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EIH: The year that was

Jul 1, 2003

EIH, India’s second largest chain of hotels, recently declared its FY03 results. While revenues have risen marginally for FY03, profits have halved during the year (57% YoY). However, as we have mentioned in our previous report, the industry is on the verge of a turnaround and the March quarter of the company is an apparent indicator of the same.

(Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
Net Sales 988 1,122 13.5% 3,747 3,833 2.3%
Other Income 218 226 3.5% 526 519 -1.3%
Expenditure 806 841 4.4% 3,311 3,540 6.9%
Operating Profit (EBDIT) 182 281 54.0% 436 294 -32.7%
Operating Profit Margin (%) 18.4% 25.0%   11.6% 7.7%  
Interest 48 72 49.2% 186 185 -0.4%
Depreciation 76 113 49.3% 288 346 20.0%
Profit before Tax 277 322 16.4% 488 282 -42.2%
Extraordinary items (1) (3) 135.7% (1) (7) 407.1%
Tax 80 145 80.0% 131 120 -8.3%
Profit after Tax/(Loss) 195 174 -10.7% 356 155 -56.5%
Net profit margin (%) 19.7% 15.5%   9.5% 4.0%  
No. of Shares 52.4 52.4   52.4 52.4  
Diluted Earnings per share* 14.9 13.3   6.8 3.0  
P/E Ratio (x)         58.7  
* annualised            

Consider the March quarter performance of the company first. During the quarter, topline rose by 14% over the previous period. However, it has to be remembered that 4QFY02 was one of the worst quarters, as a result of which growth in 4QFY03 is on the higher side. Having said that, 4QFY03 was also mired by issues like the US-Iraq conflict and SARS. The positive factor for the industry is that that tourist arrivals have already started showing signs of revival, now that issues like SARs are subsiding.

Source: CMIE monthly June 2003

Although topline grew in 4QFY03, the worrying part for EIH has been the continuous erosion in bottomline. During the March quarter, net profits fell 11% YoY (PAT was down 56% in FY03). In the March quarter, while occupancies have increased, ARRs continue to remain under pressure. Despite this, operating margin has increased notably. Since fixed costs are higher in the hotel sector, a recovery in volumes will result in improved profitability. Nevertheless, operating margins for FY03 is down, as the first nine months in FY03 was a challenging one for the industry and EIH.

EIH has been an under-performer when compared with its peer, Indian Hotels (the owners of ‘Taj’). As can be seen from the graph below, EIH has been a laggard in terms of operating profit margins. Indian Hotels benefits from higher contribution from luxury hotels (40% of sales) as compared to EIH, which has its major presence in the business and leisure segment. Both these segments are facing intense competition.

EIH has been incurring huge interest expenses as it has taken debts for its expansion plans. Apart from that, depreciation costs also has gone up by (20% YoY), as the company completed construction of two of its hotels and resorts. As a result, net profit has fallen at a faster rate in FY03.

At Rs 173, the scrip is trading on a multiple of 58.7x FY03 earnings. Though valuations look skewed due to the sharp drop in FY03 earnings, the stock is on the expensive side when compared with peers (even if one were to assume a 100% rise in net profit, the stock trades at 28.8x FY04E earnings). Going forward, the performance of the company is likely to improve, as compared to FY02 (indicative from the 4QFY03). Having said that, the hotel industry is vulnerable to geo-political events. Apart from this, with EIH setting up new hotels in the country as well as globally, cash flows may continue to remain under stress (hotels have long gestation period).

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