EIH Ltd, India's second largest hotel chain is looking forward to good times. Occupancy rates in metro city hotels have improved over the last quarter. For the 1QFY01, EIH has reported an occupancy rate of 62% as compared to 58% reported for the corresponding period of FY2000.
Average room rates (ARRs) for the 1QFY01 remained flat over the previous year, however for the month of June'2000 they have reported an improvement of 1.2% YoY. This is positive news as for the last two-three years ARRs have continuously been declining. These improving figures would benefit EIH which derives 80% of its profits from its Mumbai and Delhi hotels.
Like other hotel chains EIH has been reeling under the pressure of falling occupancy rates and declining ARRs in five star city hotels for the past four years. However for the first time the company has reported a growth in both ARR and occupancy rates. The fact that occupancy rates are improving but not at the cost of a fall in room rentals this suggests a strong recovery for the hotel industry.
The year ahead looks positive as hotels should see demand increase further from October onwards (the beginning of the peak season). The improving economy and the stable political climate will result in a more favourable macro climate for the industry.
The negative news affecting the hotel industry seems to have been factored into EIH's low valuations. Increasing room supply in metro cities is not a worry as most of the projects are delayed or some have been stalled due to lack of adequate funds.
On valuations, EIH Ltd is trading at 9.0x (on FY00 earnings). This is low as compared to multiples of 20x-25x it had traded at few years ago.
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