear that in the Hospitality industry, competition is intense, but among
strategically fragmented groups, based on money they spend. Fixed costs remain, more or
less the same for all players in a particular segment, thus competitive advantages can be
enjoyed by having a good location and offering quality service.

Macro-Economic factors affecting Industry

GDP of the Nation:

GDP plays an important role in determining the fate of the hotel Industry at a macro level. It
states the consumer purchasing power for commodities and services intended by a specific
topography or a province. The higher the GDP index in terms of per capita income as well as
the purchasing parity level, the better are the chances of its survival and feasibility in a
competitive environment. Thus, the correlation analysis used to determine the relationship
between HMPI (Hotel market Performance Indicators) and economic determinants of a
certain time frame that has been drifted in time relative to one another. Thus, the cross
correlation between the varied economy is adequate to characterize link between the two over
time at macro level. HMPI data had been drafted to highlight a lag in economy determinants
in a unit-year time interval up till three years. Since the 1970s, major HMPI have been
conversely reflected to have a significant proportional correlation with GDP at only Null-time
year lag
Unemployment:
The scalability of employment in a region is also a primary macro-economic factor which can
be crucial to determine the sustenance of the hotel industry in a particular region. It gives
illustrations on affordability, likelihood of the consumer towards attaining services of the
hotels. There is a negative relationship between the HMPI and the unemployment. Major
chunk of HMPI is evident to have a considerable gain in the correlation index w.r.t
unemployment even if there is marginal dip in business or revenue is shown during a
certain/fixed tenure. In the scaling terms of timing, the relationship of unemployment with
HMPI reflects it to have noteworthy impact at a null-year time or during a unit-year lag time
frame. Thus, these two indices are inversely proportional to its outcome.
Consumer Price Index (CPIs):
CPI is one of the most important determinants among expenses, wherein the relationship
exists among various segments of a time frame. Thus, variance in the coefficient of
correlation have been deter a considerable stability in the Expense parameter. The Depository
Receipt (A-DR), Profit data and a revenue per available room (Rev-PAR) indicate a
progressive gain in Consumer Price Index over in a different time zone. On contrary CPI
reflects a fluctuation in relationship, which considerably deemed to lag when mapped at the
longer-term perspective when compared to short term stretch. In the past Forty years CP
index and A-DR is found to be closely aligned indicating in a generalized fashion the ability
of a hotel to adjust rate with inflation measured as a zero lag in time. The clarification to this
lagged relationship between the growth in CPI and growth in hotel Expenses is not clear but
ought to be ascribed to hotel monitoring and governing their growth in expense and for
industries looking to transition to a sustained growth in supply and network of smaller motel
and budget hotel.
Recently in NEWS

Hotel & Tourism: Foreign tourist arrivals growth to India eases in July 2019

Global tourism export earnings rises 4% to US$ 1.7 trillion outpacing world economy in
2018: UNWTO

Foreign exchange earnings from tourism improved at double digit and 10-months high pace

The foreign tourist arrivals (FTAs) to India rose at slower pace of 1.4% to 8.17 lakh of FTAs
in July 2019, compared with 3.5% growth in FTAs to 8.06 lakh recorded in July 2018. The
FTAs growth has also decelerated from 5-months high growth of 5.4% recorded in June
2019.

The FTAs have rose 2.1% to 60.84 lakh in January-July 2019, showing sharp moderation in
growth from 7.1% to 56.58 lakh recorded in January-July 2018.

The percentage share of Foreign Tourist Arrivals in India during July, 2019 among the top 15
source countries was highest from Bangladesh (23.67%) followed by USA (16.02%), UK
(10.12%), Malaysia (3.15%), China (2.78%), Sri Lanka (2.75%), France (2.71%), Canada
(2.29%), Australia (2.22%), Japan (2.15%), Germany (2.05%), Singapore (1.68%), Nepal
(1.63%), Rep. of Korea (1.52%),and UAE (1.35%).
The percentage share of Foreign Tourist Arrivals in India during July, 2019 among the top 15
ports was highest at Delhi Airport (25.47%) followed by Mumbai Airport (13.22%),
Haridaspur Land Check Post (10.59%), Chennai Airport (10.05%), Bengaluru Airport
(7.67%), Kolkata Airport (4.93%), Hyderabad Airport (4.74%), Cochin Airport (4.39%),
Gede Rail Land Check Post (2.67%), Ahmedabad Airport (2.15%), Ghojadanga Land Check
Post (2.12%), Tiruchirappalli Airport (1.52%), Trivandrum Airport (1.38%), Agartala Land
Check Post (1.21%) and Chitpur Rail Land Check Post (0.84%).

