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Shanthi Venkataraman

SHAREHOLDERS can hold the stock of EIH, which is part of the Oberoi chain of hotels. The stock appreciated considerably the last couple of months as strong tourist arrivals spurred interest in hotel stocks. But it appears expensively valued compared to stocks such as Indian Hotels, Taj GVK and Hotel Leelaventure, which have also recorded strong performances in recent quarters.

With tourism on an upswing, hotel stocks are enjoying better valuations and the EIH stock is likely to remain in favour. Barring extraneous circumstances, the company is set to enjoy better prospects. But much of the gains that could accrue for the company from the tourism boom appear to have been priced in already.

EIH has seen a recovery in performance in recent quarters, after suffering a major setback in 2002. In the quarter ended December 2004, operating margins expanded by almost 15 percentage points over the corresponding previous quarter, on the back of high occupancy rates and tariffs. Profits more than trebled over the period. Of course, some of this growth can also be attributed to its lower base.

The tie-up with Hilton International for the Trident chain of hotels also appears to have aided revenue growth. The company recently undertook a brand re-structuring exercise. It clubbed the `Vilas' luxury properties under the `Oberoi' brand name, while dropping `Oberoi' from its Delhi and Shimla properties. The clearer positioning of the Oberoi and Trident Hilton brands augurs well for revenue growth. With the demand for rooms outstripping supply, many hotels have announced plans to set up more properties.

EIH, however, appears more cautious about its expansion plans. It already owns most of its properties. This results in higher fixed costs, which translates into higher profits during a boom in the industry as fixed costs are spread over a higher revenue base, and steeper losses during a lean phase. With real-estate prices soaring, more funds are needed and companies such as Indian Hotels are finding it more advantageous to expand through the management contract route, which would limit the capital outlay. EIH said it too would adopt this route for expanding in the international and domestic markets.

With the Oberoi chain catering to the luxury segment, capital expenditure would be higher; the cost per room of a luxury hotel could be as high as Rs 1 crore.

Expansion under its own banner would necessitate contracting higher debt, which would be a burden on the profitability. The decision to adopt the management contract route, therefore, augurs well for revenue and earnings growth.

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