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Asian Hotels: Same story!

Nov 16, 2006

Performance summary
Asian Hotels, the owners of the Hyatt Regency chain of hotels has posted a rise in operating profits for the second quarter ended September 2006. The revenue growth was primarily led by higher occupancy and average room rates (ARRs). The tourism sector has been on an upturn and as one of the top most hotels, Asian Hotels has benefited from the same.

(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 688 827 20.1% 1,350 1,678 24.2%
Expenditure 476 512 7.4% 895 1,007 12.4%
Operating profit (EBDITA) 212 315 48.7% 455 671 47.5%
Operating profit margin (%) 30.8% 38.1%   33.7% 40.0%  
Other income 1 1 42.9% 5 2 -57.4%
Interest (net) 51 44 -12.1% 101 86 -14.0%
Depreciation 52 52 0.6% 103 104 1.3%
Profit before tax 110 219 99.4% 256 482 88.4%
Tax 38 76 101.3% 89 166 87.1%
Profit after tax/(loss) 72 143 98.3% 167 316 89.1%
Net profit margin (%) 10.5% 17.3%   12.4% 18.8%  
No. of shares (m) 22.8 22.8   22.8 22.8  
Diluted earnings per share (Rs)*         31.4  
Price to earnings ratio (x)*         23.2  
(* 12 months trailing)            

What is company's business?
Asian Hotels (AHL) is a strong niche player at the premium end of the hotel industry with strategically located properties at Delhi, Mumbai and Kolkata. It has a total of 1,161 rooms across the three cities. AHL entered into a technical tie up and marketing agreement with Hyatt Hong Kong which allows it to use the Hyatt brand name on its properties enabling it to earn relatively higher ARRs.

What has driven performance in 2QFY07?
Topline view: Asian Hotels has reported a 20% YoY growth in the topline. There has been a visible uptrend in tourist arrivals in this year with India recording an inflow of 2.9 m tourists till August. The main reason for such growth was due to increased business activity in the country, which led to higher growth in foreign business arrivals. AHL has all of its properties situated in the metros. 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 cities has led to higher ARRs, consequently resulting in a strong growth in the topline. No new hotel is likely to be commissioned till the next two years in the regions of its presence, thereby restricting the supply of rooms. Hence, the company is expected to continue delivering a strong performance at the topline level.

Cost break-up...
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Raw materials 76 90 17.4% 152 177 16.8%
% sales 11.1% 10.8%   11.2% 10.6%  
Staff 152 150 -1.1% 280 297 5.9%
% sales 22.1% 18.2%   20.8% 17.7%  
Power & lighting 61 62 1.8% 115 121 4.7%
% sales 8.9% 7.5%   8.5% 7.2%  
Others 187 209 11.9% 348 412 18.2%
% sales 27.2% 25.3%   25.8% 24.5%  

Cost control: During the quarter, the company’s staff cost declined in absolute terms, which along with lower other expenses, were the key factors that enabled a sharp expansion in margins. As is the case generally, during upturns, operating profits tend to outgrow topline growth considering the high fixed cost nature of the sector. The company attained operating margins of 38% during the quarter compared to 30.8% in 2QFY06.

Bottomline bloats: Asian Hotels reported a 98.3% YoY growth in its bottomline, which has been a result of an increase in ARR’s and steady rise in the operating profits. This along with lower interest costs due to the repayment of debt has aided the jump in the bottomline.

What to expect?
At the current price of Rs 730, the stock is trading at 23.2 times its 12-month trailing earnings. Asian Hotels has no capex lined up in the near future. Hence for the next two years the growth will come from the existing properties. Though the growth prospects due to its key locations are good, once the new hotels come up in its area the company is likely to face intense competition. Also, at the current levels, valuations seem rich.

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