Royal Orchid Hotels-Margin expansion led by growth in sales:: ICICI Sec

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Margin expansion led by growth in sales…
Royal Orchid Hotels came out with better than expected Q2FY11
numbers. The company’s net sales registered an increase of 29.6% YoY
to Rs 34.3 crore from Rs 26.5 crore last year. The growth in revenues
came in mainly from a rise in occupancy levels backed by a pick-up in
demand from the IT/BFSI segment. Its operating costs also remained
under control and increased 16% YoY to Rs 25.6 crore while it declined
2% QoQ due to a reduction in employee cost (decrease of 13% QoQ). As
a result, its operating margin increased to 25.3% (up 887 bps YoY, 868
bps QoQ). Net profit for the quarter stood at Rs 2.0 crore as against Rs
60 lakh in the corresponding quarter of the previous year.


􀂃 Revenue growth led by improved business sentiments
The growth in revenues was mainly driven by a rise in occupancies
across business and leisure destinations. Bangalore, where the
company has a major room inventory, reported a 1450 bps
improvement in occupancy levels to 62%. Average occupancy
levels in other destinations like Mysore, Jaipur and Goa also grew
by 900 bps, to 67%. This quarter’s revenue also included revenues
from its new hotel in Ahmedabad that recorded an average
occupancy of 40% for the quarter. Average room rates (ARRs), on
the other hand, remained the same compared to last year. Mysore
and Goa reported a marginal improvement of ~11% compared to
last year while in Pune, ARRs declined by 20% YoY. In Bangalore,
ARRs remained stable compared to last year.

Valuation
At the CMP of Rs 79, the stock is trading at 11.2x and 10.3x its FY11E and
FY12E EV/EBITDA, respectively. We believe the company would continue
to witness a growth in revenue due to improvement in foreign tourist
arrivals and revival in the IT segment. Also, with investment interest
increasing in cities like Hyderabad and Navi Mumbai, where the company
has expansion plans, we expect the company to improve its margins and
return ratios, going forward. We have maintained our price target of Rs 94
with BUY rating on the stock (i.e. at 11.0x FY12E EV/EBITDA).