EIH, Higher fixed overheads pull down margins… :: ICICI Securities,

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Higher fixed overheads pull down margins…
• The Q2FY15 performance of EIH was below our expectations at the
PAT level, on account of higher depreciation and low other income.
However, the topline reflected some good improvement with a
revenue growth of 8.6% YoY to | 283.4 crore
• EBITDA margins declined 133 bps YoY to 9.7% (I-direct estimate:
11%), due to higher employee and raw material expenses
• Further, higher depreciation and low other income led to a net loss of
| 1.3 crore (I-direct estimate: | 6.6 crore)
Expect strong recovery in demand with rebound in economy
With the redefined role of the new government (i.e. from regulator to a
catalyst), we expect integrated development of enabling infrastructure to
boost overall growth of hotel industry. Growth in room demand has
consistently remained subdued in the past four years due to challenging
macroeconomic conditions with average margin touching as low as 14%
in FY14 from peak of 31% in FY08 while it witnessed a dream run in FY02-
08 (coinciding with economic boom). However, with improved tourism
measures, we expect the sector to return to the high growth trajectory
with average annual industry growth of 9-10% over next three years (vs.
average annual CAGR of 16% reported during FY05-08).
Business segment contributes larger proportion of total revenue
Out of the total operated inventory of 3721 rooms, the company owns
around 60% of rooms directly. Of this, ~95% of rooms are located in
business destinations. Going ahead, we expect revenue from these
business destinations to drive the growth of the company. We expect
revenue CAGR of 6.8% over FY14-16E led by improvement in ARRs and
occupancy levels, especially in Mumbai and Delhi, which combined
together have over 78% share in total owned room inventory.
Sound balance-sheet remains key positive for future expansion
The company has reduced its debt drastically through asset sale and
better working capital management. As a result, its D-E has come down to
0.2 in FY14 from 0.4 in FY11. Going ahead, with improved economic
environment, we expect debt to decline gradually. This will place the
company in a better position on the balance sheet front, which can be
useful in further expansion as well. The company also has a strategic
partner, Reliance Industries, with an 18.5% stake in the company. This,
we believe, would help the company in growing faster with aggressive
expansion once the economy rebounds.
Capturing long term potential; maintain BUY
With the high focus of the government towards improving the sector
along with an economic revival, we expect the sector to return to a high
growth trajectory over the next two or three years. In terms of earnings,
we expect sales CAGR of 6.8% during FY14-16E coupled with expansion
in margins. At the CMP of | 95, the stock is trading at 15.7x and 13.5x its
FY15E and FY16E EV/EBITDA, respectively. On an EV/room basis, the
stock is available at | 2.5 crore/room, which is far below its current market
value, given its strategic locations. We have valued the stock at 17.5x
FY16E EBITDA (i.e. at | 3.2 crore/room and 2.5x FY16E book value)
capturing its long term growth potential and arrive at target price of
| 124/share. We maintain our BUY rating on the stock.

LINK
http://content.icicidirect.com/mailimages/IDirect_EIHLtd_Q2FY15.pdf