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Oriental Hotels: 4Q hampers performance - Views on News from Equitymaster

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Oriental Hotels: 4Q hampers performance
May 14, 2009

Performance summary
  • The company witnesses a 22% YoY decline in sales during 4QFY09. For FY09, however, sales decline by 1% YoY.
  • Operating margins are down from 35% in FY08 to 33% in FY09.
  • During the full year, profits fall by 14% YoY on account of lower margins coupled with higher interest costs.
  • The board recommends a dividend of Rs 9 per share (dividend yield of 4.8%).


Standalone financials
Rs( m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 688 534 -22.3% 2,166 2,153 -0.6%
Expenditure 416 367 -11.8% 1,406 1,443 2.7%
Operating profit (EBDITA) 272 168 -38.3% 761 710 -6.7%
Operating profit margin (%) 39.5% 31.4% 35.1% 33.0%  
Other income 6 12 96.7% 34 30 -11.7%
Interest - 19 3 32 1000.0%
Depreciation 37 35 -4.1% 126 132 5.1%
Profit before tax 241 126 -47.9% 666 576 -13.5%
Tax 84 47 -44.6% 231 203 -12.3%
Profit after tax/(loss) 157 79 -49.7% 435 374 -14.2%
Net profit margin (%) 22.9% 14.8%   20.1% 17.3%  
No. of shares (m) 17.9 17.9   17.9 17.9
Diluted earnings per share (Rs)* 20.9  
Price to earnings ratio (x)*   9.0  
* 12 month trailing earnings

What has driven performance in FY09?
  • Oriental Hotels witnessed a 22% YoY decline in sales during 4QFY09. Like its peers, the company faced the brunt of economic slowdown and terror attacks. Further, with Chennai being an IT hub, reduction of corporate travel budget worsened matters. For FY09, the sales, however, saw a marginal decline of 1% YoY. The company had reported a growth of 10% during 9mFY09 but mainly on account of the last quarter (a peak quarter, earning large part of revenues), performance for the full year got hampered. The topline is, however, higher by 8% as compared to our estimates.

    Cost break-up
    As a % of net sales 4QFY08 4QFY09 FY08 FY09
    Total Cost of goods 9.6% 9.4% 11.1% 10.3%
    Staff Cost 15.6% 20.6% 17.0% 18.6%
    Power and fuel 5.5% 6.3% 6.3% 7.1%
    Other Expenditure 29.8% 32.3% 30.5% 31.0%

  • During the quarter, the operating margins shrunk 8% YoY mainly on account of decline in sales. Margins being a play on room rates and occupancy, lower sales led to the pressure. For the full year, margins stood at 33%, down from 35% in FY08. The company was witnessing good times till 1HFY09. However, economic slowdown and terror attacks led to the poor performance during the second half. The margins are, however, higher than our estimates.

  • Decline in sales and operating revenues led to the 50% YoY decline in the bottomline during 4QFY09. During the full year, profits fell by 14% YoY on account of lower margins coupled with higher interest costs.

What to expect?
At the current market price of Rs 189, Oriental Hotel’s stock is trading at a multiple of 12 times our estimated FY11 earnings. The company has done well as compared to our estimates. The worst financial crisis in many decades, high oil prices and a slew of militant attacks hit the hotel industry during FY09. Often described as a “fragile” industry, the demand for travel is highly susceptible to events like economic slowdown, wars, disease outbreaks and terrorism. When the Indian tourism and hotel industry had just started gaining recognition worldwide, it was dealt a severe blow and this is evident from the performance. However, with the economic scenario expected to improve and the government taking initiatives to promote India as a tourist destination, things would improve, though not in the medium term. While the coming few quarters would remain subdued for the hotel industry, given India’s attractive fundamentals over the long term, the hotel industry will benefit.

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