Stock Review: EAST India Hotels (EIH)

 

Arrivals of more tourists, a significantly better business sentiment, a push for high margin premium hotels and the capacity build-up mean the to line will become a lot fatter for hospitality major EIH. Efforts to scale down debts will be a big plus

 

EAST India Hotels (EIH) stock looks promising on the back of rising foreign tourist arrival, improving business sentiment, and its focus on high-margin premium hotels segment. The company's new property in Mumbai's Bandra, which is now up and running, should add to its topline. It has also taken steps to reduce its debt burden by raising funds through a rights issue and this should support net profitability by lowering the interest outgo. The stock is seen attractive at current valuation with a horizon of at least one year.

BUSINESS:

EIH is the flagship company of the Oberoi Group, known for its luxury hotels. The company is also into airline catering, management of restaurants and airport bars, travel and tours services, car rental and corporate air charter businesses. It operates two brands, Oberoi and Trident. It currently operates 32 properties in India and overseas through ownership, subsidiaries and associates.

GROWTH DRIVERS:

The company targets the luxury segment of the hospitality sector, which tends to attract better margins compared with budget and mid-tier hotels. Its management did not rule out possibility of collaboration with a foreign entity for luxury hotels.

   The company would also benefit from the measures it has undertaken in the past few years to lighten its balance sheet. Recently, the company successfully completed its rights issue of 1,179 crore, of which 900 crore would be used to retire part of debt of 1,400 crore. This would reduce its debt-equity ratio from 1.2 to 0.3. This will also reduce its interest cost, which accounted for 15% of net sales in the past six quarters.

   Another major investment trigger is the attempt by ITC and Reliance Industries to seek a controlling stake in EIH. According to Sebi guidelines, an open offer would be triggered if ITC raises its current stake in EIH by 0.02% or if RIL owns another 0.2% of the hotel major. An open offer could be lucrative for retail investors, given that RIL had earlier acquired nearly 15% stake in EIH at a steep premium of 54% to its current stock price.

   The company is also seen benefiting from improvement in inflow of foreign tourists, who account for over 75% of its customers. Foreign tourist arrival in India has risen by over 15% in February compared with a year ago, according to government data. Higher tourist flow is expected to keep the company's occupancy rates and average room rates up. The company's occupancy rates have increased by over 40% to more than 60% currently.

   The company's two properties in Mumbai (Trident at Nariman Point and at Bandra-Kurla Complex) are now fully operational. Since the Mumbai region contributes around 50% to its revenues, the development should boost its topline in the near term. The company is also coming up with a few more properties at Gurgaon, Hyderabad and Bangalore on a management contract basis, which offers higher profitability.

FINANCIALS:

In the December 2010 quarter, the company's net profit rose by 27% to 28 crore from a year ago. Its net sales shot up by 26% to 281 crore in the December 2010 quarter. The company's net profit in the December 2010 quarter would have been more had it not been for its increased interest burden and employee expenses.

VALUATION:

At the current market price of 83, EIH's market capitalisation is close to 4,700 crore with a debt of close to 1,400 crore. This means its enterprise value is close to 6,000 crore. This looks reasonable, given its premium brand and strategic locations of its hotels.

   Its immediate peer, Indian Hotels Company, has an enterprise value of over 7,000 crore. Considering its growth prospects, EIH's stock looks attractive over a longer horizon.