Stock Review: Royal Orchid

Rising occupancy and expansion are not translating into a higher earnings trajectory

A steady inflow of tourists and a pick-up in domestic activity have been positives for the hospitality sector, with the niche player, Royal Orchid, being a beneficiary. Revenues rose 26 per cent year-on-year to `32 crore in the June quarter. The company has finalised a `300-crore expansion plan. The board has also approved fund-raising of `150 crore through equity-linked instruments.

The company has around 1,104 rooms (including 227 rooms under operations and maintenance) and plans to open nearly 678 this financial year. The locations include Jaipur, Hyderabad, Shimla, Goa and Mussoorie. These additions are likely to boost revenue growth to 30 per cent compounded levels in the next three years. The Bangalore property, which has a major room inventory, reported a 17 per cent yearon-year improvement in occupancy levels (to around 60 per cent). Average occupancy levels in other destinations like Mysore, Jaipur and Goa also burgeoned by around 1,100 basis points to 69 per cent. However, average room rates (ARRs) mostly remained flat. Rates in Mysore and Goa reported a marginal improvement of 11 per cent year-on-year. But, ARRs declined 20 per cent in Pune.

While other hotel majors have managed strong margin growth, Royal Orchid saw a114 basis points jump in operating margins at around 16 per cent. Higher-than-expected operating costs, 43 per cent rise in employee costs and a 26 per cent surge in raw material costs dulled the effect of strong occupancy rates.

Strong occupancy is expected to take care of revenues, but the real challenge will be the management's ability to have these percolate to the the net earnings level. This will enable a possible re-rating to the visibly undervalued hospitality stock.