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Asian Hotels: Good quarter - Views on News from Equitymaster

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Asian Hotels: Good quarter

Mar 1, 2007

Performance summary
Asian Hotels, the owners of the Hyatt Regency chain of hotels, has reported robust results for the third quarter and nine months ended December 2006. Driven by the tourist rush (both foreign and domestic tourists), revenues during the quarter recorded a strong 27% YoY growth. Cost efficiencies led to margin expansion of 280 basis points. All these factors put together, along with lower interest and depreciation charges, contributed to the 48% YoY growth in the bottomline.

Financial performance: A snapshot
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net sales 894 1,133 26.7% 2,244 2,811 25.3%
Expenditure 542 656 20.9% 1,437 1,663 15.7%
Operating profit (EBDITA) 352 477 35.6% 807 1,148 42.3%
Operating profit margin (%) 39.3% 42.1%   35.9% 40.8%  
Other income 2 6 275.0% 7 8 21.2%
Interest (net) 48 44 -8.8% 149 130 -12.9%
Depreciation 53 53 0.8% 156 157 0.9%
Profit before tax 253 386 52.8% 509 869 70.9%
Tax 80 131 64.1% 169 297 75.9%
Profit after tax/(loss) 173 255 47.6% 340 572 68.3%
Net profit margin (%) 19.3% 22.5%   15.1% 20.3%  
No. of shares (m) 22.8 22.8   22.8 22.8  
Diluted earnings per share (Rs)*         35.0  
Price to earnings ratio (x)*         21.4  
(* 12 months trailing)            

What is company's business?
Asian Hotels (AHL) is a strong niche player at the premium end of the hotel industry with strategically located properties at Delhi, Mumbai and Kolkata. It has a total of 1,161 rooms across these three cities. AHL entered into a technical tie up and marketing agreement with Hyatt Hong Kong which allows it to use the Hyatt brand name on its properties enabling it to earn relatively higher ARRs.

What has driven performance in 3QFY07?
Robust topline: All the properties of the company viz. Mumbai, Delhi and Kolkata are strategically located in terms of demand. Hyatt, as a premium deluxe brand, derives higher average room rates (ARR). Operating from business hubs of Mumbai and Delhi, the hotel has seen a surge in occupancy and room rates during the quarter. Even Kolkata is witnessing increasing business tourists due to the rising economic activity in the state of West Bengal. As a result of the higher ARRs and occupancy rates, the topline grew by 27% YoY during the quarter. With India on the radar of investors worldwide as a important business destination and the favourable demand supply gap prevailing in the hotel industry, the room rates are likely to continue rising going forward. However, Asian Hotel has no expansion plans lined up and so the growth is expected to be limited to that extent.

Operating leverage plays its part: Hospitality being a fixed asset intensive business, operating leverage has played its part in perking up margins for Asian Hotels during both 3QFY07 and 9mFY07. During the quarter, all the major cost heads (raw materials, staff, power and fuel) have witnessed a decline (as percentage of sales) resulting in the 280 basis points expansion in operating margins.

Cost break-upů
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Raw materials 96 107 10.6% 248 284 14.2%
% sales 10.8% 9.4%   11.1% 10.1%  
Staff 176 170 -3.0% 456 467 2.6%
% sales 19.6% 15.0%   20.3% 16.6%  
Power & lighting 52 52 -1.7% 167 173 3.0%
% sales 5.9% 4.5%   7.5% 6.1%  
Others 218 328 50.2% 566 740 30.7%
% sales 24.4% 28.9%   25.2% 26.3%  
OPM 39.3% 42.1%   35.9% 40.8%  

Flowing down to the bottomline: Asian Hotels has reported a strong bottomline growth of 48% YoY during 3QFY07. Apart from the strong growth in topline and expansion in operating margins, the net profit growth has been aided by lower interest and depreciation expenses as well.

What to expect?
At the current price of Rs 815, the stock is trading at a price to earnings multiple of 21.4 times its 12-month trailing earnings. The boom in the hotel industry is likely to continue going forward owing to the robust tourist inflow. Also, with no major rooms coming up in next two years, the existing players would continue to enjoy higher room rates. However, given the fact that Asian Hotels has not planned any expansion yet, growth is likely to be limited going forward. At the current levels, valuations also seem to be on the higher side.

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