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Oriental Hotels: Interest costs weigh heavy

Jan 28, 2011

Oriental Hotels Limited has announced its 3QFY11 results. The company has reported 22.8% YoY increase in sales and a 19.7% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Revenue of Oriental Hotels increased by 22.8% YoY during the quarter.
  • Operating (EBITDA) margins fell by 2.2% to 27.8% as a result of increase in costs of goods sold, employee costs and power and fuel costs (as a percentage of sales).
  • Net profits fell by 19.7% YoY on the back of fall in other income and higher interest costs.
  • Net profit for 9mFY11 fell by 2.7% YoY while net profit margins fell by 1.7%. This performance came on the back of fall in other income and higher interest costs.

Financial picture
Rs(m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net sales 529 650 22.8% 1,318 1,642 24.6%
Expenditure 371 469 26.6% 1,019 1,299 27.4%
Operating profit (EBDITA) 159 180 13.7% 298 343 15.1%
Operating profit margin (%) 30.0% 27.8%   22.6% 20.9%  
Other income    35      2 -94.4%    44      8 -82.6%
Interest    32    45 40.5%    77 114 47.2%
Depreciation    34    40 15.8% 101 114 12.1%
Profit before tax 127    97 -23.6% 163 123 -24.6%
Exceptional Items -        3   -      28  
Tax    45    34 -25.2%    58    49 -15.5%
Profit after tax/(loss)    83    66 -19.7% 106 103 -2.7%
Net profit margin (%) 15.6% 10.2%   8.0% 6.3%  
No. of shares (m)    18 179      18 179  
Diluted earnings per share (Rs)*           1.3  
Price to earnings ratio (x)*           26.1  
* 12 month trailing earnings

What has driven performance in 3QFY11?
  • Sales of Oriental Hotels improved on the back of the economic recovery and increased demand. The top line also benefited from the inclusion of sales from the company’s new Trivandrum property as well as income from 50 new rooms at the company’s Fisherman’s Cove hotel. On a like-to-like basis, the company’s sales grew by 9% YoY this quarter over the same quarter last year.

  • Operating income increased by 13.7% YoY during the quarter. This increase was slower than sales growth as a result of sharp increase in cost of goods sold, employee costs and power and fuel costs. While costs of goods sold increased by 29%, employee costs and power and fuel costs increased by 38% YoY and 41% YoY respectively.

    Cost break-up
    As a % of net sales 3QFY10 3QFY11 9mFY10 9mFY11
    Total Cost of goods 10.5% 11.0% 10.7% 11.2%
    Staff Cost 16.9% 19.0% 21.9% 22.4%
    Power and fuel 6.7% 7.8% 8.3% 9.0%
    Other Expenditure 35.9% 34.5% 36.5% 36.4%

  • Net profit fell by 20% YoY during the quarter. This was on the back lower other income and increase in interest costs. Interest expense increased by 41% YoY during the quarter possibly due to the acquisition costs of the Trivandrum property and the building of the Coimbatore property. Other income on the other hand fell by 94.4% YoY.

What to expect?
At a price of Rs 33.5, the company is trading at 16 times our estimated FY13 earnings (RPro subscribers click here). Oriental Hotels has been affected due to the debt taken by the company to lease the Trivandrum property and fund its expansion. The expansion includes a Taj branded hotel in Coimbatore and a Gateway branded hotel in Bangalore. These two hotels are expected to add 380 rooms to the company’s current inventory of 870 guest rooms. However, the stock has run up recently and we believe that growth from a 2-3 years perspective is already priced into the stock. We therefore advise investors to be cautious on this stock.

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