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EIH: Terror strikes still hurts

Jan 28, 2010

Performance summary
  • Sales of EIH fell by 6% YoY during the quarter due to the economic slowdown and the Oberoi property still undergoing renovation after the terrorist attack.
  • Operating (EBITDA) margins shrunk by 1.3% to 32.8% during 3QFY10. This fall comes on the back of higher cost of provisions, stores and wines and higher staff costs as a percentage of sales.
  • Net profits fell by 33% on the back of lower operating income, lower other income and higher interest costs.
  • Net profit for 9mFY10 declined by 69% due to shrinking sales, higher operating costs and a jump in interest expense.

Financial picture
Rs(m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 2,543 2,383 -6.3% 7,531 6,256 -16.9%
Expenditure 1,672 1,602 -4.2% 5,019 4,586 -8.6%
Operating profit (EBDITA) 871 781 -10.4% 2,512 1,670 -33.5%
Operating profit margin (%) 34.3% 32.8%   33.4% 26.7%  
Other income 30 8 -72.0% 108 50 -53.6%
Interest 223 266 19.4% 599 724 20.7%
Depreciation 140 170 21.6% 405 470 16.2%
Profit before tax 538 354 -34.3% 1,616 526 -67.5%
Extraordinary items - -   - -  
Tax 206 130 -36.7% 590 209 -64.6%
Profit after tax/(loss) 333 223 -32.9% 1,026 317 -69.1%
Net profit margin (%) 13.1% 9.4%   13.6% 5.1%  
No. of shares (m) 393 393   393 393  
Diluted earnings per share (Rs)*         2.5  
Price to earnings ratio (x)*         49.7  
* 12 month trailing earnings

What has driven performance in 3QFY10?
  • EIH’s topline declined by 6% YoY during 3QFY10. The hotel segment witnessed a 6% YoY decline in revenues, while others segment saw a drop of 9% YoY. Based on claims submitted to the insurance company for losses due to business interruption at EIH’s Mumbai hotels for 9QFY10, it has considered an income of Rs 527 m as revenues. The main reason for the fall in EIH’s revenues is that a major chunk of the company’s revenue comes from its Mumbai properties, which were the target of terror attacks in November 2008. These properties are expected to get operational during the current year.

    Cost break-up
    As a % of net sales 3QFY09 3QFY10 9mFY09 9mFY10
    Total Cost of goods 10.1% 12.2% 10.1% 12.9%
    Staff Cost 23.8% 25.0% 24.8% 28.1%
    Power and fuel 6.1% 6.2% 6.8% 6.8%
    Other Expenditure 25.7% 23.7% 24.9% 25.5%

  • Operating income declined as a result of increase in cost of provisions, stores and wines. Cost of provisions, stores and wines increased by 13% YoY during the quarter. While staff costs dropped YoY they did not drop in line with the drop in revenues. This resulted in higher staff costs as a percentage of sales compressing the operating margins still further. The margins could have been lower but for a 14% YoY fall in other expenditure.

  • The net profits declined by 33% YoY during the quarter. This was the result of a decline in operating profits along with lower other income and higher interest costs.

What to expect?
At a price of Rs. 126, the company is trading at 50 times its trailing twelve month earnings. The company continues to face the after effects of the terrorist attacks in the form of pressure on margins. During the quarter EIH opened its new 436 key hotel in Bandra Kurla, Mumbai. However, until the reopening of Oberoi, Mumbai, we believe the company will continue to face pressure.

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