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Asian Hotels: Leverage plays its part!

Jun 13, 2006

Performance summary
Asian Hotels (AHL) announced decent results for the fourth quarter and full year ended March 2006. A significant surge in business and tourist travel resulted in the operating revenues for the quarter and full year grow by 38% and 27% respectively over the corresponding period of the preceding year. Operating margins were strong at 38% for FY06. Bottomline saw a rise of more than 100% YoY due to a substantial fall in the interest expenditure. The company has recommended a dividend of Rs 2 per share (dividend yield of 0.3%)

(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 756 1,041 37.7% 2,581 3,285 27.3%
Expenditure 477 588 23.3% 1,680 2,026 20.6%
Operating profit (EBDITA) 279 453 62.4% 901 1,259 39.7%
Operating profit margin (%) 36.9% 43.5%   34.9% 38.3%  
Other income 5 8 60.0% 9 14 55.6%
Interest 54 43 -20.4% 231 192 -16.9%
Depreciation 46 54 17.4% 206 210 1.9%
Profit before tax 184 364 97.8% 473 871 84.1%
Tax 77 136 76.6% 218 304 39.4%
Profit after tax/(loss) 107 228 113.1% 255 567 122.4%
Net profit margin (%) 14.2% 21.9% 9.9% 17.3%  
No. of shares (m) 22.8 22.8 22.8 22.8  
Diluted earnings per share (Rs) 4.7 10.0 11.2 24.9  
Price to earnings ratio (x)   23.9  

What is company's business?
Asian Hotels (AHL) is a strong niche player at the premium end of the hotel industry with strategically located properties at Delhi, Mumbai, and Kolkata. It has a total of 1,161 rooms across the three cities. AHL entered into a technical tie up and marketing agreement with Hyatt Hong Kong which allows it to use the Hyatt brand name on its properties enabling it to earn relatively higher ARRs.

What has driven performance in FY06?
Strong presence in key market: AHL's properties are strategically located in the cities of Mumbai, Delhi and Kolkatta. Hotels in the metros are key links to business as well as tourist travelers. Thus, occupancy rates are much higher than hotels in the other region. 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 foreign tourist arrivals into the country in FY06 (around 3.9 m). The company posted a 27% YoY growth in its topline. Its presence in key gateway cities is a big positive and we expect occupancy rates to remain robust in the next three years.

Costs under control: Hotel sector is a high-fixed cost industry and thus benefits from operating leverage (profits improve sharply once the business generates enough revenues so as to meet the fixed costs). This is reflected in AHL's performance as well. On a YoY basis, both in 4QFY06 and in FY06, operating margins have witnessed strong expansion, which has been driven by reduction in the operating heads (as % of sales).

Rs m 4QFY05 4QFY06 %Change FY05 FY06 %Change
Raw materials cost 119 149 25.2% 496 565 13.9%
% sales 15.7% 14.3% 19.2% 17.2%
Staff cost 133 212 59.4% 484 668 38.0%
% sales 17.6% 20.4%   18.8% 20.3%
Others 225 227 0.9% 700 793 13.3%
% sales 29.8% 21.8% 27.1% 24.1%  

Benefits to the bottomline: AHL reported a strong bottomline growth of 122% YoY during the fiscal. In the scenario where ARRs are increasing and are expected to remain strong for the next couple of years, we believe net margins of AHL are likely to remain buoyant. While the company has been generating strong cash flow and has reduced its debt levels, we expect interest costs to go down in the future.

What to expect?
The stock currently trades at Rs 595, implying a price to earnings multiple of 23.9 times its FY06 earnings. AHL is relatively smaller player in industry with only three hotels and total room capacity of just 1,161. More importantly, its revenues are majorly dependent on two hotels (Delhi & Mumbai). However, no new hotels are likely to be commissioned in these cities in the next two years, thus restricting the supply of rooms. This will help keep the ARRs at higher levels, this boosting the company's performance.

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