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East India Hotels – Extraordinary Effect - Views on News from Equitymaster
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East India Hotels – Extraordinary Effect
Jan 31, 2006

Performance Summary
East India Hotels (EIH) announced results for the third quarter and nine months ended December 2005. Operating revenues for the quarter ended December 31, 2005 grew by 36% YoY, driven by a significant surge in business and tourist travel. Operating profits rose by 84% in 3QFY06. Reduction in operational expenditure increased the operating margins from 29% in 3QFY05 to 40% in this quarter.

(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Net sales 1,610 2,195 36.3% 3,788 5,170 36.5%
Expenditure 1,138 1,325 16.4% 3,137 3,645 16.2%
Operating profit (EBDITA) 472 870 84.3% 651 1,525 134.3%
Operating profit margin (%) 29.3% 39.6%   17.2% 29.5%  
Other income 193 13 -93.3% 492 201 -59.1%
Interest (net) 181 161 -11.0% 508 502 -1.1%
Depreciation 101 106 5.0% 297 309 4.0%
Profit before tax 383 616 60.8% 338 915 170.7%
Extraordinary Income (16) 1,033 - (93) 981 -
Tax 148 385 160.8% 124 381 208.4%
Profit after tax/(loss) 220 1,264 476.0% 122 1,515 1147.0%
Net profit margin (%) 13.6% 57.6%   3.2% 29.3%  
No. of shares (m) 52.4 52.4   52.4 52.4  
Diluted earnings per share (Rs)*         33.2  
Price to earnings ratio (x)   0.817053     21.4  
(*trailing 12-month basis)            

What is company's business?
EIH is a member of the Oberoi Group that runs and manages luxury hotels in India and abroad. It operates under ‘ The Oberoi’ and ‘Trident ‘ brands. Oberoi properties are luxury hotels in the premium segment, while Trident hotels are high quality medium priced hotels. The total number of rooms (managed and owned) put together stood at around 3,082 in FY05, of which an estimated 1,068 were managed.

What has driven performance in 3QFY06?
ARRs gets a boost: EIH's property mix is skewed towards the luxury travelers in the business and leisure segments. We understand that the company will continue to remain focused on this segment going forward. It has properties in all the key metro cities viz. Delhi, Mumbai, Kolkata, Chennai and Bangalore. Considering the magnitude of tourist inflows into the country, the overall occupancy rate of EIH increased to 64% in 9mFY06 from 62% last year. This, in turn, had a positive impact on average room rates (ARRs), which touched Rs 7,550, which is almost 28% higher than ARRs in FY05. The topline growth of 36% YoY in 3QFY06 has to be viewed in this perspective. We do not foresee any need to upgrade our topline estimates for FY06, even though the rise in ARR is much higher than our projections.

Cost pressures under control: As is evident from the table below, the company has been successful in managing costs. Operating margins expanded by 10% and stood at 39.6% in 3QFY06 on the back of operating leverage. In our view, a 28% growth in ARR directly filters into operating profits. Compared to our operating profit margin estimate of 29% in FY06, margins as of December 2005 stands at 29%, which is likely to expand given the fact that the fourth quarter is also a major season for hotel companies in general.

Rs m 3QFY05 3QFY06 %Change 9mFY05 9mFY06 %Change
Raw materials 148 179 20.9% 352 457 29.8%
% sales 9.2% 8.2%   9.3% 8.8%  
Staff 370 408 10.3% 1,037 1,170 12.8%
% sales 23.0% 18.6%   27.4% 22.6%  
Power & lighting 133 153 15.0% 388 427 10.1%
% sales 8.3% 7.0%   10.2% 8.3%  
Others 487 586 20.3% 1,359 1,592 17.1%
% sales 30.2% 26.7%   35.9% 30.8%  

Extraordinary effect: The company reported a 476% YoY growth in bottomline for the quarter. However, this was on account of extraordinary income pertaining to the profit on sale of land to the tune of Rs 1,033 m in 3QFY06. Without considering the extra-ordinary income, the bottomline fell by 2% YoY. This is mainly due to a 90% fall in other income and higher tax incidence.

What to expect?
At the current price of Rs 716, the stock is trading at a price to earnings multiple of 16 times our estimated FY08 earnings. We believe that our earnings will be upgraded to the extent of profit of sale of land as well as any gains from the sale of two properties to EIH Associated Hotels. Looking forward, the company’s presence in key gateway cities is a big positive and we expect occupancy rates to remain robust in the next three years. EIH has initiated a project at Bandra-Kurla complex in Mumbai. The capital expenditure towards this project is budgeted at Rs 6.5 bn, of which Rs 3 bn has already been invested. The company is also looking for expansion in Bangalore (also looking at management contracts). This expansion is likely to further propel growth going forward.

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