GST Rates for Hotels slashed

The Indian Government recently slashed rates for Hotel rooms costing above Rs.7500 a night
from 28% to 18%, there by bringing down their prices considerably. Hotels costing between
Rs.1001 and 7500 earlier were charged GST at 18%, and now shall only have to pay at the
rate of 12%. This move was lauded by the executives of major Hotel businesses. They expect
a growth in business due to the slashed rates. It has several positive implications such as, the
Companies which had moved from the premium segment to middle one, owing to high taxes
shall now come back, and the Indian Hospitality Industry, which was missing out on revenues
from International Conferences, meetings, incentives and exhibitions, shall not anymore, as
the rates are in competition with other Nations. In view of this hope, Hotel stock prices
jumped as high as 20% on the day of announcement. In this dismal economic scenario, this
move has indeed improved National outlook considerably.

Police probe seek by Hotel body against OYO

Bruhat Bangalore Association, a Bengaluru based Hotel by has written to the Commissioner
of Police requesting a probe against OYO Rooms. It was because of the unfair trade practices
carried on by them that resulted in loss of revenue to the Hotel owners, which allegedly run
into hundreds of crores. The association claims to have over 1800 Hotels and restaurants as
members, has written that the Company (OYO) willfully takes advantage of its dominant
position in the market, and technology to falsify booking data. They also withhold true
information from the hotel owners, and do not pay the amounts due to them. OYO
Spokesperson are unruffled by all this, calling it a “routine commercial matter”. They assured
stakeholders to have faith in the legal machinery and not sensationalize the matter.

Expedia given exclusive wholesale rate rights by Marriott

In an unprecedented move, Expedia has been granted all wholesale rates related rights by JW
Marriott group. All others shall now have to approach Expedia for a piece of this pie. It is a
first of its kind move that has players ruffled across the industry.
Owner of Marriott-operated Hotels files for IPO
SAMHI Hotels, which owns the largest group of Hotels operated by IGH group and Marriott
has filed for an Initial Public Offering (IPO) in the hope of raising over $150 million by issue
of new shares. The existing shareholders of the Company are also hopeful of selling close
to19 million shares owned by them. These include Goldman Sachs Investment Holdings and
Blue Chandra Pvt. Ltd. The move is being managed by Kotak Mahindra, CLSA India, DSP
Merrill Lynch and Goldman Sachs India. The Company has said that the proceeds shall be
used for cutting existing debt.
Accounting Principles used in the industry

a) Use of estimates
The preparation of financial statements are in conformity with Indian GAAP requires the
management to make judgments, estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent liabilities at the end of the reporting
period. Although these estimates are based upon management's best knowledge of current
events and actions, uncertainty about these assumptions and estimates could result in the
outcomes requiring a material adjustment to the carrying amounts of assets or liabilities in
future periods.

b) Tangible Fixed Assets

Fixed assets are stated at cost (or revalued amounts, as the case may be), net of accumulated
depreciation and accumulated impairment losses, if any. Cost comprises the purchase price,
borrowing cost if capitalization criteria are met and any direct attributable costs of bringing
the asset to its working condition for its intended use. Any trade discounts and rebates are
deducted in arriving at the purchase price.

Subsequent expenditure related to an item of fixed asset is added to its book value only if it
increases the future benefits from the existing asset beyond its previously assessed standard
of performance. All other expenses on existing fixed assets, including day-to-day repair and
maintenance expenditure and cost of replacing parts, are charged to the statement of profit
and loss for the period during which such expenses are incurred.

The Company adjusts exchange differences arising on translation/ settlement of long-term

foreign currency monetary items pertaining to the acquisition of a depreciable asset to the
cost of the asset and depreciates the same over the remaining life of the asset. In accordance
with MCA circular dated 09 August 2012, exchange differences adjusted to the cost of fixed
assets are total differences, arising on long-term foreign currency monetary items pertaining
to the acquisition of a depreciable asset, for the period. In other words, the Company does not
differentiate between exchange differences arising from foreign currency borrowings to the
extent they are regarded as an adjustment to the interest cost and other exchange difference.

