EIH in red as margins drop - Accumulate - Elara Capital

• EIH
• Rating : Accumulate
• Target Price : INR145
• Upside : 17%
• CMP : INR125 (as on 29 October 2010)

EIH in red as margins drop

Better operational matrix, Oberoi, metro hotels may boost topline in future

EIH reported a decent growth of 28% YoY on the topline for Q2FY11 at INR 2.17bn; 13% below our estimates on the back of better occupancies and ARRs. `The Oberoi' which was re-launched in end April and seems muted during off season, must propel revenues as in the past with the approaching season. We feel the strain on the topline would ease off in the coming quarters due to EIH's strong presence in metro cities.

Margins shrink to 5.6% with high cost pressures

The company lost out on 701bps of EBIDTA margin at 5.6% (INR 122mn) vs 12.7% in Q1FY10 due to high expense pressures on all accounts - employee cost and food and beverage were the major ones. EIH reported a net loss of INR419.7mn in Q2FY11 as against a loss of INR96mn in Q2FY10 due to higher overall expenses.

Recovery in numbers seen in H2

EIH had launched Trident, BKC in Dec'2010 with effective revenues from the new hotel for four months in FY10. 'The Oberoi' has also started functioning since April end after being closed for more than a year. We expect EIH to improve its revenues and profitability in the second half of the fiscal on the back of the improved occupancy and ARRS and a full year operation of key properties.

Upgrade to Accumulate rating; Retain INR145 target price

We expect EIH to present a healthy earnings growth going ahead. The company is currently trading at INR20mn FY12E EV/Adj Room. We upgrade to 'Accumulate' rating, maintaining our target price at INR145, valuing it at INR22mn FY12E EV/Adj. Room, presenting a 17% upside.

Source : Equity Bulls

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