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Shanthi Venkataraman

SHAREHOLDERS can consider booking profits in the stock of EIH, part of the Oberoi group of hotels. The stock has appreciated smartly over the past few months on the back of buoyant trends in the hotel industry, which is set to have another year of strong demand with the average room rates likely to rise. EIH should benefit, given its wide reach and strong brand recall.

Expensive valuations

But while its fundamentals have improved over the past year, the company remains an underperformer compared to smaller chains such as Hotel Leela and Taj GVK. Valuations of The stock valuations are also expensive vis-à-vis other players in the industry.

At its current market price, the stock trades at about 60 times its FY-05 earnings per share, while the likes of Indian Hotels and Hotel Leela command multiples of 25-30 times.

The stock's ability to command this stiff premium could be partly attributed to ITC's `strategic' stake of slightly less than 15 per cent in EIH. The merger of ITC Hotels with ITC and the latter's plans for expansion in the hotel sector appear to have further strengthened the acquisition buzz. There is, however, still no news of any development on this front. Shareholders would have to be patient if they wish to capitalise on any such development. Shareholders can, therefore, consider booking profits on at least a part of their holdings.

Trailing performance

In a year when leading hotel chains witnessed a multi-fold growth in profits, EIH reporting improvement of about 25 per cent over that of 2004 is rather disappointing.

The company cut back its losses in the first two quarters and in its earnings more than trebled in the third, suggesting a stronger comeback by the group. In the January-March quarter, however, its profits slipped marginally. Higher operating expenses and interest cost appears to have strained earnings growth in the last quarter.

Like its peers, EIH's operating margins also expanded significantly in 2005, on the back of higher room rates. Margins expanded by about 700 basis points over the year. At about 21 per cent, however, the margins are still lower than that of some of its peers .

This need not be a cause for concern. Both Indian Hotels and EIH, being larger chains, bear substantially higher employee costs. The supply situation is unlikely to improve over the next year, as most hotels are still in the early stages of their expansion plans. Room rates are, therefore, likely to increase, if the current demand is sustained. This provides scope for further expansion in margins. The revenue growth would, however, have to be substantially higher, so that the earnings growth keeps pace with that of its peers.

Slow on expansion

The presence in the top metros and key leisure destinations, the strong brand recall of Oberoi, the Trident-Hilton tie-up which helps attract international business travellers, all should help EIH sustain its current revenue growth.

EIH has, however, been relatively silent on the expansion front, at a time when most hotels are under pressure to add to their capacities. Admittedly, it is the second largest chain in the country. But other hotel chains such as Hotel Leela and ITC are also on an aggressive expansion drive.

Indian Hotels too has forayed into the budget segment to stimulate revenue growth. Competition is also likely to intensify with the foray of other international luxury chains into the Indian market and the mushrooming of mid-priced business hotels. EIH would have to expand at a much faster clip to preserve its market share.

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