East India Hotels -In line quarter… :: ICICI Securities, report

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In line quarter… • The Q3FY15 performance remained broadly in line with our estimates with sales, PAT growth at 7.5%, 6.2% YoY, respectively • EBITDA margins improved 14 bps YoY to 28.6% (I-direct estimate: 27.9%), due to lower raw material costs • Although sales were marginally lower than our estimates, low raw material and interest costs led to higher PBT growth in the quarter while PAT remained broadly in line with our estimates due to higher tax expenses 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 come back to 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 4752 rooms, the company owns around 60% of rooms directly. Of this, ~44% 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 5.5% over FY14-17E led by improvement in 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 an 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 the rebound in the macro environment. 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 growth trajectory over the next three years. In terms of earnings, we expect sales CAGR of 5.5% during FY14-17E coupled with expansion in margins. At the CMP of | 112, the stock is trading at 16.1x and 14.7x its FY16E and FY17E EV/EBITDA, respectively. On an EV/room basis, the stock is available at | 2.8 crore/room, which is far below its current market value, given its strategic locations. We have valued the stock at 17.5x FY17E EBITDA (i.e. at | 3.2 crore/room and 2.5x FY17E book value) capturing its long term growth potential and arrive at target price of | 131/share. We maintain our BUY rating on the stock.

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 http://content.icicidirect.com/mailimages/IDirect_EIHLtd_Q3FY15.pdf