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Oriental Hotels: Chennai spark
Oct 22, 2008

Performance summary
  • Topline grows by 11% YoY in 2QFY09 and 15.5% YoY during 1HFY09
  • Operating margin declines by 1.2% during 2QFY09.
  • Lower other income and higher interest cost can be attributed to the expansionary phase.
  • Net profit increases marginally by 1.4% YoY during 2QFY09.


Rs( m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 458 510 11.3% 901 1,040 15.5%
Expenditure 316 357 13.2% 635 707 11.3%
Operating profit (EBDITA) 143 153 7.1% 266 334 25.4%
Operating profit margin (%) 31.1% 30.0% 29.5% 32.1%
Other income 10 7 -35.0% 21 15 -27.1%
Interest 0 3 2800.0% 1 3 416.7%
Depreciation 30 32 9.8% 59 63 8.4%
Profit before tax 123 124 0.6% 228 282 23.9%
Tax 43 43 -0.7% 79 97 22.9%
Profit after tax/(loss) 81 82 1.4% 149 185 24.4%
Net profit margin (%) 17.6% 16.0% 16.5% 17.8%
No. of shares (m) 17.9 17.9 17.9 17.9
Diluted earnings per share (Rs)* 32.2
Price to earnings ratio (x)* 7.6
* 12 month trailing earnings

What has driven performance in 2QFY09?
  • Oriental Hotels reported a topline growth of 11% YoY 2QFY09, while the sales were higher 15.5% YoY during 1HFY09. Though the room rates and occupancies are not known, the performance of the company is commendable considering the current global scenario. Also the first half of the year is an off-season and hotel companies witness lower occupancies during that period. However, with the advent of BPOs, the automobile industry and the IT sector, the entire outlook of the Chennai market and the guest profile has undergone a major change. The market scenario is that Chennai has emerged to be a business destination and not merely a tourist destination. With Oriental Hotel being a market leader it stands to gain.

    Cost break-up
    As a % of net sales 2QFY08 2QFY09 1HFY08 1HFY09
    Total Cost of goods 11.9% 11.4% 12.1% 11.4%
    Staff Cost 18.8% 19.1% 18.8% 18.6%
    Power and fuel 7.0% 7.8% 7.3% 7.5%
    Other Expenditure 31.2% 31.8% 32.3% 30.4%

  • While the operating margins during 2QFY09 declined by 1.2%, they were higher by 2.5% during 1HFY09. The company faced higher power and labour costs during the quarter. The margins are in line with our estimates.

  • The net profits during 2QFY09 increased marginally by 1.4% YoY mainly due to lower other income and higher interest costs.

What to expect?
At the current market price of Rs 245, Oriental Hotelís stock is trading at a multiple of 11.0 times our estimated FY11 earnings. The performance of the company so far is better than our FY09 full year estimates. Going forward, with the next 2 quarters being the peak season and no new room supply coming up in Chennai, the company maybe at an advantage. However, occupancies and room rates may not witness the same growth as last year.

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