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EIH: Looking for respite - Views on News from Equitymaster
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  • Aug 29, 2002

    EIH: Looking for respite

    The poor performance of hospitality companies is not alarming considering the challenging operating environment over the past 18 months. East India Hotels (EIH), popularly known as Oberoi Hotels, for 1QFY03 has reported it's fifth consecutive YoY quarterly decline in sales. Exhibiting some recovery in 4QFY02, the financials have slipped again.

    (Rs m) 1QFY02 1QFY03 Change
    Net Sales 1,004 818 -18.6%
    Other Income 90 94 4.7%
    Expenditure 839 781 -6.9%
    Operating Profit (EBDIT) 165 37 -77.7%
    Operating Profit Margin (%) 16.4% 4.5%  
    Interest 49 28 -43.8%
    Depreciation 69 72 3.8%
    Profit before Tax 137 31 -77.0%
    Extraordinary items (11) (27) 147.7%
    Tax 19 (2)  
    Profit after Tax/(Loss) 107 7 -93.8%
    Net profit margin (%) 10.6% 0.8%  
    No. of Shares 52.4 52.4  
    Diluted Earnings per share* 8.1 0.5  
    * annualised      

    Having said that, a concern is the company's underperformance at the turnover level for both FY02 and 1QFY03 compared to the peer group. Sales of the company, as compared to peers, could be adversely affected due to relative lack of asset diversifications -- higher dependence on Bombay properties. Besides dry up of business & tourist traffic, the Bombay hospitality market is experiencing oversupply in 5-star rooms. While the industry is likely to have experienced recovery in April & May '02, prospects were dashed with travel advisories towards end May '02. We reckon, similar to industry, EIH has suffered from the travel advisories. Peer company, Indian Hotels (IHCL) attributed the entire decline in 1QFY03 sales to June '02 due to advisories, which affected room revenues. Reports suggest that inbound travel to the country is likely to have declined by an estimated 19% YoY during the month of June '02.

    We mentioned that the sector is likely to have seen some improvement in 4QFY02 with operating margins recovering from low single digits in the second & third quarter. However, operating margins have again slipped dramatically. Surprisingly, the company has not shown any raw material costs, which includes food & beverage expense. Other operating expenses, which constitute an estimated 50% of operating cost, has increased by 12.3% YoY for the concerned quarter, which has pulled down margins and operating profits. EIH, as compared to IHCL, seems to have been unable to execute stringent control on such cost heads. IHCL, in 1QFY03, reduced other operating expenses by 14%, which helped prevent further erosion in margins.

    Considering the sharp downturn in inbound travel during June to mid July '02, we reckon, the industry is likely to have experienced recovery. Having said that, with the ongoing slack season (June-September), the turn in fortunes is likely to be limited. EIH in 2QFY02 had reported significantly reduced operating margins. Consequently, with a recovery, the company could post better YoY results for 2QFY03.

    EIH scrip is quoting at Rs 205 and has traded in band of Rs 205 to Rs 215 over the past month. However, the scrip has declined from Rs 240 levels since mid-June '02, which could be due to the advisories. Considering the wash out of the previous season, second half performance of FY03 is likely to be much stronger. However, markets seem to have factored in the improvement in business environment. Consequently, any threat to the recovery could negatively affect stock price performance.



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