After charting a revival in FY01, East India Hotels Ltd. (EIH) has once again experienced erosion in sales and profits. The company has registered four consecutive quarters of decline in top and bottomline. However, in its favour, the industry experienced rough times in year ended March '02. As compared to its key Indian competitor, IHCL, the financials have proved to be more vulnerable.
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Underperformance compared to its peer could be due to greater dependence on select properties. That said, hospitality and travel & tourism business has experienced very challenging 18 months. Slowdown in global and domestic economy affected the sector in the first half of FY02. The second half, which is more remunerative, experienced a wash out with September 11 and related fallouts. These events were followed by internal setbacks from communal riots and border conflict. Reportedly, the industry is expected to have revived in the first two months of the current fiscal. However, travel advisories is likely to affect industry fortunes. While advisories could lead to a precipitous drop in arrivals, withdrawal of advisories is likely to have a gradual effect.
With reduced business flow and efforts to control costs, operating expenses have declined. But the precipitous drop in sales has proved difficult to manage. Consequently, operating margins have declined, which is in line with industry trend. The company had undertaken a voluntary separation scheme in FY01 and gains seem to have accrued. The accumulated costs, amounting to Rs 105.8m, have been written off against reserves.
Interest expense, which was flat for the first nine months, has registered a sharp rise in the fourth quarter. Other income also has shown significant increase over the concerned periods. Adjusting for other income, pre-tax profit would be wiped out for FY02, which indicates poor earnings quality. Other income includes profit from foreign exchange transaction.
At Rs 206 the scrip is trading on a multiple of 30.3x FY02 earnings. Valuations look skewed due to the sharp drop in FY02 earnings. However, to that extent, valuations are likely to revert to mean as earnings revive. This could dilute stock performance. Markets seem to have factored in better financial performance in the current fiscal.
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