Gains or losses arising from de-recognition of fixed assets are measured as the difference
between the net disposal proceeds and the carrying amount of the asset and are recognized in
the statement of profit and loss when the asset is derecognized.
c) Depreciation on fixed assets
Depreciation on fixed assets is calculated on Straight Line basis using the rates arrived at
based on the useful lives estimated by the management or those prescribed under schedule
XIV of the Companies Act, 1956, whichever is higher.

In the following cases, the estimated useful life of the assets determined by the company has
resulted in depreciation rates being higher than that provided under schedule XIV.

Depreciation rates based Depreciation rate as per

on estimated useful (SLM) schedule XIV (SLM)

Fabricated luxury tents 25% 1.63%

(included in buildings)

Depreciation on additions is provided on pro-rata basis from the date on which the assets
have been put to use and individual assets acquired for less than Rs. 5,000/- are depreciated
@ 100% per annum.

Depreciation is charged on the revalued assets over the remaining useful life of such assets
and the additional depreciation on account of revaluation is adjusted against revaluation
reserve.

Leasehold buildings are amortized on straight line basis over the period of lease or useful life,
whichever is earlier.

d) Impairment
The Company assesses at each reporting date whether there is an indication that an asset may
be impaired. If any indication exists, or when annual impairment testing for an asset is
required, the Company estimates the asset's recoverable amount. An asset's recoverable
amount is the higher of an asset's or cash-generating unit's (CGU) net selling price and its
value in use. Where the carrying amount of an asset or CGU exceeds its recoverable amount,
the asset is considered impaired and is written down to its recoverable amount. In assessing
value in use, the estimated future cash flows are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of the time value of money and
the risks specific to the asset. In determining net selling price, recent market transactions are
taken into account, if available. If no such transactions can be identified, an appropriate
valuation model is used.
After impairment, depreciation is provided on the revised carrying amount of the asset over
its remaining useful life.

An assessment is made at each reporting date as to whether there is any indication that
previously recognized impairment losses may no longer exist or may have decreased. If such
indication exists, the company estimates the asset's or cash-generating unit's recoverable
amount. A previously recognized impairment loss is reversed only if there has been a change
in the assumptions used to determine the asset's recoverable amount since the last impairment
loss was recognized. The reversal is limited so that the carrying amount of the asset does not
exceed its recoverable amount, nor exceed the carrying amount that would have been
determined, net of depreciation, had no impairment loss been recognized for the asset in prior
years. Such reversal is recognized in the statement of profit and loss unless the asset is carried
at a revalued amount, in which case the reversal is treated as a revaluation increase.

e) Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. Following
initial recognition, intangible assets are carried at cost less accumulated amortization and
accumulated impairment losses, if any.

Intangible assets are amortized on a straight line basis over the estimated useful economic
life.

The Company has capitalized computer software in the nature of software licenses as
intangible assets, and the same is amortized over the license period or three years, being their
expected useful economic life, whichever is lower.

Gains or losses arising from derecognition of an intangible asset are measured as the
difference between the net disposal proceeds and the carrying amount of the asset and are
recognized in the statement of profit and loss when the asset is derecognized.

f) Investments
Investments, that are readily realizable and intended to be held for not more than one year
from the date on which investments are made, are classified as current investments. All other
investments are classified as long-term investments.

On initial recognition, all investments are measured at cost. The cost comprises purchase
price and directly attributable acquisition charges such as brokerage, fees and duties. Current
investments are carried in the financial statements are carried at lower of cost and fair value
determined on an individual investment basis. Long-term investments are carried at cost.
However, provision for diminution in value is made to recognize a decline other than
temporary in the value of the investments.

On disposal of an investment, the difference between its carrying amount and net disposal
proceeds is charged or credited to the statement of profit and loss.

g) Inventories
Stores and spares inventory comprises cutlery, crockery, linen, other store items food and
beverage, liquor and wine items in hand, which are valued at lower of cost and net realizable
value. Cost is determined on First in first out basis. Circulating stock of crockery and cutlery
is charged to the profit and loss account as consumption.

Trading goods are valued at lower of cost and net realizable value.

Unserviceable / damaged / discarded stocks and shortages observed at the time of physical
verification are charged off to Profit & Loss Account.

Net realizable value is the estimated selling price in the ordinary course of the business, less
estimated costs necessary to make the sale.

