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Oriental Hotels: So far, so good - Views on News from Equitymaster

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Oriental Hotels: So far, so good
May 28, 2008

Performance summary
  • Topline grows by 10.5% YoY and 12.7% YoY in 4QFY08 and FY08 respectively.
  • While the margins for the quarter decline by 3% YoY, stable margins of 35% are witnessed in the full year.

  • Profits for 4QFY08 are up just 1.5%, while 14.6% YoY jump is reported in FY08.

  • The board has declared a dividend of Rs 10.5 per share (dividend yield of 3.8%)

Financial performance
Rs( m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 616 681 10.5% 1,916 2,159 12.7%
Expenditure 358 415 16.2% 1,250 1,406 12.5%
Operating profit (EBDITA) 259 266 2.7% 667 753 13.0%
Operating profit margin (%) 42.0% 39.0% 34.8% 34.9%
Other income 11 13 18.9% 38 42 9.8%
Interest 0 0 0.0% 1 3 119.0%
Depreciation 32 37 15.8% 117 126 7.7%
Profit before tax 238 242 1.7% 586 666 13.6%
Tax 82 84 2.1% 207 231 11.6%
Profit after tax/(loss) 155 158 1.5% 379 435 14.6%
Net profit margin (%) 25.2% 23.1% 19.8% 20.1%
No. of shares (m) 17.9 17.9 17.9 17.9
Diluted earnings per share (Rs)* 24.4
Price to earnings ratio (x)* 11.5
* 12 month trailing earnings

What has driven performance in FY08?
  • The company achieved a topline growth of 12.7% YoY in FY08, despite the renovation programme under execution in Taj Coromandel in which 68 rooms (previous year 66 rooms) were not in operation during the year. Though the companyís occupancy and room rates are not known, as per HVS (a global hospitality surveyor), the occupancy in Chennai stood around 76% in FY08 up from 75% in FY07. Even the room rates were higher at 18%.

    Chennai is the base of about 40% of India's automobile industry and has also become a hub for high-end IT services and ITES outsourcing. Further, the cityís hotels have not pushed the room rates unreasonably. Having said that, of the 254% increase in room supply expected by FY11-FY12, 68% are expected by 2010 itself. Many domestic and international players are entering this market. Though the new supply is not coming in FY09, with the slowdown in the US economy and software sector, the high room rates are becoming unviable and a slow down in growth of room rates is likely in the next 2 to 3 years.

    Cost break-up
    As a % of net sales 4QFY07 4QFY08 FY07 FY08
    Total Cost of goods 10.3% 9.7% 11.8% 11.1%
    Staff Cost 12.3% 15.7% 14.9% 17.0%
    Power and fuel 5.4% 5.4% 6.5% 6.3%
    Other Expenditure 30.0% 30.1% 32.0% 30.6%

  • The operating margins remained stable at 34.9% in FY08. While other expenses and power and fuel cost as a percent of sales declined, staff costs increased to 17% in FY08 (14.9% in FY07). It includes a provision for retirement benefits of Rs 34.9 m. Excluding this, the staff costs are up 15% YoY. The operating profits are in line with our estimates.

  • Stable margins, lower depreciation and lower tax outgo led to the profits in FY08 jump by 14.6% YoY. The tax rate was lower to 34.7% from 35.3% in FY07. The bottomline is marginally ahead of our estimates.

What to expect?
At the current market price of Rs 280, Oriental Hotelís stock is trading at a price to earnings multiple of 9.2 times our FY10 estimates. Most of its properties are market leaders in their respective cities. The company is expanding its capacity to have an inventory of 928 rooms in the next three years. Though the next year would witness good times on account of supply crunch, going forward, with around 1,500 rooms expected to come in the city, fall in occupancy and room rates would be witnessed.

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