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C. Raja Rajeshwari

Mr P. R. S. Oberoi, Chairman and CEO... Smiling away the blues.

SHAREHOLDERS of EIH can remain invested in the stock. The Oberoi group company has been indifferent over the past few years and the stock suffered. If the decline in earnings persists, it would have further downside. However, there is a possibility of the stock valuation being influenced by extraneous factors, such as a take-over.

Quarterly performance, up and down

The improved business environment brought in a number of business travellers in May and June. The business travellers account for a major chunk of business for EIH, which has a strong presence in Delhi and Mumbai.

But the effect of the increased occupancy rate was nullified by the decreased average revenue rates (ARR). The occupancy rate is reflected in the first quarter results, with a top line growth of 7 per cent. Operating profits improved 15 per cent (all figures are quarter-on-quarter). However, the huge increase in interest cost and depreciation charges left the company with no cash profits; interest payments rose 19 per cent owing to the burgeoning debt burden.

The operating margin rose from 12.8 per cent to 14 per cent mainly due to the company's strict cost-control measures to curtail its expenses growth.

Margins hold the key

The company operates in the high-end category. The trend in occupancies at both Mumbai and Delhi has been improving. But there was no concomitant improvement in the ARR. Also, pricing pressure due to competition persists. With occupancy looking up, players are contemplating a price hike. Even a 5 per cent hike in the ARR would augur well for EIH in the short-term.

Funds, a cause for concern

Being a high-end player, EIH incurs huge capital expenditure for new projects or for revamping existing properties. The new players have forced the company to ramp up its existing ones. The markets of Delhi and South Mumbai are to an extent saturated. For higher growth rates and profitability, the company needs new business for which it has to either seek untapped markets or augment services at its existing properties.

The company purchased a piece of land in Bandra, in south Mumbai, in 2001. But the construction was delayed due to lack of funds. Adding to this capital outlay is EIH's ongoing overseas project with the ONA Group (two properties in Morocco).

EIH has also increased its stake to 60 per cent from 26 per cent in Amarvilas, Agra, leading to a substantial cash outflow. This has left the company with a mounting debt burden.

The total debt rose from about Rs 273 crore to about Rs 464 crore over the last three years. The company's reserves dipped 14 per cent from Rs 565 crore to Rs 485 crore in 2002 (excluding revaluation reserves). In 2002, EIH borrowed about Rs 200 crore to meet its working capital requirements, besides meeting capital expenditure on its properties under construction.

If the cash flow continues to be strained, as is the case now, debt may be increasingly used to fund requirements. This could weigh heavily on the stock valuations.

Overseas forays

Increasing debt, decreasing cash reserves and mounting interest charges have forced the company to go slow on new investments and, instead, look forward to management contracts. EIH has been looking at other international hotel chains for a marketing tie-up. However, this has not fructified in the past three years.

Such tie-ups, if forged, would improve the international visibility and augur well for EIH in the long-term. On the other hand, ITC's acquisition of EIH shares (14.35 per cent) from the open market, through unlisted investment companies, signifies a consolidation in the industry. Owing to the brand name and the geographic spread of the company, the open offer may bring in opportunities of gain, if the group increases its stake. Shareholders can stay invested for the moment.

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