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EIH: Steady performance

Apr 20, 2001

EIH, India's second largest hotel chain's share price has been quite steady over the past few months. This despite the market tanking during this period. Earlier investors were worried that EIH's share price run up was more due to buying by ITC's investment companies who were keen to increase their stake in this profitable hotel company, with a view to takeover. However, the company's excellent performance in 3QFY01 has resulted in keeping up its share price, even after these investors have reduced their stake. The company reported a net profit of Rs 277 m for 3QFY01, a growth of 80% YoY. EIH's operating profit margins have gone up from 13.8% in 3QFY00 to 26.4% in 3QFY01, an increase of 1,255 basis points.

This was the result of higher occupancy rates and average room rates at its prime hotels in Mumbai, Delhi, Bangalore and Calcutta. Also the company's increasing presence into the leisure hotel segment in the past couple of years has helped in shoring up its revenues. The company has opened hotels in Rajasthan and Shimla. It also has plans for other tourist destinations like Kerala.

  1QFY00 1QFY01 2QFY00 2QFY01 3QFY00 3QFY01
Operating Profit Margin (%) 18.9% 20.6% 11.0% 12.0% 13.8% 26.4%

To improve its operations further and to keep up with the increasing competition in the luxury hotel market in India the company is on the look out for a tie-up with an international hotel company. This will help the company increase its brand presence in the large markets of Europe and USA.

In terms of future valuations, EIH's price to earnings multiple is expected to remain more or less steady at current levels. This stems from the likelihood that growth in the hotel sector is expected to be on an upswing in the next two years, however the fear of increasing competition in Mumbai and Delhi is likely to keep valuations at moderate levels. Even though EIH derives over 52% of its profits from its South Mumbai hotels, and is in that sense protected from the increasing competition in North Mumbai, the sentiment and fear about higher competition will keep its valuations at more or less the same levels.

Hence any increases to stock price performance will come from higher revenues and an improvement in operating profit margins, the probability of which is quite good.

On the current price of Rs 213, EIH is trading at 8.7x FY02E EPS of Rs 24.4 and on a net asset value per share basis it is trading at a 40% discount to its NAV per share of Rs 353.

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