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EIH: Higher costs affect bottomline - Views on News from Equitymaster

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EIH: Higher costs affect bottomline
May 29, 2010

EIH Limited has announced its FY10 results. The company has reported a 15% YoY and 66% YoY fall in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales of EIH fell by 15% YoY in FY10 on the back of economic slowdown and the Oberoi property being nonoperational as a result of renovations after the terrorist attack.
  • Operating (EBITDA) margins shrunk by 9.2% to 27.8% during FY10. This fall comes on the back of higher cost of provisions, stores and wines, higher staff costs and higher other expenditure as a percentage of sales.
  • Net profits fell by 66% on the back of lower operating income, lower other income, higher interest costs and higher depreciation costs.


Financial picture
Rs(m) FY09 FY10 Change
Net sales 10,620 8,998 -15.3%
Expenditure 6,685 6,494 -2.9%
Operating profit (EBDITA) 3,935 2,505 -36.4%
Operating profit margin (%) 37.1% 27.8%  
Other income 165 75 -54.8%
Interest 825 1,009 22.3%
Depreciation 542 680 25.4%
Profit before tax 2,733 890 -67.4%
Extraordinary items      
Tax 1,028 318 -69.1%
Profit after tax/(loss) 1,704 572 -66.4%
Net profit margin (%) 16.0% 6.4%  
No. of shares (m) 393 393  
Diluted earnings per share (Rs)*   1.5  
Price to earnings ratio (x)*   81.0  
* 12 month trailing earnings

What has driven performance in FY10?
  • EIH's top line declined by 15% YoY during FY10. The hotel segment witnessed a 16% YoY decline in revenues, while others segment remained flat during the year. Based on claims submitted to the insurance company for losses due to business interruption at EIH's Mumbai hotels for 9QFY10, it has considered an income of Rs 527 m as revenues for the year. The main reason for the fall in EIH's revenues is that a major chunk of the company's revenue comes from its Mumbai properties, which were the target of terror attacks in November 2008 and which have since been closed for renovation.

    Cost break-up
    As a % of net sales FY09 FY10
    Total Cost of goods 10.3% 13.2%
    Staff Cost 23.6% 27.2%
    Power and fuel 6.0% 6.6%
    Other Expenditure 23.1% 25.1%

  • Operating income declined by 36% YoY as a result of increase in cost of provisions, stores and wines. Cost of provisions, stores and wines increased by 9% YoY during the year. While staff costs and other expenditure dropped YoY they did not drop in line with the drop in revenues. This resulted in higher staff costs and higher other expenditure as a percentage of sales and resulted in a further decline in operating income.

  • The net profits margins declined by 9.6% to 6.4% during the year. This was the result of increase in operational costs, along with lower other income and higher interest costs.

  • On a consolidated basis, the company's top line fell by 13% YoY while net profits fell by 61% YoY.

What to expect?
At a price of Rs. 118, the company is trading at 81 times its trailing twelve month earnings. During the year, the company opened its 436 key property in Bandra Kurla. The costs for a newly opened property as a percentage of sales is higher in the initial stages as staff is hired 3-6 months before the launch for training. This has added to the company's costs. We expect this cost to come down as a percentage of sales as the property sees increase in occupancy rates. Oberoi, Mumbai has become operational in April after the terrorist attacks. Hence, going forward, we expect to see improvement in the company's performance.

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