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Oriental Hotels: High costs play spoilsport

Oct 20, 2010

Oriental Hotels Limited has announced its 2QFY11 results. The company has reported 21.6% YoY and 14% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenue of Oriental Hotels increased by 22% during the quarter.
  • Operating (EBITDA) margins fell by 2.6% to 16.5% as a result of increase in costs of goods sold, employee costs and power and fuel costs (as a percentage of sales).
  • Net profits increased by 14% on the back of one-time extraordinary income registered during the quarter.
  • Net profit for 1HFY11 increased by 58% YoY while net profit margins improved by 0.8%. This performance came on the back of increase in sales and one-time extraordinary items recorded during the period. However, increase in costs of goods sold, higher interest expense and increase in effective tax rate capped bottom line growth. When adjusting for extraordinary items, the bottom line of the company fell by 54% YoY.

Rs(m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Net sales 419 509 21.6% 788 992 25.9%
Expenditure 339 425 25.4% 649 829 27.8%
Operating profit (EBDITA) 80 84 5.5% 139 163 16.7%
Operating profit margin (%) 19.1% 16.5%   17.7% 16.4%  
Other income 5 4 -30.6% 9 6 -34.6%
Interest 26 36 39.5% 45 69 51.9%
Depreciation 33 39 17.0% 67 74 10.3%
Profit before tax 27 14 -48.6% 36 26 -28.1%
Exceptional Items      -   16        -   26  
Tax 9 10 5.4% 13 15 18.6%
Profit after tax/(loss) 17 20 14.0% 23 37 57.7%
Net profit margin (%) 4.1% 3.9%   2.9% 3.7%  
No. of shares (m) 18 18   18 18  
Diluted earnings per share (Rs)*         13.7  
Price to earnings ratio (x)*         27.4  
* On a trailing 12-month basis

What has driven performance in 2QFY11?
  • Sales of Oriental Hotels improved on the back of the economic recovery and increased demand. The top line also benefited from the inclusion of sales from the company’s new Trivandrum property. When excluding sales from the new Trivandrum property, the top line of the company grew by 9.6% YoY.

  • Operating income increased by 5.5% YoY during the quarter. This increase was slower than sales growth as a result of sharp increase in cost of goods sold, employee costs and power and fuel costs. While costs of goods sold increased by 30%, employee costs and power and fuel costs increased by 28% YoY and 30% YoY respectively.

    Cost break-up
    As a % of net sales 2QFY10 2QFY11 1HFY10 1HFY11
    Total Cost of goods 10.7% 11.4% 10.8% 11.4%
    Staff Cost 23.7% 24.9% 25.2% 24.6%
    Power and fuel 8.9% 9.5% 9.4% 9.9%
    Other Expenditure 37.7% 37.7% 36.9% 37.7%

  • Net profit grew by 14% YoY during the quarter. This was on the back of a one-time gain recorded during the quarter. The company recorded Rs 15.9 m as gain on foreign currency loan during the quarter. When not accounting for onetime gains, the net profits fell by 78% YoY. The growth in net profit could have been higher but for an increase in interest costs and higher effective tax rate registered during the quarter. Interest expense increased by 40% during the quarter possibly due to the acquisition costs of the Trivandrum property and the building of the Coimbatore property.

What to expect?
At a price of Rs. 376, the company is trading at 15.2 times our estimated FY13 earnings (RPro subscribers click here). During the previous year, the company had taken, on a long term lease, a 137 room hotel in Trivandrum which has been branded Vivanta by Taj and is in advanced stages of completing an addition of 64 rooms at Taj Fisherman’s Cove in Chennai. The company is also entering the Coimbatore market with a Taj branded hotel and the Bangalore market with a Gateway branded hotel. These two hotels are expected to add 380 rooms to the company’s current inventory of 870 guest rooms. However, the stock has run up recently and we believe that growth from a 2-3 years perspective is already priced into the stock. We therefore advise investors to be cautious on this stock.

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