East India Hotels (EIH)

EIH is one of the largest players in the industry with a strong balance sheet, good dividend paying record, low debt, strong brand recall and positive cashflow from operations. Investors can accumulate the stock at the current levels

 

THE hotel industry has regained its growth momentum after the slowdown of 2007 and 2008, when there was a sharp fall in business and leisure travel. It was seen in hotel companies' financial performance in the quarter ended December 2009.

   The leading stocks in the sector — Indian Hotels, Hotel Leela Ventures, Asian Hotels and TaJ GVK among others — have rewarded investors with more than 100% returns in the past one year. The only exception has been East India Hotels (EIH), which has appreciated just by 10% during the period.

   This offers opportunity for investors considering that EIH is one of the largest players in the industry with a strong balance sheet, good dividend paying record, low debt, strong brand recall and positive cashflow from operations. Investors can accumulate the stock at the current levels.

BUSINESS:

East India Hotels (EIH) owns the Oberoi Group of hotels. Founded in 1934, the company operates 28 luxury and business hotels and three cruisers. The company's luxury hotel brand is best recognised by the name Oberoi's while its business hotels are branded as Trident.

   Currently, the company has nine Trident hotels in India in cities like Mumbai, Gurgaon (Delhi, NCR), Chennai, Bhubaneshwar, Kochi, Agra, Jaipur and Udaipur. The company has presence in Saudi Arabia, Indonesia, Mauritius and Egypt.

   The good times are back for the Indian hotel industry with a strong revival in the business and leisure travels. This is especially true for EIH, which incurred huge losses in 2008 due to terrorist attack at its Mumbai hotel, which accounted for nearly 40% of its revenue before the terrorist attacks. After 17 months of renovation, the hotel opened for guests last week and it will add substantially to the company's revenue and profitability in the coming quarters.

   According to the ministry of tourism, foreign tourist arrival in India grew by around 13% in the year ended March 2010. The foreign exchange earnings from tourists (in rupee terms) jumped by 24% during the period. This is an encouraging sign for EIH as its hotels are popular with upmarket foreign tourists. In FY09, the company's forex revenue was over Rs 500 crore and accounted for nearly 56% of its revenues.

   The company's expansion plans will get a boost from the Budget proposals to provide investment related concessions for construction of new hotels. The company recently opened its second unit in Mumbai and plans to open hotels in Gurgaon (later this year), Hyderabad (2013) and Bangalore (2011). All these new properties are eligible for tax breaks and thus lower its capex cost.

INVESTMENT RATIONALE :

One of the convincing facts for investing in East India Hotels is that the company's stock didn't appreciate much even as hotel stocks are rallying. This leaves enough room for the stock to catch up as most of its peers have scaled their peaks. In addition to this, the company has one of the least leveraged balance sheets in the industry.

   As of FY09, the company's debt to equity ratio was 0.8, which was in par with the segment leader, Indian Hotels Company. In the past three years, the company has been in cash conserving mode as seen in its dividendpaying pattern, which decreased from 100 % in FY06 to 60% in FY09. As of FY09, the company had cash and liquid investments worth nearly Rs 350 crore. Now with the Oberoi Mumbai opening to full capacity, it will show strong revenue and profit growth in the coming quarters.

VALUATION:

On the valuation front, the company is trading at a price to earnings multiple of 49 times. In comparison, Indian Hotels Company is trading at a price to earnings multiple of 87 times. This provides enough downside protection to risk-averse investors. Investors are advised to accumulate the stock at current levels.