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Oriental Hotels: Growth everywhere - Views on News from Equitymaster
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Oriental Hotels: Growth everywhere
Jan 22, 2008

Performance summary
  • Oriental Hotels (ORHT) reports a 14.5% YoY topline growth for 3QFY08.
  • The companyís operating margins improve by 3.9% YoY led by low operating costs.

  • Higher sales and operating profits lead to the bottomline growth of 29% YoY for 3QFY08.

  • For nine months topline grows by 13.6% YoY, while bottomline grows by 20.2% YoY.

Rs( m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 504 577 14.5% 1,300 1,477 13.6%
Expenditure 330 355 7.7% 891 990 11.1%
Operating profit (EBDITA) 174 222 27.4% 409 487 19.0%
Operating profit margin (%) 34.5% 38.4% 31.5% 33.0%
Other income 7 8 5.6% 27 29 5.2%
Interest 0 2 633.3% 1 3 115.4%
Depreciation 30 31 4.3% 86 90 5.0%
Profit before tax 151 196 29.7% 349 423 21.0%
Tax 52 67 30.6% 120 146 22.4%
Profit after tax/(loss) 100 129 29.2% 230 276 20.2%
Net profit margin (%) 19.8% 22.3% 17.7% 18.7%
No. of shares (m) 17.9 17.9 17.9 17.9
Diluted earnings per share (Rs)* 24.1
Price to earnings ratio (x)* 11.5
* 12 month trailing earnings

What has driven performance in 3QFY08?
  • With the renovation of 68 rooms at Taj Coromandel being completed during the current quarter, the topline witnessed a growth of 14.5% YoY. Further, the third quarter is generally a peak season, which helped the double-digit growth. Also, due to growing business in IT, ITES, automobile and biotechnology sectors, the arrival of foreign technicians has increased, which has propelled greater demand for rooms both in the metros and tier II cities. The Government of Indiaís open sky policy has encouraged both international and domestic airlines to choose South India as a major operations hub. This has resulted in increased demand in hotel rooms for the aircrew as well.

    Cost break-up
    As a % of net sales 3QFY07 3QFY08 9mFY07 9mFY08
    Total Cost of goods 11.7% 11.2% 12.5% 11.8%
    Staff Cost 15.7% 15.9% 16.1% 17.6%
    Power and fuel 6.2% 5.9% 7.1% 6.8%
    Other Expenditure 31.9% 28.6% 32.9% 30.9%

  • The operating margins expanded by 390 basis points (3.9%) in 3QFY08. A much slower growth in expenses as compared to the revenues led to the robust 27% YoY growth in operating profits. A sizeable reduction in other expenditure (as percentage of sales) was instrumental in perking up margins.

  • Higher operating profits aided the 29% YoY growth in the bottomline for 3QFY08. The margins improved from 19.8% to 22.3% in the quarter. The results are in line with our estimates.

What to expect?
At the current market price of Rs 278, Oriental Hotelís stock is trading at a price to earnings multiple of 9.1 times our FY10 estimates. The company has lined up renovation plans for the next 2 years. Though the Indian room rates have became expensive in recent times, with the shortage of rooms still prevailing, room rates are expected to remain strong. Moreover, in South India, state governments are giving incentives for hotel projects, seeing the demand for rooms. We, thus, believe that Orientals Hotels is expected to benefit from the prevailing industry scenario.

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