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EIH: Buoyant margins drive growth - Views on News from Equitymaster
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EIH: Buoyant margins drive growth
Jun 20, 2008

Performance summary
  • Topline grows 15% YoY on account of higher room rates.

  • The margins are higher by 9.5% and 5.5% for 4QFY08 and FY08 respectively.

  • Net profits jump 84% YoY and 43% YoY excluding the extraordinary item for both the periods under consideration.

  • The board has declared dividend for the year of Rs 1.8 per share (dividend yield 1.4%)

Rs( m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 3,004 3,399 13.1% 9,390 10,799 15.0%
Expenditure 1,934 1,866 -3.5% 6,427 6,800 5.8%
Operating profit (EBDITA) 1,070 1,533 43.2% 2,963 3,999 35.0%
Operating profit margin (%) 35.6% 45.1%   31.6% 37.0%  
Other income 10 181 1808.4% 578 713 23.4%
Interest 153 197 28.9% 606 726 19.8%
Depreciation 126 133 5.6% 427 453 6.2%
Profit before tax 801 1,385 72.8% 2,508 3,533 40.9%
Extraordinary item 144 (174) - 457 (34)  
Tax 352 556 58.2% 960 1,326 38.1%
Profit after tax/(loss) 593 654 10.3% 2,005 2,172 8.4%
Net profit margin (%) 19.7% 19.2%   21.3% 20.1%  
No. of shares (m) 392.9 392.9   392.9 392.9  
Diluted earnings per share (Rs) *         5.5  
Price to earnings ratio (x)*         22.1  
* 12 month trailing earning

What has driven performance in FY08?
  • For 4QFY08, the sales were higher by 13% YoY. EIH reported a topline increase of 15% YoY in FY08. Though the room rates and occupancy rates have not been divulged, given the slowdown in tourism and rising airfares, the company like its peers has been affected. Bangalore in recent times is facing lower occupancy and room rates. The Trident Hotel with its capacity of 440 rooms in Mumbai is nearing completion and is expected to commence operations in 3QFY09.

    Cost break-up
    As a % of net sales 4QFY07 4QFY08 FY07 FY08
    Total Cost of goods 7.8% 7.8% 8.5% 8.5%
    Staff Cost 17.6% 19.3% 20.9% 21.6%
    Power and fuel 3.9% 4.5% 5.7% 5.9%
    Other Expenditure 35.1% 23.4% 33.3% 27.1%

  • Lower other expenses (as percentage of sales) led the operating profits to rise by 43% YoY and 35% YoY respectively for both the periods. The company was able to expand margins despite slowing growth in ARRs and increasing cost pressures, which is commendable. The performance of the company at the operating level is better than our expectations.

  • Excluding the extraordinary item, net profits grew by 84% YoY in 4QFY08. The same jumped 43% YoY in FY08. Higher operating margins, higher other income and lower depreciation charges aided the growth.

  • The topline on a consolidated basis grew by 15.3% YoY for FY08, while the bottomline witnessed a 12% YoY growth.

What to expect?
The stock is currently trading at Rs 122, implying a price to earnings multiple of 16.5 times our estimated FY10 earnings. The company has outperformed our estimates for the full year. However, slowdown is being witnessed in key markets such as Bangalore and Delhi. Further, moderation in ARR growth and stagnation in occupancies is likely to affect the company going forward. We believe that the company’s new assets in the pipeline will contribute to earnings only after FY10 given the 2 to 3 year gestation period. With the risk reward ratio being skewed towards the former, valuations at current levels appear stretched.

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