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EIH: All round growth - Views on News from Equitymaster

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EIH: All round growth

Jan 31, 2008

Performance summary
  • Topline grows by 18% YoY on account of higher room rates.

  • On a YoY basis, operating margins witness strong expansion of 2% due to benefits of operating leverage.

  • Net profits register a growth of 17% YoY. However, if one excludes the impact of the extraordinary expense, net profits rise by 26% YoY.

Rs (m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 2,625 3,086 17.6% 6,470 7,400 14.4%
Expenditure 1,573 1,786 13.6% 4,556 4,878 7.1%
Operating profit (EBDITA) 1,052 1,300 23.5% 1,914 2,522 31.7%
Operating profit margin (%) 40.1% 42.1% 2.0% 29.6% 34.1% 4.5%
Other income 157 182 16.5% 426 562 32.1%
Interest 160 206 28.5% 454 530 16.6%
Depreciation 103 108 5.1% 312 321 3.0%
Profit before tax 946 1,168 23.5% 1,574 2,233 41.9%
Extraordinary item - (55) #DIV/0! 144 54  
Tax 326 389 19.5% 577 770 33.5%
Profit after tax/(loss) 620 724 16.8% 1,141 1,517 33.0%
Net profit margin (%) 23.6% 23.5%   17.6% 20.5%  
No. of shares (m) 52.4 392.9   52.4 392.9  
Diluted earnings per share (Rs) *         5.4  
Price to earnings ratio (x)*         30.7  
* 12 month trailing earning

What has driven performance in 3QFY08?
  • The company reported a topline growth of 18% YoY in 3QFY08. EIH's revenues are concentrated in Delhi, Mumbai and Bangalore. As per industry data, occupancy in Bangalore has fallen due to new supply coming in. However, the occupancy in Mumbai and Delhi continue to remain strong. Also, while room rates in Bangalore are stabilising, Delhi and Mumbai continue to command higher room rates. The company has aggressive capex plans for new properties, but given the long gestation period of 2-3 years for commissioning of new hotels, most of the growth will only kick in post FY10.

    As a % of net sales 3QFY07 3QFY08 9mFY07 9mFY08
    Total Cost of goods 8.4% 8.4% 8.9% 8.8%
    Staff Cost 18.9% 18.7% 22.5% 22.6%
    Power and fuel 4.6% 5.0% 6.6% 6.5%
    Other Expenditure 28.0% 25.8% 32.4% 28.0%

  • For 3QFY08 and 9mFY08, the operating margins have improved by 2% YoY and 4.5% YoY respectively as the company benefited from operating leverage. A sizeable fall in other expenditure (as percentage of sales) was also instrumental in bolstering margins.

  • While net profits registered a 17% YoY growth, this included an extraordinary expense of Rs 55 m during the quarter. If one excludes the impact of the same, net profits clocked an impressive 26% YoY growth in 3QFY08. Strong performance at the operating level and lower depreciation charges aided the growth. For 9mFY08, the bottomline grew by 33% YoY.

What to expect?
The stock is currently trading at Rs 165, implying a price to earnings multiple of 22.3 times our estimated FY10 earnings. Though the earnings have outperformed our estimates, it would slow down going forward given potential room supply in key markets such as Bangalore and Delhi which will likely lead to moderation in ARR growth and stagnation in occupancies going forward. Further, we believe that the company’s new assets in the pipeline will contribute to earnings only after FY10 given the 2-3 year gestation period. Thus, looking at the risk return scenario, valuations appear stretched at current levels

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Mar 26, 2019 (Close)