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Oriental Hotels: Chennai calling! - Views on News from Equitymaster
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Oriental Hotels: Chennai calling!
Aug 11, 2006

Performance summary
Oriental Hotels started the year on a buoyant note. For the first quarter ended June 2006 the company reported a topline growth of 19% YoY. Reduction in operational expenditure led to significant expansion in operating margins during the period. The net profits also surged 66% YoY on back of low interest and depreciation costs.

Rs( m) 1QFY06 1QFY07 Change
Net sales 329 391 19.1%
Expenditure 243 273 12.7%
Operating profit (EBDITA) 86 118 37.2%
Operating profit margin (%) 26.2% 30.2%  
Other income 6 11 83.9%
Interest 1 0 -60.0%
Depreciation 30 28 -7.3%
Profit before tax 61 101 65.3%
Tax 21 35 63.4%
Profit after tax/(loss) 40 67 66.2%
Net profit margin (%) 12.2% 17.0%  
No. of shares (m) 17.9 17.9  
Diluted earnings per share (Rs)*   18.8  
Price to earnings ratio (x)*   19.7  
* 12 month trailing earnings      

What is company's business?
Oriental Hotels is a southern India focused hospitality player with a total inventory of 666 rooms. On a standalone basis, the company owns seven properties, in and around Chennai. The company has a track record of having generated strong cash flows in the past and is currently debt-free. On a consolidated basis, the company has investments in Taj Asia, which owns properties in Sri Lanka and Maldives. It also owns a 30% voting right in Taj Karnataka Hotels & Resorts, which has a property in Chikmagalur.

What has driven performance in 1QFY07?
Chennai king: Oriental Hotels two prime properties, Taj Coromandel (Luxury) and Fisherman's Cove (Leisure) are the price leaders in Chennai. On a standalone basis, its properties in the Chennai market accounted for 44% of total inventory of the company. Chennai requires 7,500 rooms but currently can provide only 5,000 rooms. This has led to a rise in the average room rates (ARR) leading to a 19% YoY growth in the topline. With substantial commercial space being created in Chennai, the demand for rooms is likely to continue going forward and a substantial upside in room rates in its properties located in Chennai.

Margin boost: During the quarter, Oriental Hotels recorded a strong 400 basis points expansion in its operating margins. This was entirely contributed by reduction in all the major cost heads (as a % of sales). Hospitality being a fixed asset intensive business, operating leverage has played its part in perking up margins for Oriental Hotels during 1QFY07.

Cost break-up
As a % of net sales 1QCY06 1QCY07
Total Cost of goods 13.4% 12.8%
Staff Cost 17.7% 17.2%
Power and fuel 8.9% 8.0%
Other Expenditure 33.7% 31.7%

It boils down to the bottomline: Aided by the strong operating margins, lower interest cost and depreciation the bottomline increased by 66% YoY. The net margins also witnessed a 480 basis point increase in the quarter.

What to expect?
At the current market price of Rs 370, Oriental Hotel’s stock is trading at a price to earnings multiple of 19.7 times its trailing 12-month earnings. The company is in process of adding 75 rooms to its Fisherman’s Cove property, which will come into operation by FY07. With this, its total inventory in Chennai market percentage will touch 50%. Also the buoyancy in the Chennai market is likely to continue going forward. We had recommended a ‘Hold’ on the stock in January 2006 at Rs 388 with a target price of Rs 560. We maintain our positive view on the stock.

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