Margins key to EIH's 3QFY01 net - Views on News from Equitymaster

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Margins key to EIH's 3QFY01 net

Jan 25, 2001

EIH, India's second largest hotel chain will be reporting its 3QFY01 results today. We expect EIH to declare a robust growth of 35%-40% YoY in its net profit. The main drivers to this are likely to be higher occupancy rates in its metro city hotels. Average room rates are also likely to show an improvement in the 3QFY01 as a result of a hike in room tariffs by around 5%-10% at its main hotel properties in Mumbai, Delhi, Bangalore and Calcutta. This increase in average room rates assumes significance from the point of view that for the last four years they have consistently declined due to higher discounts and incentives offered.

Keeping in mind that the 2H contributes to 70%-75% of the profits of hotel companies, as this is the peak season for the industry for both business and leisure hotels. As a result we expect a substantial improvement in margins and profitability in the 3QFY01 as compared to the 2QFY01.

1QFY00 2QFY00 1QFY01 2QFY01
Operating Profit Margin (%) 18.9% 11.0% 20.6% 12.0%

EIH is on the look out for a marketing tie-up with a well known international hotel company so as to increase its marketing reach and enhance its brand image in Europe and USA. This strategy is expected to pay off in the long run.

In the current year, EIH has benefited from an improvement in the economy and stable political climate. On the supply side the increase in room supply in metro cities is not a worry as most of the projects are delayed. Besides EIH gets 52% of its profits from its Mumbai hotels, which are located in South Mumbai. As most of the new supply is coming in North Mumbai they are relatively less affected.

FY97 FY98 FY99 FY2000
Occupancy rate 69.0% 60.0% 61.0% 61.0%
Change -9.0% 2.0% -
ARR (Rs) 6,631 6,939 6,441 5,835
% change 5.0% -7.0% -9.0%

On the current price of Rs 208, EIH is trading at 11.4x FY01E EPS of Rs 18.3. This is low as compared to multiples of 20x-25x it had traded at few years ago. Given its capital cost advantage, prime hotel properties and widespread network it is an attractive play in the Indian hotel sector.

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