Inventory of food and beverage items in hand include items used for staff cafeteria and is
charged to consumption, net of recoveries, when issued.

h) Revenue recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to
the Company and the revenue can be reliably measured. The following specific recognition
criteria must also be met before revenue is recognized:

● Revenue from hotel operations:

Revenue from hotel operations comprise sale of rooms and apartments, food and
beverages, liquor and wine, banquet rentals and other services relating to hotel
operations including telecommunication, laundry, business centre, health centre, etc.
Revenue is recognized as and when the services are rendered and is disclosed net of
allowances. The Company collects taxes such as value added tax, luxury tax,
entertainment tax and service tax on behalf of the Government and, therefore, these
are not economic benefits flowing to the company. Hence, they are excluded from
revenue. Excise duty deducted from revenue (gross) is the amount that is included in
the revenue (gross) and not the entire amount of liability arising during the year.

● Aircraft charter:
Revenue from hiring of the aircraft is recognized as and when services are rendered.
 ● Rent:
Income from rent is recognized over the period of the contract on straight line basis.
Initial direct cost is expensed off when incurred.

● Maintenance charges:
Amounts collectible as maintenance charges are recognized over the period of the
contract, on an accrual basis. Corresponding costs are recorded as incurred.
● Membership programme revenue:
Membership revenue is recognized pro-rata over the period of the membership term.
Joining fee is recorded as income on sale of membership card.

● Sale of goods (Trading goods)

Revenue is recognised when all significant risks and rewards of ownership of the
goods have passed to the buyer, taxes such as Sales Tax and VAT are deducted from
turnover.

● Interest:
Revenue is recognized on a time proportion basis taking into account the amount
outstanding and the rate applicable. Interest income is included under the head "other
income" in the statement of profit and loss.

● Commission Income
Income is recognised when right to receive payment is established by the terms of the
contract.

● Consultancy Fees:
Consultancy fee is recognised when right to receive payment is established by the
terms of the contract.

k) Borrowing Costs:
Borrowing costs include interest and commitment charges on borrowings, amortization of
costs incurred in connection with the arrangement of borrowings and finance charges under
leases.

Borrowing costs directly attributable to development projects, that take a substantial period of
time to get ready for its intended use, are capitalized as part of cost of the respective asset. All
other borrowing costs are recognized in the Profit and Loss Account in the period in which
they are incurred.
m) Employee benefits:
i. Retirement benefit in the form of provident fund is a defined contribution scheme. The
Company has no obligation, other than the contribution payable to the provident fund. The
Company recognizes contribution payable to the provident fund scheme as an expenditure,
when an employee renders the related service. The Company has no obligations other than
the contribution payable to the Provident Fund.

ii. Gratuity liability is a defined benefit plan. The cost of providing benefits under the plan is
determined on the basis of actuarial valuation at each year-end. Actuarial valuation is carried
out by using the projected unit credit method. Actuarial gains and losses for defined benefit
plan is recognized in full in the period in which they occur in the statement of profit and loss.

iii. The Company treats accumulated leave expected to be carried forward beyond twelve
months, as long-term employee benefit for measurement purposes. Such long-term
compensated absences are provided for based on the actuarial valuation using the projected
unit credit method at the year-end. Actuarial gains/losses are immediately taken to the
statement of profit and loss and are not deferred. The Company presents the entire leave as a
current liability in the balance sheet, since it does not have an unconditional right to defer its
settlement for 12 months after the reporting date.

iv. Accumulated leave, which is expected to be utilized within the next 12 months, is treated
as short-term employee benefit. The Company measures the expected cost of such absences
as the additional amount that it expects to pay as a result of the unused entitlement that has
accumulated at the reporting date.

n) Income taxes:
Tax expense comprises of current and deferred tax. Current income tax is measured at the
amount expected to be paid to the tax authorities in accordance with the Income-Tax Act,
1961. The tax rates and tax laws used to compute the amount are those that are enacted or
substantively enacted at the reporting date.

Deferred income taxes reflect the impact of current year timing differences between taxable
income and accounting income for the year and reversal of timing differences of earlier years.
Deferred tax is measured based on the tax rates and the tax laws enacted or substantively
enacted at the balance sheet date. Deferred tax assets and deferred tax liabilities are offset, if
a legally enforceable right exists to set off current tax assets against current tax liabilities and
the deferred tax assets and deferred tax liabilities relate to the taxes on income levied by same
governing taxation laws. Deferred tax assets are recognized only to the extent that there is
reasonable certainty that sufficient future taxable income will be available against which such
deferred tax assets can be realized. In situations where the Company has unabsorbed
depreciation or carry forward tax losses, all deferred tax assets are recognized only if there is
virtual certainty supported by convincing evidence that they can be realized against future
taxable profits.

