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EIH: Benefits continue - Views on News from Equitymaster
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EIH: Benefits continue
Jul 26, 2007

Performance summary
  • Net sales for 1QFY08 up by 12% YoY on back of robust industry scenario.

  • On a YoY basis, operating margins witness strong expansion of 330 basis points, as the company continues to reap benefits of operating leverage

  • Net margins expand by 420 basis points and grow 49% YoY.

Rs( m) 1QFY07 1QFY08 Change
Net sales 1,923 2,155 12.1%
Expenditure 1,405 1,504 7.0%
Operating profit (EBDITA) 518 651 25.7%
Operating profit margin (%) 26.9% 30.2%  
Other income 110 187 69.8%
Interest 141 155 10.0%
Depreciation 107 104 -3.3%
Profit before tax 381 580 52.4%
Tax 134 213 59.3%
Profit after tax/(loss) 247 367 48.6%
Net profit margin (%) 12.8% 17.0%  
No. of shares (m) 52.4 393.0  
Diluted earnings per share (Rs) *   4.7  
Price to earnings ratio (x)*   22.5  

What is the company's business?
EIH is a member of the Oberoi Group that runs and manages luxury hotels in India and abroad. It operates under ‘ The Oberoi’ and ‘Trident ‘ brands. Oberoi properties are luxury hotels in the premium segment, while Trident hotels are high quality medium priced hotels. The total number of rooms (managed and owned) put together stood at around 3,193 in FY07.

What has driven performance in 1QFY08?

Topline view: India continues to be one of the most exciting emerging markets in the world with GDP growth of 8%+ over the last three years. With India being on the radar of global investors, large number of visitors continue visiting the country. Also, with April and May being vacation seasons domestic tourism is also on the rise. A significant mismatch in the demand-supply scenario continues to be aided by huge growth in domestic as well as international business and leisure tourists. The current boom in demand is particularly being witnessed in the National Capital Region (comprising Delhi, Gurgaon, NOIDA and some other surrounding areas), as well as in Bangalore, Chennai, Mumbai, Hyderabad, Kolkata and Pune. EIH has its properties located in some of these regions. As a result, its revenues have witnessed a 12% YoY growth in 1QFY08.

Cost break-up
As a % of net sales 1QFY07 1QFY08
Total Cost of goods 9.1% 9.2%
Staff Cost 22.1% 23.5%
Power and fuel 8.0% 7.7%
Other Expenditure 33.9% 29.4%
Higher margins: EIH has been successful over the last few quarters in reporting stronger margins. The benefits from operating leverage are clearly visible over quarters. On a YoY basis, operating margins have witnessed strong expansion of 330 basis points, which has been driven by a reduction in the operating heads (as % of sales) except labour costs.

It flows to the bottomline: Stronger operating margins aided by higher other income and lower depreciation charges has led to the bottomline grow by 48.6% YoY in the current quarter. The net margins have also witnessed an expansion of 420 basis points. In hotel industry, ARRs (avg. room rates) over and above the levels sufficient to meet the fixed costs flow straight down to the bottomline, which is clearly visible in the performance of EIH.

What to expect?
The stock currently trades at Rs 105, implying a price to earnings multiple of 22.5 times its trailing 12-month earnings. The company has announced new ventures going forward. It is expected to increase the chain's room inventory to 4,800 over the next four years. At the same time, the hospitality major is looking at increasing its presence in the Gulf market, while checking out opportunities in other Asian destinations such as Singapore and Bangkok. Its plans to add around 1,200 rooms to its international operations by 2011 from current levels of 1,700. EIH is not only reducing its dependence on the domestic market but also looking at asset management strategy to improve its return ratios. However, given the long gestation period of 2-3 years for setting-up new hotels, most of the growth is expected to kick in after 2009. EIH is one of our top three hotel sector plays in the long-term, albeit with a higher risk profile due to execution risks.

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Feb 22, 2018 (Close)


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