EIH Ltd, India's second largest hotel chain has been a star performer in the last few trading sessions. In the past three months EIH's share has gone up by 102% and it has outperformed the market by a robust 101% during this period.
What could be the reasons for this spectacular performance:
Well the most obvious being that occupancy rates in metro cities have shown a strong improvement in the first quarter. The fact that EIH derives over 80% of its profits from its hotels in Mumbai and Delhi, it is naturally a beneficiary of this.
Besides this there are rumours floating in the market about a buyback of shares and setting up of a software subsidiary by EIH. Also as EIH is on the look out for a marketing tie-up with a foreign hotel chain, this too has added to the above. All these have resulted in a flare up in EIH's share price.
Share price performance in absolute and relative terms
Aug 31, 2000
EIH Ltd (Rs)
Relative to BSE Sensex (%)
On the average room rate (ARR) front the improvement has been slow as hotel companies normally raise their rates in the second half of the year which is the peak season for the industry. Besides with the new room supply in North Mumbai, hoteliers are still in the process of deciding their course of action. Hotels based in South Mumbai are currently relatively unaffected by the North Mumbai hotels.
On the current price of Rs 251, EIH is trading at 15x FY0IE earnings. This is low as compared to multiples of 25x-30x it had traded at few years ago. Given its capital cost advantage, prime hotel properties and widespread network it seems an attractive play on the Indian hotel sector.
On a Net asset value (NAV) per share it is currently trading at a 30% discount to its replacement cost NAV of Rs 353.
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