At each Balance Sheet date, the Company re-assesses unrecognized deferred tax assets. It
recognizes deferred tax assets to the extent that it has become reasonably certain or virtually
certain, as the case may be, that sufficient future taxable income will be available against
which such deferred tax assets can be realized.
The carrying amount of deferred tax assets are reviewed at each balance sheet date. The
Company writes-down the carrying amount of a deferred tax asset to the extent that it is no
longer reasonably certain or virtually certain, as the case may be, that sufficient future taxable
income will be available against which deferred tax asset can be realized. Any such
write-down is reversed to the extent that it becomes reasonably certain or virtually certain, as
the case may be, that sufficient future taxable income will be available.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists
to set-off current tax assets against current tax liabilities and the deferred tax assets and
deferred taxes relate to the same taxable entity and the same taxation authority.
MAT credit is recognised as an asset only when and to the extent there is convincing
evidence that the Company will pay normal income tax during the specified period. In the
year in which the Minimum Alternative Tax (MAT) credit becomes eligible to be recognized
as an asset in accordance with the recommendations contained in Guidance Note issued by
the Institute of Chartered Accountants of India, the said asset is created by way of a credit to
the profit and loss account and shown as MAT Credit Entitlement. The Company reviews the
same at each balance sheet date and writes down the carrying amount of MAT Credit
Entitlement to the extent there is no longer convincing evidence to the effect that the
Company will pay normal Income Tax during the specified period.

In the current year deferred tax liability has been considered evidence for recognition of
deferred tax asset on unabsorbed depreciation and carried forward losses.

Hotel accounting procedures help a firm in the hospitality industry prepare accurate financial
statements that conform to regulations and accounting principles. These regulations include
international financial reporting standards (IFRS) and U.S. generally accepted accounting
principles (GAAP). They also relate to the Securities and Exchange Commission (SEC) and
Public Company Accounting Oversight Board (PCAOB) rules.
Revenue and Expense Recognition
SEC and PCAOB regulations require a hospitality company to establish adequate and
functional controls in revenue and expense recognition (recording) systems. Revenue is
income that a hotel generates by providing services or renting rooms. Example of revenue
items include guest reservation fees and room charges. A hotel accountant credits a revenue
account to increase its amount and she debits it to reduce the account balance. An expense is
a cost or loss that a hotel incurs in providing services or renting rooms. Expenses may relate
to salaries, cost of food and beverage and utilities. A hotel bookkeeper debits an expense
account to increase its amount and he credits it to reduce the account balance. A hospitality
firm reports revenues and expenses in its statement of profit and loss.

Asset and Liability Recording

A hotel manager must implement adequate guidelines in asset and liability recording systems
because asset and liability items indicate the company's financial solidness. These items
reflect a firm's working capital or short-term cash availability (working capital equals current
assets minus current liabilities). An asset is a resource that a hotel owns, such as cash and
inventories (short-term assets) or real-estate and machines (long-term assets). A liability is a
debt the hotel must repay when it is due or a financial promise it must honor on time. A
short-term liability is a debt that a hospitality firm must repay in a year or less, whereas a
long-term debt is due after a year. A hotel bookkeeper debits an asset account to increase its
amount and she credits it to reduce the account balance. The opposite is true for a liability
account. A hotel reports assets and liabilities in its balance sheet.

Financial Reporting
Accounting regulations and procedures, such as U.S. GAAP and IFRS as well as SEC and
PCAOB rules, require a hospitality company to report "fair" and complete financial
statements at the end of each quarter or year. In hotel accounting terminology, "fair" means
accurate or objective. A complete set of financial reports includes a balance sheet (otherwise
known as statement of financial position), statement of profit and loss (P&L or statement of
income), statement of cash flows and statement of equity (also referred to as statement of
retained earnings).
Financial Ratio Analysis
Liquidity ratios
1. Current Ratio
It is a liquidity ratio that ideates the company to give its ability to pay short term obligations.
If the ratio is high, the company is capable to pay its current liabilities. It indicates the
working effectiveness of a company to transfer its asset to money.
Current ratio = (Current Assets/ Current Liability)

