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Oriental Hotels: Chennai spark! - Views on News from Equitymaster
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Oriental Hotels: Chennai spark!
May 31, 2006

Performance Summary
Oriental Hotels has announced strong results for the fourth quarter and full year ended March 2006. The topline for the quarter and fiscal grew by 34% YoY and 23% YoY respectively, driven by a significant surge in business and tourist travel. Reduction in operational expenditure led to significant expansion in operating margins during both the periods. The board has recommended a dividend of Rs 7.5 per share (dividend yield of 2.2%).

(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 374 501 34.0% 1,324 1,632 23.3%
Expenditure 274 323 17.9% 974 1,100 12.9%
Operating profit (EBDITA) 100 178 78.0% 350 532 52.0%
Operating profit margin (%) 26.7% 35.5%   26.4% 32.6%  
Other income 8 11 37.5% 29 33 13.8%
Interest 1 1 -40.0% 5 3 -40.0%
Depreciation 32 30 -7.8% 126 119 -5.6%
Profit before tax 75 159 111.9% 248 443 78.6%
Extraordinary income - -   - 20  
Tax 13 56 330.8% 94 172 83.0%
Profit after tax/(loss) 62 103 66.0% 154 291 89.0%
Net profit margin (%) 16.6% 20.5%   11.6% 17.8%  
No. of shares (m) 17.8 17.8   17.8 17.8  
Diluted earnings per share (Rs)         16.3  
Price to earnings ratio (x)         20.8  

What is company's business?
Oriental Hotels is a southern India focused hospitality player with a total inventory of 666 rooms. On a standalone basis, the company own seven properties, in and around Chennai. The company has a track record of having generated strong cash flows in the past and is currently debt-free. On a consolidated basis, the company has investments in Taj Asia, which owns properties in Sri Lanka and Maldives. It also owns a 30% voting right in Taj Karnataka Hotels & Resorts, which has a property in Chikmagalur.

What has driven performance in FY06?
Buoyant Chennai market: As per the Tamil Nadu tourism department, total tourist arrivals into the state has grown at a CAGR of 6.9% during the period FY00 to FY04, with foreign tourist arrivals outpacing the total arrivals by 1.1 times during this period. Oriental Hotels’ two prime properties, Taj Coromandel (Luxury) and Fisherman's Cove (Leisure), are the price leaders in Chennai. On a standalone basis, properties in the Chennai market accounted for 44% of total inventory of the company during FY06. Revenues were higher by 23% YoY during the fiscal, led by higher average room rates (ARRs). The actual revenues are in line with our estimates.

Operating leverage plays its part: Hospitality being a fixed asset intensive business, operating leverage has played its part in perking up margins for Oriental Hotels during both 4QFY06 and FY06. During the fiscal, all the major cost heads (raw materials, staff and others) have witnessed declines as percent of sales.

(% of sales) 4QFY05 4QFY06 % Change FY05 FY06 % Change
Raw material and cost of goods 44 57 29.5% 164 199 21.3%
% of sales 11.8% 11.4%   12.4% 12.0%  
Staff cost 75 70 -6.7% 240 249 3.8%
% of sales 20.1% 14.0%   18.1% 15.0%  
Power and Fuel cost 26 30 15.4% 107 119 11.2%
% of sales 7.0% 6.0%   8.1% 7.2%  
Other expense 130 166 27.7% 463 533 15.1%
% of sales 34.8% 33.1%   35.0% 32.0%  

It flows to the bottomline: Strong growth in the topline, combined with expansion in operating margins has helped Oriental Hotels post a superlative growth in bottomline during the fiscal. The net profit growth has also been aided by lower depreciation costs. The actual bottomline performance is 15% above our FY06 estimates (excluding the impact of extraordinary income) and, to that, extent, we shall have to upgrade our numbers.

What to expect?
At the current price of Rs 340, the stock is trading at a price to earnings multiple of 13.6 times our estimated FY08 earnings. Oriental Hotels’ FY06 performance has outperformed our estimates, especially on the profitability front. The company has benefited immensely from operating leverage, and considering that buoyancy in the Chennai hospitality market is likely to continue in the future, we shall have to upgrade our numbers for the company.

The company is in process of adding 75 rooms to its Fisherman’s Cove property, which will come into operation by FY07. Since the company is cash rich, we believe that some of the expansions of the Taj Group in the hotels segment could be routed through Oriental Hotels, which we have not factored in our numbers. We had recommended a ‘Hold’ on the stock in January 2006 at Rs 388 with a target price of Rs 560. We maintain our positive view on the stock.

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Feb 21, 2018 11:05 AM


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