EIH Ltd, India's second largest hotel chain has seen a run up of over 50% in its stock price over the past three months. There are rumours that some companies are trying to garner up shares of EIH in a takeover bid. However, a word of caution to them. EIH may not be as attractive as it seems after the recent run up in the share price.
There are two ways to value a hotel company: EV/EBIDTA and P/NAV per share.
On an enterprise value to earnings before interest, depreciation and tax (EV/EBIDTA) basis it looks expensive as compared to its international peers. The company's EV/EBIDTA for FY01 is 13.3x and for FY02 is 10.0x.
Some of the global hotel chains like Mandarin Oriental and Shangri-La Asia are trading at around the same levels as EIH. However, it is important to note that by investing in these companies, investors get an exposure to the global hotel market as compared to EIH which is primarily an Indian hotel chain and, hence, has a higher geographical risk profile.
There are many other international hotel companies like Mariott International and Hilton Hotels which are undervalued when compared to EIH on the EV/EBIDTA parameter.
In comparison to its nearest domestic competitor Indian Hotels Company Ltd (Indian Hotels), EIH looks expensive. On current prices, Indian Hotels EV/EBIDTA is 6.8x FY01 and 5.2x FY02.
On a net asset value (NAV) per share both the Indian hotel stocks, EIH and IHCL look attractive on current prices. NAV attempts to unlock the true value of a company's properties and brands. On a NAV basis both of India’s two largest hotel chains Indian Hotels and EIH, are currently trading at a huge discount to their "true" value. Indian Hotels owns 17 hotels and has an equity interest and manages around 30 more. EIH, on the other hand, owns 10 hotels and manages 4 hotels across the country.
However, in comparison to Indian Hotels, EIH looks more expensive on NAV method. Indian Hotels is trading at a 64% discount to its NAV of Rs 540, while EIH is trading at a 48% discount to its NAV of Rs 353. It is important to note that NAV calculations are subject to fluctuations in real estate prices. Price to NAV is a popular parameter to value hotel companies the world over. In India, though, hotel company assets are illiquid and never traded.
When comparing EIH and IHCL it is also important to note that the consolidated earnings for IHCL are much higher. This is due to the fact that IHCL has many affiliate companies like Oriental Hotels and Indian Resort Hotels which are profitable and have been operating for many years. On the other hand EIH Ltd's affiliate companies are fairly new and will take a few years to have a material impact on EIH's earnings. Hence, on this basis too, IHCL looks more attractive.
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