The Tata Group’s Indian Hotels Company (IHCL) said on Tuesday that it expects to make an additional non-cash provision of R400 crore in its standalone profit and loss (P&l) statement and R100 crore in its consolidated P&l statement, respectively, for the year ending March 31, 2014.
The additional provision, it said, was for its overseas and domestic investments, and was being made as some investments have been hit "due to a sustained depression in the macroeconomic and market environment".
With the additional provisioning, IHCL’s total impairment charges to its standalone P&L statement will be R687 crore for FY14. The hotel chain had in the second quarter recognised a diminution of R287 crore in its long-term investment in Taj International Hotels (HK), which, in turn, holds investments in the company’s various international entities, including Orient-Express Hotels.
"With the economic uncertainty expected to continue over the near and medium term, it has had an impact on the downward revision of projected cash flow expectations from some of the underlying affected investments," it said in a statement. The impairment will not affect the covenants related to the company's borrowings, it said.
This is not the first time the $100-billion Tata Group has written down the value of its assets in IHCL or a group company.
Analysts say the hotel chain could report weak fourth quarter net profit although they believe this impairment charge would likely be the last major exceptional hit, and will help clean up the balance sheet at a time when the hospitality business seems to be recovering from its bottom. The difference in the provisioning for standalone and consolidated income statements, they say, may be due to some upward revision in the holding value of investments at the consolidated level.
It is unlikely that the company will take impairment charges on its investments related to Orient Express Hotels this time, unlike on the previous two occasions.
The company, which bought nearly 7.13 million class 'A' shares of Orient Express Hotels (valued R1,078 crore at cost price) during 2007-09, has seen a decline in its holding value on account of the weak global macroeconomic environment. The holding value of the Orient Express Hotels stake at the current share price of $14.30 a piece would amount to nearly R620 crore while the company has already provided for a notional loss of R592 crore.
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