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Oriental Hotels - Enchanting South!
Jan 28, 2006

Performance Summary
Oriental Hotels announced results for the third quarter and nine months ended December 2005. Operating revenues in 3QFY06 grew by 20% YoY, driven largely by buoyancy in the Chennai market. Operating profits rose by 73% in 3QFY06. Reduction in operational expenditure increased the operating margins from 29% in 3QFY05 to 42% in this quarter.

(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Net sales 374 449 19.9% 950 1,131 19.0%
Expenditure 266 261 -1.8% 700 758 8.3%
Operating profit (EBDITA) 108 188 73.2% 250 373 49.0%
Operating profit margin (%) 29.0% 41.8%   26.3% 33.0%  
Other income 5 9 84.8% 21 22 6.3%
Interest (net) 1 1 -40.0% 4 2 -33.3%
Depreciation 31 29 -5.5% 94 90 -5.2%
Profit before tax 81 166 105.6% 173 303 75.2%
Tax 30 51 73.2% 67 98 48.0%
Profit after tax/(loss) 51 115 124.2% 106 204 92.2%
Net profit margin (%) 13.7% 25.6%   11.2% 18.1%  
No. of shares (m) 17.8 17.8   17.8 17.8  
Diluted earnings per share (Rs)*         15.0  
Price to earnings ratio (x)**         27.5  
(*trailing 12-month earnings)

What is company's business?
Oriental Hotels (Indian Hotels has around 19% stake directly and combined stake of the Tata Group stands at 33%) is a southern India focused player with a total inventory of 666 rooms. On a standalone basis, the company has seven properties. The company has a track record of having generated strong cash flows and is debt-free. On a consolidated basis, the company has investments in Taj Asia, which owns properties in Sri Lanka and Maldives. It also owns a 30% voting right in Taj Karnataka Hotels & Resorts, which has a property in Chikmagalur.

What has driven performance in 3QFY06?
ARRs are strong: Oriental Hotels two prime properties, Taj Coromandel (Luxury) and Fisherman's Cove (Leisure) are the price leaders in Chennai. On a standalone basis, properties in the Chennai market accounted for 44% of total inventory of the company. Chennai is the key gateway city to the state, and we expect the Chennai hotel market to remain robust in the next three years on account of increased services sector activity apart from higher inflow of FDI in the state (that creates demand for business travel). Revenues were higher by 19% YoY in 3QFY06, led by higher average room rates (ARRs). Considering the fact that in 2HFY05, occupancy rates in the Chennai properties averaged around 77%, any sharp rise in occupancy rate is unlikely and therefore, the bulk of the topline growth is basically a factor for higher room rates. We expect room rates to remain strong in 4QFY06 as well. We have factored in 18% YoY growth in revenues for FY06 and our estimates are in line with the 9mFY06 performance.

Standalone property mix
Name Type Rooms Occupancy rates (%)  
    (Nos) FY04 FY05
Taj Coromandel Chennai Luxury 205 78% 79%
Fisherman's Cove Chennai Leisure 88 73% 72%
Taj Malabar Kochi Leisure 96 52% 64%
Taj Residency Vizag Business 93 55% 59%
Taj Garden Retreat Madurai Leisure 63 56% 56%
Taj Garden Retreat Coonoor Leisure 33 44% 47%
Taj Manjarun Mangalore Business 88 59% 60%
Total   666 64% 67%

Margins – Higher than expected: While we do not estimate quarterly operating margins, in our view, operating margins of 41.8% in 3QFY06 is robust by any standards, considering the fact that some of the company’s hotel properties are in the Tier-II cities. During the quarter, the company’s staff cost and other expenses declined n absolute terms, which were the key factors that enabled a sharp expansion in margins. As is case generally, during upturns, operating profit tend to outgrow topline growth considering the high fixed cost nature of the sector. We have factored in operating margins of 29.2% in FY06 as against which margins as of 9mFY06 stands at 33%.

Interest and depreciation falls: Oriental Hotels is virtually a zero-debt company (debt to equity of 0.2 times in FY05) and one should not read much into the decline in interest costs in 3QFY06. Against a decline in 3QFY06, we have factored in 9% growth in depreciation charges in FY06, based on the premise of the ongoing expansion in Fisherman’s Cove (Chennai). Net profit has increased by 92% YoY in 9mFY06 and the company is well on its path to outperform our earnings expectations for FY06.

What to expect?
At the current price of Rs 411, the stock is trading at a price to earnings multiple of 14 times our estimated FY08 earnings. The company dominates in the Chennai market with nearly 70% of its revenues coming from there in FY05. It is in the process of adding 75 rooms to its Fisherman’s Cove properties, which will come into operation by FY07. Since the company is cash rich, we believe that some of the expansions of the Taj Group in the hotels segment could be routed through Oriental Hotels, which we have not factored in our numbers. Overall, we remain positive on the company.

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