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Oriental Hotels: Higher costs weigh on bottomline - Views on News from Equitymaster

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Oriental Hotels: Higher costs weigh on bottomline
May 23, 2011

Oriental Hotels Limited has announced its full year results of financial year 2010-2011 (FY11). The company has reported 21.5% YoY increase in sales and a 3.7% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Revenue of Oriental Hotels increased by 21.5% YoY during the year.
  • Operating (EBITDA) margins fell by 2.3% to 24.5% as a result of increase in costs of goods sold, employee costs and power and fuel costs (as a percentage of sales).
  • Net profits fell by 3.7% YoY on the back of fall in other income and higher interest costs.
  • The company has recommended a dividend of Rs 0.8 per share. T


Standalone Financial picture
Rs(m) FY10 FY11 Change
Net sales 1,941 2,357 21.5%
Expenditure 1,420 1,779 25.2%
Operating profit (EBDITA) 520 579 11.2%
Operating profit margin (%) 26.8% 24.5%  
Other income 68 11 -84.3%
Interest 111 137 23.9%
Depreciation 137 154 12.5%
Profit before tax 340 298 -12.5%
Exceptional Items 14 23  
Tax 122 98 -20.0%
Profit after tax/(loss) 232 223 -3.7%
Net profit margin (%) 11.9% 9.5%  
No. of shares (m) 179 179  
Diluted earnings per share (Rs)*   1.2  
Price to earnings ratio (x)*   24.8  
* 12 month trailing earnings

What has driven performance in FY11?
  • Sales of Oriental Hotels improved on the back of the increased demand. The top line also benefited from the inclusion of sales from the company's new Trivandrum property as well as income from 50 new rooms at the company's Fisherman's Cove hotel. On a like-to-like basis, the company's sales grew by 8% YoY this year over last year.

  • Operating income increased by 11.2% YoY during the year. This increase was slower than sales growth as a result of sharp increase in cost of goods sold, employee costs and power and fuel costs. While costs of goods sold increased by 27% YoY, employee costs and power and fuel costs increased by 33% YoY and 29% YoY respectively.

    center>Cost break-up
    As a % of net sales FY10 FY11
    Total Cost of goods 10.4% 10.9%
    Staff Cost 19.1% 20.9%
    Power and fuel 7.8% 8.3%
    Other Expenditure 35.8% 35.3%

  • Net profit fell by 3.7% YoY during the quarter. This was on the back of lower other income and increase in interest costs. Interest expense increased by 24% YoY during the quarter possibly due to the acquisition costs of the Trivandrum property and the building of the Coimbatore property. Other income on the other hand fell by 84.3% YoY.

What to expect?
At a price of Rs 30.9, the company is trading at 14.8 times our estimated FY13 earnings (RPro subscribers click here). Oriental Hotels has been affected due to the debt taken by the company to lease the Trivandrum property and fund its expansion. The expansion includes a Taj branded hotel in Coimbatore and a Gateway branded hotel in Bangalore. These two hotels are expected to add 380 rooms to the company's current inventory of 870 guest rooms. The stock has corrected recently. However, considering that the company failed to display the intended performance over our investment horizon of 2-3 years we discontinue our coverage on the stock.

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