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Oriental Hotels: Decent performance - Views on News from Equitymaster
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Oriental Hotels: Decent performance
Oct 30, 2007

Performance summary
  • Topline witnesses a growth of 13% YoY. This is despite the fact that 66 rooms (32% of its inventory) were under renovation in the current quarter.
  • The companyís operating margins improve by 2.4% YoY led by low operating costs.

  • Higher operating income aided by lower depreciation charges leads to a 27% YoY jump in net profits.

Rs( m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 405 458 13.3% 796 900 13.1%
Expenditure 288 316 9.5% 562 635 13.1%
Operating profit (EBDITA) 116 142 22.6% 234 266 13.3%
Operating profit margin (%) 28.7% 31.1% 29.4% 29.5%
Other income 9 11 23.3% 20 21 6.8%
Interest 0 0 -57.5% 1 1 -25.0%
Depreciation 28 30 5.5% 56 59 4.9%
Profit before tax 96 123 27.9% 198 228 15.2%
Tax 33 43 30.2% 68 79 16.2%
Profit after tax/(loss) 64 80 26.7% 130 149 14.7%
Net profit margin (%) 15.7% 17.6% 16.3% 16.5%
No. of shares (m) 17.9 17.9 17.9 17.9
Diluted earnings per share (Rs)* 22.6
Price to earnings ratio (x)* 14.0
* 12 month trailing earnings

What is the company's business?
Oriental Hotels is a southern India focused hospitality player with a total inventory of 666 rooms. On a standalone basis, the company owns seven properties, in and around Chennai. The company has a track record of having generated strong cash flows in the past and is currently debt-free. On a consolidated basis, the company has investments in Taj Asia, which owns properties in Sri Lanka and Maldives. It also owns a 30% voting right in Taj Karnataka Hotels & Resorts, which has a property in Chikmagalur.

What has driven performance in 2QFY08?
1QFY08 repeat: Like in 1QFY08, the topline for 2QFY08, witnessed a growth of 13% YoY. Tourist inflow continued to be strong on back of the India shining story. The performance is decent despite the fact that 66 rooms (32% of its inventory) continued to be under renovation in the current quarter. They are expected to commence operations in 3QFY08. The company has lined up renovation plans for the next 2 years. Also, it is adding 64 rooms in Fishermanís Cove and 200 rooms in Bangalore over the next 2 years. The second quarter is generally a slower quarter in terms of domestic inflow due to monsoons and ending of vacation period. However, with the rooms commencing operations in the next quarter and it being a peak season, Oriental Hotels is expected to do well.

Cost break-up
As a % of net sales 2QFY07 2QFY08 1HFY07 1HFY08
Total Cost of goods 13.1% 11.8% 12.9% 12.1%
Staff Cost 15.5% 18.8% 16.3% 18.8%
Power and fuel 7.4% 7.0% 7.7% 7.3%
Other Expenditure 35.4% 31.2% 33.6% 32.3%

Improved margins: Operating margins for 2QFY08 have improved by 2.4% YoY. While staff costs (as percentage of sales) have risen, the company has managed to keep its raw material and other costs under control. The company is in the process of renovating its properties. Besides this, given that 66 rooms of Taj Coromandel are under renovation, the expansion is margins is commendable.

Net profits: The net profit growth at 27% YoY has significantly outperformed the topline growth as well as the operating profit growth. Being a virtually zero debt company (debt equity ratio in FY06 was 0.1) one should not read much in the decline in the interest costs. The higher operating profits and lower depreciation charges have aided growth. Hotel sector is a high fixed cost industry and thus benefits from operating leverage (profits improve sharply once the business generates enough revenues so as to meet the fixed costs).

What to expect?
At the current market price of Rs 315, Oriental Hotelís stock is trading at a price to earnings multiple of 10.4 times our FY10 estimates. With the renovations expected to get complete in the coming quarter, the performance is expected to improve. Also, with shortage of rooms still prevailing, the room rates are expected to remain high. Given that growth in the economy is expected to sustain over a long-term horizon, subsequently having a favourable impact on the hospitality industry, Orientals Hotels is expected to benefit from the same going forward.

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