Current Mar ‘15 Mar ‘16 Mar ‘17 Mar’18 Mar ‘19
Ratio

EIH 0.81 1.12 1.35 1.19 0.9

Bharat 1.46 1.72 1.68 1.7 0.95

ITDC 1.94 1.98 1.90 1.79 1.94

Analysis
ITDC has the highest current ratio. EIH and Bharat have a close value of the current ratio. It
depends on the individual current assets and liabilities that a company is able to pay its
liabilities or not. If the current ratio is high it does not indicates that the company is in good
position, it might be due to inventory and cash being idle not being used to its potential.
2. Quick Ratio/Acid Test Ratio
The quick ratio or acid test ratio measures whether a firm has sufficient short-term assets to
cover the liabilities that are lying immediately. It is more robust than working capital ratio
(current ratio).
Quick Ratio = Total Quick Assets / Current Liabilities

Quick ratio Mar ‘15 Mar ‘16 Mar ‘17 Mar’18 Mar ‘19

EIH 1.05 1.81 1.79 1.43 1.53

Bharat 2.36 2.50 2.24 2.08 8.18

ITDC 1.79 1.81 1.73 1.63 1.78

Analysis
Bharat have a higher quick ratio among the three firms. This indicates that it has a better
ability to pay off their short-term debts. If the quick ratio is high, creditors look it in favor as
debt recovery is easy.
Solvency Ratio

1.​Debt Equity Ratio

Debt/Equity (D/E) Ratio, is used to know the company’s financial leverage. It is the ratio of
company’s total debt liabilities to its shareholders’ equity. It indicates that how much debt a
company is using to finance its assets relative to the value of shareholders’ equity.
Debt Equity (D/E) Ratio = Total Liabilities / Shareholders’ equity
Debt equity Mar ‘15 Mar ‘16 Mar ‘17 Mar’18 Mar ‘19

EIH 0.07 0.09 0.10 0.14 0.15

Bharat 1.59 2.11 1.36 1.00 1.13

ITDC - - - - -

Analysis
The DE ratio of Bharat is more as compared to EIH. Thus it can be concluded that Bharat
relies more on debt as compared to EIH.

Turnover/Efficiency Ratios

1. Fixed Assets Turnover Ratio

Fixed Assets Turnover Ratio can be defined as the measure of Sales revenue that is generated
relative to the total fixed assets of the firm. It indicates how effectively a firm is utilizing
assets available to them.
Fixed Asset Turnover Ratio = Sales Revenue/ Total Fixed Assets

Fixed Asset Mar ‘15 Mar ‘16 Mar ‘17 Mar’18 Mar ‘19
turnover ratio

EIH 0.47 0.79 0.72 0.58 0.63

Bharat - 23.50 25.30 28.79 98.56

 ITDC 3.11 2.78 5.82 5.40 5.44

Industry Average (2019) ​=0.58

Analysis
Among three industries, Bharat has the highest asset turnover ratio, it means that it utilizes its
assets most efficiently to generate revenue. All the three hotels have a higher fixed asset ratio
than industry average. However, Bharat have improved in their asset turnover ratio in 2018
and 2019 whereas it has remained the same for EIH and ITDC.

2. Inventory Turnover
Inventory Turnover Ratio can be defined as the ratio of the cost of goods sold to the average
inventory. It indicates how efficiently a company can control the inflow and outflow of its
inventory.
Inventory Turnover Ratio = COGS/ Inventory

Inventory Mar ‘15 Mar ‘16 Mar ‘17 Mar’18 Mar ‘19
turnover ratio

EIH 33.86 34.19 30.91 31.55 30.64

 Bharat - - - - -

ITDC 38.50 31.23 26.14 32.26 35.19

3. Debtors Turnover Ratio

Debtors Turnover is a measure of how effectively the Company can manage its finances.
Debtors Turnover Ratio= Net Credit Sales/ Average Accounts Receivables

Debtors Mar ‘15 Mar ‘16 Mar ‘17 Mar’18 Mar ‘19
turnover
ratio

EIH 7.38 7.57 7.18 7.24 7.20

Bharat 169.86 238.96 179.60 171.97 334.98

ITDC 4.68 3.84 3.22 3.41 3.51

Industry Average (2019) =7.21

Analysis
EIH and ITDC have a lower debtors turnover ratios than industry average. Among the three
hotels, Bharat has the highest debtors turnover ratio and this ratio has increased in 2019. It
means that Bharat is able to collect its debts in shortest period of time when compared to
others. ITDC need to look to debt collection method as the collection time very large to
collect the debt.

