EIH: Hold/Buy on declines

Anup Menon

At around Rs 198, the EIH stock trades at a price-earnings multiple of 19 times its latest annualised earnings per share.

The company's performance in recent times has been fairly impressive. Further, with the economy showing signs of reviving, there seems to be some improvement in the industry. However, the question is if this will be sustained with most of the economic research outfits revising downward the estimated growth rates.

Earnings performance: EIH's earnings performance for the first half of fiscal 2000 was fairly impressive. Sales revenues rose 15 per cent to Rs 215.78 crore compared to the corresponding previous period. In the same time-frame, operating margins improved marginally from around 22 per cent to 23 per cent. Post-tax earnings rose 36 per cent to Rs 27.13 crore. On an equity base of Rs 52.39 crore, the annualised earnings per share works out to around Rs 10.

Business profile: EIH is a leading player in the hospitality industry, catering primarily to travelers in the business community, which constitutes around 70 per cent of the total revenues. The company's brand equity is well-established. The focus on the business traveler has also resulted in the concentration of the company's properties in the major business cities.

Prospects: The company's prospects seem stable for the time being. Since EIH depends to a large extent on business travelers, the state of the economy becomes critical from the point of view of performance. Of late, there are signs of slowdown in the economy which could hurt business sentiment. This would, in turn, lead to lower business travel. Hence, cash flows in the near term may come under pressure.

On the other hand, there are other factors in favour of the company. EIH has also invested in tourist locations. Tourist arrivals into the country rose by around 6.4 per cent in first nine months of calendar 2000. Further, the recent depreciation of the rupee should make India a more attractive tourist destination. If this trend continues, the investments in the tourist locations are likely to generate a positive pay-off for the company.

Another key determinant of earnings is the average room rate charged by the hotels. The trends in room rates in the five-star category indicate that they are high, next only to Hong Kong compared to other major Asian destinations.

EIH has also taken initiative to tie-up with some of the leading international hotels chains. At a time when the competitive scenario in the industry is heating up, this move will help the company pre-empt additional competitive pressures. The tie-up comes with co-branding, which will help identify EIH with some of the leading hotel chains in the world. This is also likely to have a positive impact on the brand image of the company.

Investors should watch for pressure on the earnings stream on account of the slowdown in the overall economy. Shareholders can stay invested and accumulate at declines to the current market price. Fresh investments can be considered at declines to the current market price.