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Shanthi Venkataraman

The Oberoi, Mumbai_Buoyancy in occupancy and room rates yet to spur earnings growth.

SHAREHOLDERS can hold on to the stock of EIH, which is part of the Oberoi group and enjoys the No.2 position in the Indian hotel industry. Even though its financial performance over the past few years has not been as impressive as its peers, it has managed to tide over a difficult period, aided by a strong brand name and a relatively large international presence.

The stock valuation has not always been in line with financial performance; it has been influenced by factors such as acquisition buzz. At about Rs 215, the stock remains expensively valued.

Improving fundamentals on the back of robust demand and expansion through management contracts augurs well for earnings growth over the long term. The imminent merger of ITC Hotels and ITC is a confirmation of the latter's plans to emerge as a big player in the hotels business.

ITC holds a stake of slightly less than 15 per cent in EIH. This has been positioned as just a strategic stake; it would, however, be important to track any consolidation efforts by ITC.

The risks associated with the stock are a slowdown in demand (which is not the case now), and a high fixed cost structure.

Buoyed by tourist arrivals

The company's performance, which suffered post-9/11, did pick up in the October-March period of FY04. Occupancy and average room rates improved on the back of strong tourist arrivals and a pick-up in business travel.

The April-June quarter saw a continuation of this trend. EIH has particularly benefited, as its clientele consists predominantly of foreign tourists and business travellers. Foreign tourist arrivals rose 25 per cent during this period leading to a surge in occupancy and room rates.

The tie-up with the international hotel group, Hilton International, for its Trident group of hotels, may have also helped in improving occupancy rates. The arrangement provides Trident Hotels the opportunity to cater to Hilton's customers who visit India.

The growth in revenues during the April-June quarter, have outpaced that of expenditure by more than 10 percentage points; this has led to a spurt operating profits.

The growth in operating profits, however, is not reflected in shareholders earnings due to the large interest cost and depreciation charges.

EIH's legacy of owning hotel properties has resulted in an increase in fixed costs in the form of interest and depreciation costs.

The high fixed-cost component stood it in good stead during the boom periods, but acted as a drag on performance in the post-9/11 period.

The company was forced to put its expansion plans on hold and concentrate on existing projects. Now, with surging demand, the hotel is again under pressure to add more rooms, as is the case with other hotels.

Growth by contracts

EIH is shifting from a strategy of owning properties and now intends to expand by way of management contracts. Under this system, the hotel would earn a fee for its management expertise. This would allow EIH to expand its presence without a heavy capital outlay. It would also ensure that there is no additional interest burden.

As part of this strategy, EIH has already entered into management contracts with resorts at Maldives and Dubai, which would earn it a fee for 26 years and 40 years respectively. It is also, however, to continue with the development of existing hotel properties. As this could lead to higher capex, profitability may continue to be strained by interest costs.

Clientele profile

EIH derives 75 per cent of its revenues from foreign travellers. This enables it to earn higher revenues by way of foreign exchange. Foreign exchange earnings of hotels in the April-June period are estimated to have grown by about 34 per cent on the back of increasing tourist arrivals and a depreciating rupee.

The dependence on foreign travellers, however, increases the vulnerability of profits to global events that would affect international travel.

EIH also caters to business travellers due to its strong presence in Delhi and Mumbai. This brings in less seasonality to earnings compared to leisure hotels. The company, however, lacks a presence in the budget hotels segment, which its competitors are entering into. Budget hotels would cater to business customers during trough periods when the focus would be on cutting costs.

Prospects

The long-term prospects for EIH remain bright. It enjoys a strong brand recall. Its "Oberoi Vilas" properties are among the more reputed premium leisure hotels. It is also a strong player in the flight catering business.

The modernisation of airports and the growth in airline traffic should foster some revenue growth for the company. EIH also has a relatively strong international presence, spanning six countries in the Asia-Pacific region.

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