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EIH: Cautious times - Views on News from Equitymaster

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EIH: Cautious times

Jul 29, 2008

Introduction to results
  • Topline grows 9.6% YoY on account of higher room revenues in 1QFY09.
  • Operating margins decline by 20 basis points on account of higher staff costs.
  • Net profits grow by 3.6% YoY as higher depreciation and interest costs eat into profits


Rs (m) 1QFY08 1QFY09 Change
Net sales 2,155 2,363 9.6%
Expenditure 1,504 1,653 9.9%
Operating profit (EBDITA) 652 709 8.9%
Operating profit margin (%) 30.2% 30.0%  
Other income 187 195 4.3%
Interest 155 180 16.3%
Depreciation 104 134 29.3%
Profit before tax 580 590 1.7%
Tax 213 210 -1.4%
Profit after tax/(loss) 367 380 3.6%
Net profit margin (%) 17.0% 16.1%  
No. of shares (m) 393.0 393.0  
Diluted earnings per share (Rs) *   5.6  
Price to earnings ratio (x)*   21.6  
* 12 month trailing earning

What has driven performance in 1QFY09?
  • EIH reported a topline growth of 9.6% YoY during the quarter. While the company’s room rates and occupancy rates are not known, the performance is decent considering the recent global crisis and higher travel fares witnessed. While the room rates did correct in 4QFY08 on account of new supply of rooms, EIH, we believe is relatively insulated on account of its locational advantages. Mumbai and Delhi, where the company has majority of its properties still continue to witness strong demand and room rates. EIH has sizeable capex on the anvil over the next 2 to 3 years, which would be funded largely through a mix of internal cash flows and debt. This would increase its presence in other regions where it is currently not present.

    Cost break-up
    As a % of net sales 1QFY08 1QFY09
    Total Cost of goods 9.2% 8.8%
    Staff Cost 23.5% 24.8%
    Power and fuel 7.7% 7.4%
    Other Expenditure 29.4% 29.0%

  • The operating margins declined marginally by 20 basis points for the quarter. While all the other expenses were lower as a percent of sales, staff cost was higher at 24.8% of sales in 1QFY09 up from 23.5% in 1QFY08.

  • The bottomline has grown by 3.6% YoY. While interest cost and depreciation charges were higher, effective tax rate reduced from 36.7% to 35.6% in the quarter under consideration.

What to expect?
The stock is currently trading at Rs 120, implying a price to earnings multiple of 16.2 times our estimated FY10 earnings. The growth is lower that that of last year largely on the back of average room rate growth and occupancy levels being lower from last year. The slowdown in the global economy, rising crude prices and higher airfares has affected the hotel sector to a certain extent. Further, as per the industry, the growth witnessed last year is not sustainable and the rates would get rationalised. While EIH would not be that hard hit on account of its few prime properties, the growth witnessed in the last few quarters would however slow down going forward.

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