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EIH: Inflows continue! - Views on News from Equitymaster

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EIH: Inflows continue!
Nov 1, 2006

Introduction to results
EIH announced decent results for the second quarter and half-year ended September 2006. The topline grew by strong 22.3% YoY due to a significant surge in business and tourist travel. However, on back of higher labour costs, the margins fell by 190 basis points. Net profits were up 242% YoY due to an extraordinary item. If one were to exclude this, then the net profit improvement stands at 37% YoY, aided to a good extent by rise in other income and reduction in interest expenses.

Rs( m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 1,572 1,922 22.3% 2,975 3,846 29.3%
Expenditure 1,191 1,494 25.5% 2,319 2,899 25.0%
Operating profit (EBDITA) 381 428 12.4% 655 947 44.5%
Operating profit margin (%) 24.2% 22.3%   22.0% 24.6%  
Other income 34 75 119.4% 188 185 -1.6%
Interest 174 153 -12.4% 341 294 -13.9%
Depreciation 101 102 1.2% 203 209 3.1%
Profit before tax 140 248 77.5% 299 629 110.2%
Extraordinary item (16) 144   (52) 144  
Tax 44 117 168.0% (4) 250 -6689.5%
Profit after tax/(loss) 80 275 242.6% 251 522 108.0%
Net profit margin (%) 5.1% 14.3%   8.4% 13.6%  
No. of shares (m) 52.4 392.9   52.4 392.9  
Diluted earnings per share (Rs) *         5.5  
Price to earnings ratio (x)*         18.3  
* 12 month trailing earning            
Effective September 20, 2006, the face value of each Equity Share of Rs 10 was sub-divided into
five Equity Shares of Rs 2 each & new Equity Shares were issued by way of Bonus in the ratio of
one Equity Share of Rs 2 for every two Equity Shares of Rs 2 each.

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 3,082 in FY05, of which an estimated 1,068 were managed.

What has driven performance in 2QFY07?
Tourist inflow continues: The company posted a 22.3% YoY growth in its topline. Part of this could be attributed to higher ARRs as well, given the favourable demand-supply dynamics currently prevailing in the industry. EIH has presence in key gateway cities like Mumbai, Delhi, Chennai and Bangalore where occupancy rates continue to remain robust. Though occupancy rates and numbers with respect to the growth in average room rates (ARRs) of the company are not available, the growth has to be viewed with respect to the robust growth in foreign tourist arrivals into the country in 2006. In the first quarter of calendar year 2006, the rise in tourist inflow was 14% YoY. EIH has ambitious expansion plans with projects planned in Bangalore, Goa and Gurgaon. The construction of the Mumbai property is also on track and is expected to be complete by 2008. This will make the company a bigger player and also expand its geographical reach, thus diversifying its geographical revenue base.

Labour cost dent margins: EBITDA margins for 2QFY07 shrunk by 190 basis points to 22.3%. The fall in operating margins for the quarter could be attributed to higher labour cost, which as a percentage of sales, increased from 25.9 % in FY05 to 27.9% in 2QFY07. Though power & fuel costs witnessed a fall, cost of goods sold as percentage of sales also saw a marginal rise in the quarter.

Cost break-up
As a % of net sales 2QFY06 2QFY07 1HFY06 1HFY07
Total Cost of goods 9.0% 9.3% 9.3% 9.2%
Staff Cost 25.9% 27.9% 25.6% 25.0%
Power and fuel 8.7% 8.0% 9.2% 8.0%
Other Expenditure 32.1% 32.6% 33.8% 33.2%

Extraordinary effect: The company reported a 242% YoY growth in bottomline for the quarter. However, this was on account of an extraordinary income pertaining to the profit on sale of land to the tune of Rs 144 m in 3QFY06. Without considering the extra-ordinary income, the bottomline rose by 36.6% YoY, still higher than the growth in operating profits. This could be attributed to a 119% rise in other income and a lower interest outgo.

What to expect?
The stock currently trades at Rs 100, implying a price to earnings multiple of 18.3 times its trailing 12-month earnings. Apart from expansion plans, the company has announced an investment of US$ 100 m for its project overseas. Seeing the robustness in tourist inflow and favourable demand supply gap, the performance of EIH is expected to remain strong. We maintain our positive view on the stock.

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