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EIH: Extraordinary saves the day - Views on News from Equitymaster

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EIH: Extraordinary saves the day
Nov 5, 2008

Performance summary
  • Topline grows 9.6% YoY on account of higher room revenues in 2QFY09.

  • Operating margins decline by 0.2% on account of higher staff costs.

  • Net profits grow by 3.6% YoY as higher depreciation and interest costs eat into profits



Rs ( m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 2,289 2,467 7.8% 4,596 4,998 8.7%
Expenditure 1,555 1,704 9.6% 3,073 3,357 9.2%
Operating profit (EBDITA) 734 763 3.9% 1,523 1,641 7.8%
Operating profit margin (%) 32.1% 30.9%   33.1% 32.8%  
Other income 38 52 36.1% 67 78 17.4%
Interest 177 196 10.7% 342 377 10.1%
Depreciation 109 131 20.7% 212 265 24.9%
Profit before tax 486 487 0.2% 1,035 1,078 4.1%
Extraordinary item 109 -   140 -  
Tax 168 174 3.6% 381 384 0.8%
Profit after tax/(loss) 427 313 -26.7% 795 694 -12.7%
Net profit margin (%) 18.7% 12.7%   17.3% 13.9%  
No. of shares (m) 393.0 393.0   393.0 393.0  
Diluted earnings per share (Rs) *         5.3  
Price to earnings ratio (x)*         16.7  
* 12 month trailing earning

What has driven performance in 2QFY09?
  • EIH reported a topline growth of 7.8% YoY during the quarter. While the hotel segment grew by 8% YoY, others witnessed a 4% YoY growth. In addition to the second quarter being an off-season, the recent global crisis impacted the company most of like its peers in the sector. For 1HFY09, the topline has grown by 8.7% YoY led by 8.5% YoY growth in the hotel segment. Factors like weak global scenario, low industrial growth, rising inflation, rising airfares and liquidity crunch, have also affected the performance.

    Cost break-up
    As a % of net sales 2QFY08 2QFY09 1HFY08 1HFY09
    Total Cost of goods 8.4% 7.9% 8.5% 8.1%
    Staff Cost 25.7% 27.5% 23.8% 25.3%
    Power and fuel 7.3% 7.3% 7.2% 7.1%
    Other Expenditure 26.5% 26.4% 27.3% 26.7%

  • During 2QFY09, the operating margins declined by 1.2%, mainly on account of staff costs which increased 15% YoY. Lower cost of goods (as a percent of sales), however bought some relief. For 1HFY09, the margins declined by 0.5% to settle at 32.8%.

  • Excluding the extraordinary item (profit on sale of land last year) in 2QFY08, the profits during 2QFY09 have declined by 1.6% YoY. Lower operating margins have restricted the growth. For the half year period, excluding the extraordinary item, the profits have increased by 6% YoY.

What to expect?
    The stock is currently trading at Rs 88, implying a price to earnings multiple of 3.4 times its 12-month trailing earnings. The company is expanding its room inventory to add around 1, 500 rooms over the next 3 years. Its Mumbai property is expected to commence during 3QFY09 through its Trident brand. While the coming quarters mark the beginning of the peak season, it is a testing time for the hotel industry. EIH earns most of its revenues from the metros. With recent slowdown in travelers, the company performance would get affected. Also execution risk remains.

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