East India Hotels (EIH) 114

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1 Result Update Rating matrix Rating : Hold Target : 124 Target Period : months Potential Upside : 8% What s Changed? Target Changed from 133 to 124 EPS FY16E Unchanged EPS FY17E Changed from 2.8 to 2.3 Rating Changed from Buy to Hold Quarterly Performance Q3FY16 Q3FY15 YoY (%) Q2FY16 QoQ (%) Revenue EBITDA EBITDA (%) bps bps PAT Key Financials Crore FY14 FY15 FY16E FY17E Net Sales 1, , , ,78.8 EBITDA Net Profit EPS (Rs) Valuation summary FY14 FY15 FY16E FY17E P/E Target P/E EV / EBITDA P/BV RoNW RoCE Stock data Particulars Amount Market Capitalization 6513 crore Total Debt (FY15) 375 crore Cash and Investments (FY15) 198 crore EV 6689 crore 52 week H/L 138/96 Equity capital Face value 2 Price performance (%) 1M 3M 6M 12M Indian Hotels Taj GVK Hotel Leela EIH Research Analyst Rashesh Shah [email protected] Devang Bhatt [email protected] February 1, 216 East India Hotels (EIH) 114 Closure of Oberoi Delhi to impact revenues EIH reported a mixed set of Q3FY16 numbers. While revenues were in line with our estimate, EBITDA was below our estimate. However, PAT was in line with our estimates due to lower-than-expected tax expenses Revenues increased 5.8% YoY to 42.6 crore (in line with I-direct estimate of 398 crore) led by higher occupancy On the margin front, the EBITDA margin declined bps YoY to 25.7% (vs. I-direct estimate of 29.4%) led by an increase in employee expenses (up 12.8% YoY) and other expenses (up 8.6% YoY) PAT increased 8.6% YoY to 47.4 crore led by 24.1% YoY decline in interest expenses and higher other income of 5.9 crore vs. 19 lakh in Q3FY15 Expect recovery in domestic demand with rebound in economy With the redefined role of the new government (i.e. from regulator to a catalyst), we expect integrated development of enabling infrastructure to boost overall growth of the hotel industry. Growth in room demand has consistently remained subdued in the past four years due to challenging macroeconomic conditions with average margins touching as low as 15% in FY14 from a peak of 31% in FY8 while it witnessed a dream run in FY2-8 (coinciding with the economic boom). However, with improved tourism measures, we expect the sector to get back on the growth trajectory in the next three to four years. Near term revenues, profitability to be hit by hotel closure EIH will close The Oberoi, New Delhi from 1 April 216 for renovation. The hotel is expected to be ready for commercial operation by April 1, 218. The hotel generated revenue of crore (contributed 13.7% of total revenues of the company). Hence, the closure of Oberoi, Delhi will lead to lower revenues and profitability over the next two years. Sound balance sheet remains key positive for future expansion The company has reduced its debt drastically through asset sale and better working capital management. As a result, its D-E has come down to.1x in FY15 from.4x in FY11. With an improved economic environment, we expect debt to decline gradually. This will place the company in a better position on the balance sheet front, which can be useful in further expansion. The company also has a strategic partner, Reliance Industries, with an 18.5% stake in the company. This, we believe, would help the company in growing faster with the rebound in the macro environment. Long term fundamentals intact; near term concern prompts downgrade With the high focus of the government on improving the sector along with an economic revival, we expect the sector to return to a growth trajectory over the next three years. Further, the company is in a better position on the balance sheet front, which can be useful in further expansion with the rebound in the macro environment. Despite long term fundamentals being intact, we expect revenue and profits to be adversely impacted led by closure of Oberoi Delhi. As a result, we have downgraded the stock from BUY to HOLD. We have valued the stock at 18.3x FY17E EBITDA (i.e. at 3.5 crore/room and 2.6x FY17E book value) and arrived at a target price of 124/share. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q3FY16 Q3FY16E Q3FY15 YoY (%) Q2FY16 QoQ (%) Comments Total Operating Income Revenues increased 5.8% YoY led by better demand Other Operating Income Raw Material Expenses Employee Expenses Other Exp EBITDA EBITDA Margin (%) ,297.8 Higher employee cost during the quarter led to a decline in margins Other Income , Interest Depreciation PBT Total Tax ,5.7 PAT Lower interest expenses and higher other income led to 8.6% YoY increase in PAT EPS Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Revenue 1, , , , We have revised our FY17E revenue estimates downwards due to closure of Oberoi, Delhi for renovation EBITDA EBITDA Margin (%) bps bps We have revised our margin estimates downwards led by increase in operating expenses PAT EPS ( ) ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Business segment contributes more to topline Majority of the company s owned hotels are in the business segment. Out of the total room inventory of 4752 with the company, EIH owns around 44% of rooms, of which, ~95% are at business locations. We expect revenues from these business destinations to drive growth of the company, going ahead, led by a revival in the economic environment. Other than business segment properties, EIH has properties at leisure destinations as well through JVs. JVs form ~29% of total rooms. Further, international properties at Bali, Lambok, Mauritius and Egypt constitute ~2% of the total capacity of the company, which has increased sharply from 8% in FY9. Exhibit 1: Revenue CAGR of 9.6% during FY FY9 FY1 FY11 FY12 FY13 FY14 FY15 Revenue ( crore) - LHS Growth (%) - RHS Exhibit 2: Hotel details Location Number of Hotels Rooms Owned Mumbai Delhi Bengaluru 1 16 Kolkata 1 29 Udaipur 1 87 Ranthambhore 1 25 Total Owned JV 1376 Total Domestic 3473 International 941 Management Contract 338 All Total 4752 Exhibit 3: Trend of ARR, occupancies at business destinations ARRs of business destinations declined 4.1% YoY while occupancy levels improved 391 bps to 72% during the same period ( ) Q3FY14 (%) Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 ARR (LHS) Occupancy (RHS) Source: Crisil, ICICIdirect.com Research Exhibit 4: Trend of ARR, occupancies at leisure destinations Leisure destinations witnessed an increase of 2.4% YoY in ARR while occupancy declined from 71% in Q3FY15 to 7% in Q3FY Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 ( ) Q2FY16 Q3FY (%) ARR (LHS) Occupancy (RHS) Source: Crisil, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 3