Profitability ratio

1. Gross Margin: Profit before Interest, Depreciation and Tax

Gross Margin can be measured by subtracting Company’ total sale from the cost of goods
sold. Gross margin can be defined as the difference between total sales made by the Company
during a year, and the Cost of goods sold. It is also written as PBITDA- Profit before Interest,
Taxes, Dividends and Amortization.

PBIDTM (%) Mar ‘15 Mar ‘16 Mar ‘17 Mar’18 Mar ‘19

EIH 10.47 11.00 6.37 8.12 12.90

Bharat 54.35 62.17 41.23 51.13 68.52

ITDC 1.14 3.20 3.11 -4.99 5.41

Industry Average (2019)=​ 23.92

Analysis
As observed, the gross margin for ITDC and EIH is below industry average. Bharat group is
the only one higher, and by a huge difference. It is clear that this firm has considerable
advantage in terms of costing. This is because all three groups represent premium groups of
Hotels and thus their prices do not differ by much. It may also be because of Customer
loyalty earned by them, or their deals with volume customers.

2. Net Profit Margin

Net profit margin can be computed by subtracting all expenses incurred during the year from
the total sales made, as opposed to just cost of goods sold in case of Gross Profit.

Net Profit Mar ‘15 Mar ‘16 Mar ‘17 Mar’18 Mar ‘19
Margin (%)

EIH 7.30 7.69 7.56 8.31 7.34

Bharat 25.93 25.91 18.65 23.75 32.42

ITDC 7.27 5.15 3.45 5.21 12.04

Analysis
From the gross profit margin, it is clear that Bharat shall have a considerably higher net-profit
margin as well. This is because Net profit is nothing but the Gross profit after deduction of
taxes and expenses. Since the Industry is the same for all three, they shall be taxed at the
same rate. As for expenses, Bharat has a major advantage over others.

3. Return on Equity Ratio (ROE)

This ratio measures the ability of a firm to generate profits from the shareholders investments
in the company.
Return on Equity= Net Income/ Shareholders Equity

ROE (%) Mar ‘15 Mar ‘16 Mar ‘17 Mar’18 Mar ‘19

EIH 3.96 4.41 3.77 3.98 3.96

Bharat 17.93 21.90 11.83 15.18 23.30

 ITDC 10.57 6.79 3.45 5.35 11.85

Industry Average (2019)=​ 5.48

Analysis
Just like gross profit, the return on equity earned by EIH is the lowest, trailing behind Bharat
group and ITDC respectively. The capital employed by all three companies are considerably
large as is for Hotel industry. However, the profitability of Bharat gives it an edge over the
others, there-by heling it utilize its capital more efficiently than the others.

4. Return on Assets (ROA)

Return on Assets is used to indicate how efficiently a company is able to use its total assets to
generate profit. It is the ratio of Net Income to the total assets of the company.
Return on Assets = Net Income/ Total Assets

ROA Mar ‘15 Mar ‘16 Mar ‘17 Mar’18 Mar ‘19

EIH 46.49 47.03 48.43 49.27 49.95

Bharat 82.86 108.63 177.32 215.24 301.30

ITDC 37.90 38.72 38.59 38.56 41.46

Analysis
Higher the ROA is a good sign because the hotel is earning more money by less investment.
The trends for EIH and ITDC are much similar. The ROA for Bharat is high among the three
hotel industries. ROA is most useful to compare industries of same segment as they use assets
differently.

5. Earnings Per Share (EPS)

Given below are the total earnings that the hotels have generated per share.

Earnings Per Mar ‘15 Mar ‘16 Mar ‘17 Mar’18 Mar ‘19
Share

EIH 1.69 1.91 1.69 1.96 1.98

Bharat 14.86 23.80 20.99 32.69 70.22

ITDC 4.01 2.63 1.33 2.06 4.92

Analysis
Bharat have high EPS among all the three hotels. Also, EPS of ITDC is more in comparison
to EIH. This indicates that stockholder’s and investors are more inclined towards investing in
Bharat and ITDC. EIH needs to look to improve its overall profitability under EPS.
References

www.moneycontrol.com
www.capitaline.com
www.economictimes.com
www.eih.com

Annexures:
Income Statement of
1. EIH
Balance Sheet of Bharat Hotels:

Cash flow of Bharat Hotels: