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Asian Hotels: All factored in?

Aug 28, 2006

Performance summary
Asian Hotels (AHL) announced robust results for the first quarter ended June 2006. The topline grew by 28.5% YoY due to a significant surge in business and tourist travel resulted. Operating margins were strong at 42% for 1QFY07. Net profits surged 84% YoY on back of low interest costs. The company has recommended a dividend of Rs 8 per share (dividend yield of 1.4%)

Rs m) 1QFY06 1QFY07 Change
Net sales 662 851 28.5%
Expenditure 419 495 18.0%
Operating profit (EBDITA) 243 356 46.7%
Operating profit margin (%) 36.7% 41.9%  
Other income 4 1 -68.6%
Interest 50 42 -16.2%
Depreciation 51 52 1.9%
Profit before tax 145 263 81.6%
Tax 51 90 76.5%
Profit after tax/(loss) 94 173 84.3%
Net profit margin (%) 14.2% 20.4%  
No. of shares (m)   22.8  
Diluted earnings per share (Rs)*   28.3  
Price to earnings ratio (x)*   20.5  
*12 month trailing earnings      

What is company's business?
Asian Hotels (AHL) is a strong niche player at the premium end of the hotel industry with strategically located properties at Delhi, Mumbai, and Kolkata. It has a total of 1,161 rooms across the three cities. AHL entered into a technical tie up and marketing agreement with Hyatt Hong Kong which allows it to use the Hyatt brand name on its properties enabling it to earn relatively higher ARRs.

What has driven performance in 1QFY07?
Key locations: AHL's properties are strategically located in the cities of Mumbai, Delhi and Kolkatta. 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 increased economic activity in the country and significant growth in domestic travel (both business and leisure). Also, the favourable demand-supply dynamics currently prevailing in the industry led to higher ARRs as well (rooms are in short-supply in Delhi). Its presence in key gateway cities is a big positive and we expect occupancy rates to remain robust in the next three years.

Buoyant margins: 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 520 basis points, which has been driven by a reduction in the operating heads (as a percentage of sales). In our view, the companyís margins are one of the highest in the sector, despite a broader portfolio of inventory. This is indeed commendable.

Cost break-up
As a % of net sales 1QCY06 1QCY07
Total Cost of goods 11.4% 10.3%
Staff Cost 19.4% 17.2%
Power and fuel 8.2% 6.9%
Other Expenditure 24.4% 23.8%

It all flows to the bottomline: The net profit growth has significantly out-performed the topline growth as well as the operating profit growth. AHLís net profits for 1QFY07 have risen sharply by 84% YoY. Lower other income and depreciation costs expanded the net margins by 620 basis points. The company has been generating strong cash flow and has reduced its debt levels, as is evident in the interest outgo during the quarter.

What to expect?
The stock currently trades at Rs 580, implying a price to earnings multiple of 20.5 times its 12 month trailing earnings. The company does not have any major concrete expansion plans, but is actively pursuing opportunities in key cities like Bangalore. So, growth in the next one to two years will be largely driven by existing properties (we expect significant upsides in Delhi and Kolkata). Despite the promising growth prospects, we are cautious on the current valuations.

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