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Oriental Hotels: Good going!
Nov 7, 2006

Performance summary
Oriental Hotels announced good results for the second quarter and first half year ended September 2006 late last week. For 2QFY07, while topline has grown by 14% YoY led by higher ARRs in Chennai, bottomline growth has been higher at 28.8% YoY due to lower interest and depreciation costs.

Rs( m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 354 405 14.4% 682 796 16.7%
Expenditure 255 288 13.2% 497 562 13.0%
Operating profit (EBDITA) 99 116 17.5% 185 234 26.6%
Operating profit margin (%) 28.0% 28.7% 27.1% 29.4%
Other income 7 9 17.8% 14 20 48.1%
Interest 1 0 -50.0% 2 1 -55.6%
Depreciation 30 28 -7.0% 60 56 -7.2%
Profit before tax 75 96 28.0% 137 198 44.7%
Tax 26 33 26.5% 47 68 43.1%
Profit after tax/(loss) 49 64 28.8% 89 130 45.6%
Net profit margin (%) 13.9% 15.7% 13.1% 16.3%
No. of shares (m) 17.9 17.9 17.9 17.9
Diluted earnings per share (Rs)* 19.5
Price to earnings ratio (x)* 17.9
* 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 2QFY07?
Topline view: Oriental Hotels reported a 14% YoY growth in the topline. The company has its two prime properties in Chennai, which are the price leaders in the city. It accounts for nearly 44% of the total inventory in Chennai. Hotels in the metros are key links to business as well as tourist travelers. Thus, occupancy rates are much higher than hotels in the other regions. Also, the favourable demand-supply dynamics currently prevailing in the city led to higher ARRs. Hence, like in the last few quarters, the company witnessed a strong growth in the topline. We expect the Chennai hotel market to remain robust in the next three years on account of increased services sector activity apart from higher inflow of FDI in the state (that creates demand for business travel). Hence, the demand for rooms is likely to continue going forward and a substantial upside in room rates in its properties located in Chennai.

Cost break-up
As a % of net sales 2QFY06 2QFY07 1HFY06 1HFY07
Total Cost of goods 13.0% 13.1% 13.2% 12.9%
Staff Cost 17.1% 15.5% 17.4% 16.3%
Power and fuel 7.9% 7.4% 8.4% 7.7%
Other Expenditure 34.1% 35.4% 33.9% 33.6%

Stable margins: Operating margins increased by 70 basis points during 2QFY07. This was mainly due to the reduction in the staff cost as a percentage of sales, which fell from 17% in 2QFY06 to 15.5% in 2QFY07. The company also managed to keep its other costs under control.

Faster growth in bottomline: The net profit growth at 28.8% YoY has significantly out performed the topline growth as well as the operating profit growth. No interest cost and lower depreciation cost expanded the net margins by 180 basis points. Also, Oriental Hotels generates adequate cash flows (debt-free), which shows that the company is in good financial health.

Performance summary
What to expect? At the current market price of Rs 350, Oriental Hotelís stock is trading at a price to earnings multiple of 17.9 times its trailing 12-month earnings. Given the fact that the Chennai market is expected to remain buoyant and that Oriental Hotels is planning to expand, its room inventory will touch 50% of the total room inventory in the city. Also with the sector fundamentals remaining intact, we continue to be positive on the company.

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