Oriental Hotels: 1QFY08 Results - Views on News from Equitymaster

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Oriental Hotels: 1QFY08 Results

Aug 17, 2007

Performance summary
  • Topline witnesses a growth of 13% YoY. This is despite the fact that 66 rooms (32% of its inventory) were under renovation in the current quarter.

  • The company faces pressure on the operating margins, which have fallen from 30.2% in 1QFY07 to 27.8% in this quarter.

  • Low operating margins and other income has led the net profits to grow by 2.9% YoY for the quarter.

Rs (m) 1QFY07 1QFY08 Change
Net sales 391 442 13.0%
Expenditure 273 319 16.8%
Operating profit (EBDITA) 118 123 4.2%
Operating profit margin (%) 30.2% 27.8%
Other income 11 11 -2.7%
Interest 0 0 7.5%
Depreciation 28 29 4.6%
Profit before tax 101 104 3.4%
Tax 35 36 4.3%
Profit after tax/(loss) 66 68 2.9%
Net profit margin (%) 16.9% 15.4%
No. of shares (m) 17.9 17.9
Diluted earnings per share (Rs)* 21.6
Price to earnings ratio (x)* 13.9
* 12 month trailing earnings

What is the 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 1QFY08?
On the topline: Traditionally the business in Chennai hotels during the summer is slack due to high temperature. The foreign leisure traffic also dries up by the end of March, while domestic leisure traffic heads towards hill stations and places of religious interest. Also, 650 new rooms were added in the city over the last six months. However, the hotel occupancies in Chennai remained high driven by activity in the IT and construction industries. In case of Oriental Hotels, the topline witnessed a growth of 13% YoY. This is despite the fact that 66 rooms (32% of its inventory) were under renovation in the current quarter. They are expected to commence operations in 3QFY08. The company has lined up renovation plans for the next 2 years. Also, it is adding 64 rooms in Fisherman's Cove and 200 rooms in Bangalore over the next 2 years. 3,000 new rooms are planned in Chennai by 2009. Till then the occupancy levels would remain high. However, Oriental Hotels might witness lower performance due to its renovations.

Cost break-up
As a % of net sales 1QFY07 1QFY08
Total Cost of goods 12.8% 12.4%
Staff Cost 17.3% 18.7%
Power and fuel 8.1% 7.6%
Other Expenditure 31.7% 33.4%

Margin pressure: The company faced pressure on the operating margins, which fell from 30.2% in 1QFY07 to 27.8% in this quarter. This fall could be attributed to higher labour cost, which as percentage of sales, increased from 17.3% in 1QFY07 to 18.7% in 1QFY08. Though power & fuel costs witnessed a fall, other expenditure (as percentage of sales) also witnessed a marginal rise in the quarter due to the renovation costs. In FY08, another 66 rooms of Taj Coromandel are planned to be renovated. This would lead to a lower supply of rooms.

Net profits: Low operating margins and other income led to the mere 2.9% YoY growth in net profits for the quarter. 66 rooms (representing 32% of the hotel's inventory) of Taj Coromandel, Chennai were under renovation for the entire duration of the current quarter and hence led to low profits. (In the previous year, 66 rooms were taken up for renovation in the second quarter). The renovation of these rooms is expected to be completed by the end October 2007.

What to expect?
At the current market price of Rs 300, Oriental Hotel's stock is trading at a price to earnings multiple of 13.9 times its trailing 12-month earnings. Most of its properties are market leaders in their respective cities and we expect the ARRs to remain firm going forward till the new supply comes in. However, the company is renovating rooms in one of its prime properties. Though the work is expected to be completed by 3QFY08, the performance would be affected till then.

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