Making Room

href="https://www.valueresearchonline.com/stocks/41868/eih-ltd/#snapshot" class="gen">EIH will spend Rs 850 crore to enhance its presence in Mumbai, which contributes over 40 per cent to its top line

East India Hotels (EIH) was incorporated in 1949 and it manages the Oberoi group's 30 hotels and five luxury cruisers across six countries. Interestingly, EIH's portfolio also includes airport and flight services, a printing press and car rentals. The F&B (food and beverage) income from the airport and flight services accounts for nearly 40 per cent of its total F&B revenue. The printing press and car rentals, which the company plans to expand, has turnovers of Rs 36-40 crore and Rs 50 crore, respectively.

Spanning India
EIH specialises in luxury destinations with 5-star deluxe category hotels and resorts across Udaipur, Ranthambore, and Cochin (luxury cruiser). By November 2009, the Rajgarh Palace would be an addition to the portfolio with 60-rooms.

EIH has major plans to enhance its presence in Mumbai, which contributes more than 40 per cent to its top line. Mumbai currently attracts around 25 per cent of tourist inflows into India. The company has undertaken a Rs 800-crore capex to construct a 437-room 5-star hotel (Trident Hotel) in Bandra-Kurla Complex (BKC). This project is expected to be very positive for the company's long-term outlook, although benefits would not accrue before January 2009. The company plans to extend the room base to 440 by FY10. This would provide EIH the largest room base hotel in the city.

The BKC property and Rajgarh Resorts would increase its owned-room base by 27 per cent bringing an impetus to revenues in FY09-10. EIH would increase its managed rooms by 72 per cent by FY10. The company also plans to expand its chain, though without burdening its books with the investment. There are plans to add around 775 rooms by management contracts of EIH Associate-owned Trident Hotels in various cities. It is expected that the revenue from management contracts would grow by 35 per cent over FY08-10.

Going Global
Under the Trident brand, the company has opened hotels and luxury resorts in India and abroad. The new ones include locations in the Mauritius, Egypt and Saudi Arabia.

EIH International, a wholly-owned subsidiary, plans to expand its overseas base from the current 298 rooms to 796 through planned projects in Bhutan, UAE, Cambodia, Maldives and Egypt.

The true value of EIH International does not get reflected in the consolidated books due to the regulations of British Virgin Islands, where it is registered. The inherent value of the stake stands much higher. South Asian countries have also been focusing on tourism and are attracting visitors from India and other parts of the world. Many corporate groups have been booking group packages. These destinations pose competition for leisure hotels. EIH has an advantage here as its revenue drivers are properties located in areas where it focuses on the business traveler.

Unlocking Value
Recently, Indian companies have started to look towards real estate investment trust (REIT) as a product to unlock their asset value. Till now regulations in India did not permit the formation and listing of REITs. But of late, the Securities and Exchange Board of India (SEBI) has shown interest in this product offering. Should the regulation be amended, sectors that have heavy real estate asset value to be unlocked would benefit the most. This would result in assets being hived off to a REIT, which would subsequently get listed. This will result in a steady income from rentals and the companies would benefit, as the load of depreciation, loan, and interest would substantially reduce. The result: a jump in margins and returns.

Hurdles Ahead
Any delays in upcoming properties would impact revenue estimates, thereby affecting profitability negatively. A slowdown in tourist inflows would bring a deceleration to the Indian hospitality dream run. The industry is also highly sensitive to risks arising from terrorism.

Another problem is that the demand-supply mismatch of quality rooms has increased in favour of the hospitality sector, so has the imbalance in availability of trained staff. The employee cost has increased and a further crunch in workforce could drive costs even higher, hitting the margins and bottom line.

Financials
During FY05-07, top line grew at 25.4 per cent while CAGR and the bottom line swelled 184 per cent. Going forward, the situation is expected to remain in favour of hoteliers. We believe EIH would be able to improve its bottom line despite the strain due to the ongoing Rs 800 crore capex. Post the commissioning of the hotel at BKC and Rajgarh Resorts, EIH should witness a momentous growth in top line and bottom line, justifying company's capex outlook.

Financials    FY 04    FY 05    FY 06    FY 07 Net Sales (Rs cr)   448.08   579.30   741.01   924.43 PAT (Rs cr)*   28.67   34.25   80.71   146.69 EPS (Rs)   3.69   5.58   4.80   5.10 RONW (%)   3.92   5.07   11.30   17.22 ROCE (%)   6.44   9.97   18.60   23.12 FY ending March 31 each year *Net of non-recurring transactions

Addition of rooms in the hospitality sector is a capital-intensive activity, which causes a constraint on the free cash flows of companies and thereby impacts return ratios negatively in the short run. Naturally, EIH would run through this cycle in its expansion period. In FY08 and FY09, we have estimated a dip in return on net worth (RONW) to 16.7 per cent and 15.4 per cent as against 17.9 per cent in FY07. However, we expect the return to rebound in FY10 to 17.7 per cent once the new hotels get commissioned. We also foresee the return on capital employed (ROCE) to head northwards to 14.4 per cent (FY10) from 13.4 per cent (FY07), post sliding to 12.2 per cent (FY08) and 11.5 per cent (FY09). Just be patient.

This article was originally published on February 05, 2008.