Stock Review: EIH

 

 

Hospitality firm EIH, which operates Oberoi and Trident hotels, is likely to witness pressure on earnings in the coming quarters due to an expected slowdown in foreign tourist arrivals, though the company's recent partnership with Reliance Industries will augur well for the stock over a one-year horizon.

On Tuesday, EIH announced a joint venture with RIL to build luxury homes and hotels in Goa and Bangalore. The JV would tap into the cashrich balance sheet of RIL and strong hotels brand of EIH. The partnership is also an extension of EIH's strong faith in RIL, which holds 14.8% in the company, and holds immense significance, especially when considered in the light of recent changes in takeover code. Sebi recently increased open offer trigger in takeover code to 25% from 15%. Investors must hold onto the company's stock for at least one year.

The EIH stock is currently trading at . 88. For ITC, which holds 14.98% and entered the company at . 35, the company's present market price would be expensive. More so, if one compares EIH's share price with Indian Hotels Company, which is bigger and present in diversified segments of the business and trading at . 73. Hence, there is an anticipation of fall in EIH's stock price. However, once either party finds the right price to hike stakes, investors must expect the company's stock to surge. In coming quarters, earnings for EIH would be muted due to an expectation of a slowdown in foreign tourists arrivals. Foreign tourist arrivals account for 75% of its customers. Though India is one of the favoured destinations due to cost advantage, experts believe that the momentum with which foreign traffic grew in the first half would slow down in the second half of the fiscal.

However, the company's efforts to lower its debt would continue to drive earnings growth in the coming quarters. It has repaid . 866 crore, from a total debt of over . 900 crore, through fund raised through the rights issue.

For the June 2011 quarter, the company posted a net profit of . 15.5 crore in the first quarter compared with a net loss of . 15 crore a year ago, driven by a rise in foreign tourists arrivals. Net sales for the quarter grew 22% year-on-year to . 246 crore. Revenues from the hotels business grew a robust 22% YoY to . 231 crore helped by an increase in occupancy rates and average room revenue.