EIH: Operating efficiency seen still intact

The promoter group of East India Hotels (EIH) recently announced that it won’t sell its stake in the company. This puts to rest the uncertainty among investors over the possibility of a change in equity holding of the country’s major luxury hotel chain.

The Street was expecting a share purchase by one of the existing stakeholders of EIH, which operates a chain of
business hotels under the brand name Oberoi. Currently, FMCG giant ITC, which also has a hotel business, holds a 14.98% stake in EIH. Another investor, Max India’s promoter Analjit Singh, owns 3.7% in EIH through two financial arms. Analysts were anticipating a further stake hike in EIH by these shareholders.

The uncertainty since past 15 months had impacted the stock performance of EIH. The stock gained just over 5% in the past one year, while the stocks of other hospitality majors rose two-folds.

Industry trackers highlight lack of clarity on future leadership of EIH as a major reason for the languishing investor interest. There is no clarity on who will take over the reins of the company after the current chairman, PRS Oberoi.

Amidst the uncertainty, one question that weighs high on investors’ mind is whether it would be lucrative to remain invested in the company. One way to answer the question is to look at the fundamental strength of EIH’s business. Over the years, the company has nurtured its flagship brand Oberoi, which enjoys a mind share among business travellers. The company has also expanded into resorts and leisure segments of hospitality through its subsidiary.

On the financial turf, EIH faced a difficult FY10, following lower demand from overseas clients. On a full-year standalone basis, the company’s net sales fell by 13% to Rs 894 crore in FY10, given the steep discounts it had to offer in its peak room rates over the year. This compares with the 8% fall in standalone revenue of Indian Hotels.

EIH was also able to, more or less, retain its operating profit margin during the past fiscal, despite a slump in
revenues. Its margin slipped by just over 10 basis points to 34%, which is on par with its peers. This reflects that
operating efficiency is still intact.

Moreover, analysts expect a rebound in financials, following the improvement in leisure and business travel and the company’s robust expansion plans. EIH has chalked out plans to add another 750 rooms in the next two-and-a-half years to its existing inventory of 1,800 rooms under its five-star brand Trident. A pick-up in demand thus augurs well for EIH.

Also, if there is an entry of a new promoter with a stake sale by existing promoters, who hold 46%, it’s unlikely that it will alter the fundamentals of EIH. Hence, long-term investors need not panic.