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EIH: Mixed show - Views on News from Equitymaster

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EIH: Mixed show

Jun 1, 2006

Performance Summary
East India Hotels (EIH) announced strong results for the fourth quarter and full year ended March 2006. While the company's topline registered a growth of 36% YoY, net profit rose by 110% (excluding extraordinary income). While the growth in net profit was led by margin expansion, lower interest expenses have also helped matters. The Board has recommended a final dividend of Rs 5 per equity share (dividend yield of 0.7%). Also a spilt in the face value of each Equity share of Rs 10 into five equity shares of Rs 2 each and a bonus ratio of 1: 2 was announced.

(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 1766 2,271 28.6% 5,555 7,564 36.2%
Expenditure 1278 1464 14.6% 4,415 5,109 15.7%
Operating profit (EBDITA) 488 807 65.4% 1,140 2,455 115.4%
Operating profit margin (%) 27.6% 35.5%   20.5% 32.5%  
Other income 205 168 -18.0% 698 223 -68.1%
Interest 230 144 -37.4% 737 622 -15.6%
Depreciation 107 100 -6.5% 404 409 1.2%
Profit before tax 356 731 105.3% 697 1,647 136.3%
Extraordinary item 16 18 12.5% 109 962 782.6%
Tax 133 341 156.4% 256 721 181.6%
Profit after tax/(loss) 207 372 79.7% 332 1,888 468.7%
Net profit margin (%) 11.7% 16.4%   6.0% 25.0%  
No. of shares (m) 52.4 52.4   52.4 52.4  
Diluted earnings per share (Rs)         36.0  
Price to earnings ratio (x)         19.0  

What is company's business?
EIH is a member of the Oberoi Group that runs and manages luxury hotels in India and abroad. It operates under ‘ The Oberoi’ and ‘Trident ‘ brands. Oberoi properties are luxury hotels in the premium segment, while Trident hotels are high quality medium priced hotels. It has properties in all the key metros viz., Delhi (287 rooms), Mumbai (880 rooms), Kolkata (213 rooms), Chennai (a Trident property with 167 rooms) and Bangalore (158 rooms).

What has driven performance in FY06?
Tourist boom: EIH’s property mix is skewed towards luxury travelers in the business and leisure segments. Though occupancy rates and numbers with respect to the growth in average room rates (ARR) of the company are not available, the growth has to be viewed with respect to the robustness in tourist arrivals into the country in FY06 (around 3.9 m). However, as compared to our estimates, the actual topline is lower by 15%. But its presence in key gateway cities is a big positive and we expect occupancy rates to remain robust in the next three years.

Cost pressures under control: As is evident from the table below, the company has been successful in managing costs. Operating margins expanded by 12% and stood at 32.5% in FY06 on the back of operating leverage. Compared to our operating profit margin estimate of 29.6% in FY06, margins as of FY06 stands at 32.5%.

(% of sales) 4QFY05 4QFY06 % Change FY05 FY06 % Change
Raw material and cost of goods 175 216 23.4% 527 673 27.7%
% of sales 9.9% 9.5%   9.5% 8.9%  
Staff cost 393 449 14.2% 1,431 1,619 13.1%
% of sales 22.3% 19.8%   25.8% 21.4%  
Power and fuel 119 129 8.4% 507 555 9.5%
% of sales 6.7% 5.7%   9.1% 7.3%  
Other expense 591 670 13.4% 1,950 2,262 16.0%
% of sales 33.5% 29.5%   35.1% 29.9%  

Extraordinary effect: The company reported a 468% YoY growth in bottomline for FY06. However, this was on account of extraordinary income pertaining to the profit on sale of land to the tune of Rs 962 m in FY06. Without considering the extra-ordinary income, the bottomline rose by 110% YoY. This is mainly due to a strong growth in the topline, combined with expansion in operating margins. Though net margins are in line with our estimates, the net profits (inclusive of extraordinary item) are lower by 18% than our FY06 estimates.

What to expect?
At the current price of Rs 683, the stock is trading at a price to earnings multiple of 12.1 times our estimated FY08 earnings. The current properties are likely to witness stable or marginally higher occupancy rates combined with robust ARRs in the next two years. Also, in order to improve profitability and fund the expansion plans. Besides the Mumbai expansion, in the long term, the company plans to increase presence in Bangalore apart from growing through management contract route. These expansions are likely to reflect in the company's financials only after FY08. We had recommended a ‘Hold’ on the stock in March 2006 at Rs 700 with a target price of Rs 900. We maintain our positive view on the stock.

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Feb 21, 2019 11:09 AM


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