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EIH: Lower occupancy pulls down profits - Views on News from Equitymaster

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EIH: Lower occupancy pulls down profits

Aug 10, 2009

Performance summary
  • Topline declines by 8% YoY during 1QFY10 on account of lower occupancy and room rates.
  • Operating margins marginally improve due to cost efficiencies.
  • Net profits drop by 50% YoY due to a fall in operating profits and other income.

Rs( m) 1QFY09 1QFY10 Change
Net sales 2,363 2,181 -7.7%
Expenditure 1,653 1,506 -8.9%
Operating profit (EBDITA) 709 675 -4.8%
Operating profit margin (%) 30.0% 30.9%  
Other income 195 10 -95.0%
Interest 180 219 21.6%
Depreciation 134 148 10.9%
Profit before tax 590 317 -46.3%
Extraordinary item - -  
Tax 210 126 -39.9%
Profit after tax/(loss) 380 191 -49.9%
Net profit margin (%) 16.1% 8.7%  
No. of shares (m) 393.0 393.0  
Diluted earnings per share (Rs) *   3.9  
Price to earnings ratio (x)*   28.8  
* 12 month trailing earning

What has driven performance in 1QFY10?
  • EIH’s topline declined by 8% YoY during 1QFY10. The hotel segment witnessed a 17% YoY decline in revenues, while others saw a drop of 8% YoY. On account of the ongoing crisis faced by the hotel sector, EIH like its peers witnessed lower occupancy and room rates. As per the industry, occupancy levels across metros last year stood in the range of 70 to 72%, while this year it was down in the range of 60 to 62%. Based on claims submitted to the insurance company for losses due to business interruption at EIH’s Mumbai hotels for 1QFY10, it has considered an income of Rs 527 m as revenues. EIH's major chunk of revenue comes from its Mumbai property, which was a target of terror attacks in November 2008. The Mumbai property is expected to get operational during the current year.

    Cost break-up
    As a % of net sales 1QFY09 1QFY10
    Total Cost of goods 8.8% 11.3%
    Staff Cost 24.8% 28.6%
    Power and fuel 7.4% 6.4%
    Other Expenditure 29.0% 22.8%

  • Inspite of a decline in sales, the company witnessed marginally higher operating margins during 1QFY10 mainly due to cost curtailment measures. The other expenses declined by 27% YoY. However, higher staff and total cost of goods saw an increase as a percent of sales. Margin is a play on occupancy and room rates. The company’s improvement in the margins is commendable considering that the sector is facing lower room rates.

  • The net profits declined by 50% YoY during the quarter mainly due to the decline in operating profits, lower other income and higher interest costs.

What to expect?
The stock is currently trading at Rs 111, implying a price to earnings multiple of 28.8 times its 12-month trailing earnings. The quarter was a dull one on account of lower spending by clients coupled with offseason blues. While the company’s expansion plans are on track, it would continue to face pressure on its occupancy and room rates.

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