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Oriental Hotels: Room for better margins
Feb 4, 2009

Performance summary
  • Topline growth remains flat during 3QFY09.During 9mFY09 the sales are higher by 10% YoY.
  • Operating margins during 3QFY09 decline by 2.4% YoY mainly on account of inability to pass on higher operating expenses.
  • Lower margins coupled with lower other income and higher interest costs led to a 15% YoY decline in profits during 3QFY09.


Standalone financials
Rs( m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 578 579 0.2% 1,478 1,619 9.5%
Expenditure 355 370 4.1% 990 1,076 8.7%
Operating profit (EBDITA) 222 209 -6.0% 488 543 11.1%
Operating profit margin (%) 38.5% 36.1% 33.0% 33.5%
Other income 7 3 -57.1% 28 18 -34.5%
Interest 2 10 371.4% 3 13 364.3%
Depreciation 31 34 9.8% 89 97 8.8%
Profit before tax 197 169 -14.3% 424 451 6.2%
Tax 67 59 -13.2% 147 156 6.3%
Profit after tax/(loss) 129 110 -14.9% 278 295 6.2%
Net profit margin (%) 22.4% 19.0% 18.8% 18.2%
No. of shares (m) 17.9 17.9 17.9 17.9
Diluted earnings per share (Rs)* 25.3
Price to earnings ratio (x)* 6.9
* 12 month trailing earnings

What has driven performance in 3QFY09?
  • Oriental Hotels reported a flat topline growth during 3QFY09. Inspite of it being the peak season the performance remained muted. The main reasons were the economic slowdown and terror attacks in Mumbai, which affected the tourist inflow. Further, with Chennai being an IT hub, reduction of corporate travel budget, worsened matters. The topline grew 10% YoY during 9mFY09.

    Cost break-up
    As a % of net sales 3QFY08 3QFY09 9mFY08 9mFY09
    Total Cost of goods 11.2% 9.2% 11.8% 10.6%
    Staff Cost 15.9% 16.8% 17.6% 17.9%
    Power and fuel 5.9% 7.2% 6.8% 7.4%
    Other Expenditure 28.6% 30.7% 30.8% 30.5%

  • Operating margins during 3QFY09 declined by 2.4% YoY mainly on account of higher operating expenses (except costs of goods). The margins during 9mFY09 improved by 0.5%. The company has done well to maintain its margins inspite of recent economic downturn faced by the sector.

  • Lower margins coupled with lower other income and higher interest costs led to a 15% YoY decline in profits during the third quarter. For 9mFY09, the profits were higher 6% YoY. The interest costs were higher mainly on account of its expansion plans. The company has marginally outperformed our bottomline estimates mainly on account of lower depreciation.

What to expect?
At the current market price of Rs 174, Oriental Hotelís stock is trading at a multiple of 11.1 times our estimated FY11 earnings. Dependency on foreign tourism can be a double-edged sword as travel decisions are based on global patterns and events that happen elsewhere can have serious impact the performance. This can be clearly seen from Oriental Hotelsí quarter performance. Further, its properties in Coonor, Madurai and Kochi are also dependent on leisure, the segment impacted by terror attacks. While the summer would be cold for Oriental Hotels, with Indiaís fundamental prospects being attractive over the long term, the momentum would get better. We retain our view on the stock

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