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EIH: Going strong

Jul 28, 2006

Introduction to results
East India Hotels (EIH) announced results for the first quarter ended June 2006. Driven by the tourist rush (both foreign and domestic tourists), operating revenues for the quarter ended grew by a strong 37% YoY. A reduction in operational expenditure increased the operating margins by 740 basis points (7.4%) in this quarter. Driven by the higher margins, the bottomline grew by a commendable 45% YoY (including extraordinary item).

Rs( m) 1QFY06 1QFY07 Change
Net sales 1,403 1,923 37.1%
Expenditure 1,129 1,405 24.5%
Operating profit (EBDITA) 274 518 89.1%
Operating profit margin (%) 19.5% 26.9%  
Other income 154 110 -28.4%
Interest 167 141 -15.4%
Depreciation 102 107 4.9%
Profit before tax 159 381 138.8%
Extraordinary item (36)   -100.0%
Tax (47) 134 -382.9%
Profit after tax/(loss) 171 247 44.7%
Net profit margin (%) 12.2% 12.8%  
No. of shares (m) 52.4 52.4  
Diluted earnings per share* (Rs)   37.5  
Price to earnings ratio *(x)   16.8  
*12 month trailing earnings

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 3,082 in FY05, of which an estimated 1,068 were managed.

What has driven performance in 1QFY07?
Strong presence in a key market: EIH’s properties are strategically located in the cities of Mumbai, Delhi, Chennai and Bangalore. Also, its property mix is skewed towards luxury travelers in the business and leisure segments. Hotels in the metros are key links to business as well as tourist travelers. Thus, occupancy rates are much higher than hotels in the other regions. Though occupancy rates and numbers with respect to the growth in average room rates (ARRs) of the company are not available, the growth has to be viewed with respect to the robust growth in foreign tourist arrivals into the country in 2006. In the first quarter of calendar year 2006, the rise in tourist inflow was 14% YoY. The company posted a 29% YoY growth in its topline. Part of this could be attributed to higher ARRs as well, given the favourable demand-supply dynamics currently prevailing in the industry. Its presence in key gateway cities is a big positive and we expect occupancy rates to remain robust in the next three years.

Cost break-up
As a % of net sales 1QCY06 1QCY07
Total Cost of goods 9.8% 9.1%
Staff Cost 25.3% 22.1%
Power and fuel 9.7% 8.0%
Other Expenditure 35.7% 33.9%
Strong margins: As was the case in the last two quarters, even in this quarter, the company has been successful in managing its costs. The hotel sector is a high fixed cost industry and thus benefits from operating leverage (profits improve sharply once the business generates enough revenues so as to meet the fixed costs and any incremental business revenues flow straight through to the bottomline). On a YoY basis, operating margins have witnessed strong expansion of 740 basis points, which has been driven by a reduction in the operating heads (as % of sales).

Bottomline benefits: EIH’s net profits for 1QFY07 have risen sharply by 45% YoY. But this was partly due to an extraordinary item incurred in 1QFY06. Excluding this, the bottomline was up 19% YoY. Thus, the net profit growth has significantly under-performed the topline growth as well as the operating profit growth. This was mainly due to lower other income and higher taxes. In fact, in 1QFY06, there was a net tax credit, which was not the case this quarter.

Expansion plans: EIH has ambitious expansion plans with projects planned in Bangalore, Goa and Gurgaon. The construction of the Mumbai property is also on track and is expected to be complete by 2008. Further, the company has announced an investment of US$ 100 m for building a 250-key (room) Oberoi brand luxury hotel and 40 service apartments in Dubai. Luxury hotels in the Maldives and at Siem Reap (Angkor Vat, Cambodia) are under planning. Construction is expected to commence in 2007. This will make the company a bigger player and also expand its geographical reach, thus diversifying its geographical revenue base.

What to expect?
The stock currently trades at Rs 631, implying a price to earnings multiple of 16.8 times its trailing 12-month earnings. The company will be expanding its room inventory over the next 3 years, which is in line with the expected growth in demand. Considering the growth strategy and its locational advantage in its regions of operations, we believe that growth story will continue. We had recommended a ‘Hold’ on the stock in March 2006 at Rs 700 with a target price of Rs 900. We maintain our positive view on the stock.

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