EIH - Lackluster performance to continue - Elara Capital

Lower ARR & OR and Sluggish FTA drag sales down

EIH reported de-growth of 1.8% in Hotel with 14.2% decline in other business, sales of printed material and transport & car hire services contribute 5-6% of overall sales. Overall sales growth stood at 2.6%, vs our expectations of 3%. The stagnant domestic demand along with sluggish foreign tourist arrival (FTA) growth of 2.6% in Q2FY13 laden with oversupply resulted in occupancy rate (OR) de-growth by 104bps to 54.8% and average room rate (ARR) drop of 2.5% to INR 5,927 in Q2FY13. Consequently, RevPAR also declined 4% to INR 3,283 in 12 major cities of the country.

Significant erosion in margins due to low operating leverage

Higher expenses due to inflationary pressure and de-growth in topline have hurt EBITDA margin significantly, down 1145bps YoY to 0.8%, against our estimate of 12.2%. It must be noted that these margins are the lowest in past five years and significantly lower than those recorded post 26/11 closure of Oberoi Mumbai. Thus, signifying that margin recovery is a hard and long drawn process from these levels.

Maintain Reduce rating; Cut target price to INR 72

The lackluster performance of sector is likely to persist for midterm due stagnant global and domestic demand outlook in the wake of dismal macro-economic factors. The lower demand from the MICE (Meetings, Incentives, Conferences and Exhibitions) segment due economic slowdown and sluggish FTA arrivals have been putting pressure continuously on demand side. The room demand has slowed down at around 4% compared with around 6% growth in supply across the mid-market and premium segments in India. We continue to maintain our 'ReduceRs. rating on the stock. Without visible recovery in the near term, we cut our target price from INR 78 to INR 72, based on SOTP valuation derived from EV/Adj. room (INR17mn-17% discount to 8 year average), EV/EBIDTA (14x-20% discount to 8 year average).

Source : Equity Bulls

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