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EIH: A likely takeover target?

Oct 16, 2000

As per market rumours, EIH's share price has been gone up as certain operators through their two investment companies have been buying up shares of the company. EIH's share price has run up by 56% in the past three months. However we do not entirely agree with the above view. We do agree that EIH is a likely takeover candidate, however do not share the view that EIH has run up on account of this factor alone. The reason why we believe that EIH is a likely target is that because it is believed that the Oberoi family holding of 40% is fragmented. However these are based on rumours that some sections of the family may not have interest in the company and would like to exit.

The perceived value of EIH's shares due to their well known international brand name and large asset base, along with an improvement in fundamentals is what has driven the share price run up.

The company's fundamentals have improved in the current financial year. In the past four years, the company reeled under the pressure of falling occupancy rates and stagnant average room rates. This had put a tremendous pressure on the profitability of the company as its operating margins fell.

In the current year, the fortunes of the company have turned around. The buoyancy in tourist arrivals and improvement in the overall economic scenario in the current year led EIH to report a 29% increase in its net profit in 1QFY01. This turnaround has fuelled the company's share price performance.

(FY00)EIHIHCL
Gross Margins 19.8%26.5%
Net Margins 17.2%19.2%
EPS (Rs)13.825.1
CFPS (Rs)18.633.5
DPS (Rs)5.08.5
P/E (x)14.17.6
Dividend yield (%)2.6%4.5%
NAV per share (Rs)353541
Discount to NAV (%)-44.8%-64.9%
As compared to its nearest competitor, Indian Hotels Company Ltd (IHCL), EIH's share price has run up significantly while IHCL's shares have been more or less stagnant. Fundamentally we believe the difference lies in the fact that in the 1QFY01, EIH's performance was much better than IHCL on the net level. Also the fact that IHCL is looking too expand its presence in the US market has not been looked upon by the market favourably. This is because the company's previous investments in New York and Chicago were a drag on the company’s bottomline due to higher interest costs. However this time round IHCL does not plan to make the same mistakes as it did in the past, hence its valuations should improve.

On the current price of Rs 195, EIH's shares are trading at 14.1x FY00 EPS of Rs 13.8.

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