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EIH: Operating leverage benefit

Oct 31, 2007

Performance summary
  • Topline grows 12% YoY on account of higher room rates.

  • On a YoY basis, operating margins witness strong expansion of 8.5% points due to operating leverage.

  • Net profits jump 144% YoY excluding the extraordinary item.

Rs( m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 1,922 2,159 12.3% 3,845 4,314 12.2%
Expenditure 1,578 1,588 0.6% 2,983 3,092 3.7%
Operating profit (EBDITA) 344 570 65.8% 862 1,221 41.7%
Operating profit margin (%) 17.9% 26.4%   22.4% 28.3%  
Other income 159 193 21.5% 269 380 41.4%
Interest 153 169 10.1% 294 324 10.0%
Depreciation 102 109 6.5% 209 213 1.7%
Profit before tax 248 486 96.3% 628 1,065 69.7%
Extraordinary item 144 109 -24.3% 144 109  
Tax 117 168 43.2% 251 381 51.6%
Profit after tax/(loss) 275 427 55.6% 521 793 52.4%
Net profit margin (%) 14.3% 19.8%   13.5% 18.4%  
No. of shares (m) 52.4 392.9   52.4 392.9  
Diluted earnings per share (Rs) *         5.1  
Price to earnings ratio (x)*         26.4  
* 12 month trailing earning

What is the company's business?
EIH is a member of the Oberoi Group that runs and manages luxury hotels in India and abroad. It operates under ‘ The Oberoi’ and ‘Trident ‘ brands. Oberoi properties are luxury hotels in the premium segment, while Trident hotels are high quality medium priced hotels. The total number of rooms managed and owned put together stood at around 3,193 in FY07.

What has driven performance in 2QFY08?
Room rates benefit: The company reported a topline increase of 12% YoY mainly due to higher room rates. With limited supply on rooms coming in and tourist inflow remaining strong, the company continues to benefit o account of its mix of properties and locations. The company has also given notice to Hilton International to terminate its strategic alliance for marketing and co- branding arrangements. The termination will be effective April 2008. EIH managed and ran seven five-star hotels under the Trident Hilton brand Gurgaon, Agra, Cochin, Jaipur, Udaipur, Bhubaneshwar and Chennai under the alliance. With Hilton planning to expand its own brand in India, EIH has decided to terminate the alliance and develop the Trident brand independently. Over the next three years, EIH will add 1,300 rooms across three Trident Hotels in Mumbai, Bangalore and Hyderabad. We are positive on the topline performance of the company going forward.

Cost break-up
As a % of net sales 2QFY07 2QFY08 1HFY07 1HFY08
Total Cost of goods 9.3% 8.9% 9.2% 9.0%
Staff Cost 27.9% 27.3% 25.0% 25.4%
Power and fuel 8.0% 7.7% 8.0% 7.7%
Other Expenditure 37.0% 29.7% 35.4% 29.6%

Operating leverage benefit: The expansion in the company’s operating margins continues due to the operating leverage. Reduction in all the overheads as a percentage of sales led to the margins expand by 8.5% YoY to touch 26.4% in 2QFY08. Though the margins are below our expectations (32.5% in FY08), with the coming quarter being the peak season for the hotel industry (due to festivals and holidays), we expect them to go up.

Bottomline soars: Higher operating income and lower depreciation led to the net profit jump by 56% YoY. Excluding the extraordinary item (profit on sale of land last year), the net profits witnessed a 144% YoY growth in the quarter. For 1HFY08, the bottomline is up 82% YoY.

What to expect?
The stock is currently trading at Rs 135, implying a price to earnings multiple of 18.2 times our estimated FY10 earnings. The company continues to do well on the margin front. Further, it also unlocked the surplus real estate to finance expansion plans. With sector scenario still favourable, the company is expected to do well. However at the current junction, it has a higher risk profile due to execution risks.

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Jan 22, 2020 (Close)