4 Exhibit 5: Q3FY16 revenue up 5.8% YoY with marginal pick-up in demand Expect revenue CAGR of 1.2% during FY15-17E For FY15, revenues grew 8.4% YoY compared to historical high growth of ~3% in FY11. With the rebound in the economy coupled with strong presence in business destinations, we expect growth to pick up from here on. However, we expect revenue growth to be impacted by closure of Oberoi Delhi. Hence, we expect revenues to grow at a modest CAGR of 1.2% during FY15-17E. Exhibit 6: Expect revenue CAGR of 1.2% during FY15-17E Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY FY9 845 FY FY FY12 FY13 FY14 FY15 FY16E FY17E Quarterly sales ( crore) - LHS YoY Growth (%) - RHS Revenue ( crore) - LHS Growth (%) - RHS FY17E margins to decline led by higher operating expenses EBITDA margins are expected to increase from 19.8% in FY15 to 23.5% in FY16E led by an improvement in occupancies and ARRs. However, we expect FY17E margins to decline to 22.8% led by higher operating expenses and closure of Oberoi, Delhi. Exhibit 7: Quarterly trend in margins Exhibit 8: Annual trend in margins (%) (%) Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16-1. FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Operating margin (%) PAT margin (%) Operating margin PAT margin ICICI Securities Ltd Retail Equity Research Page 4

5 Outlook and valuations With the high focus of the government on improving the sector along with an economic revival, we expect the sector to return to a growth trajectory over the next three years. Further, the company is in a better position on the balance sheet front, which can be useful in further expansion with the rebound in the macro environment. Despite long term fundamental being intact, near term concern due to closure of Oberoi Delhi prompts us to downgrade the stock from BUY to HOLD. We have valued the stock at 18.3x FY17E EBITDA (i.e. at 3.5 crore/room and 2.6x FY17E book value) and arrived at a target price of 124/share. Exhibit 9: One year forward EV/EBITDA Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Exhibit 1: Valuation Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE (Rs cr) (%) (Rs) (%) (x) (x) (%) (%) FY FY FY16E FY17E ICICI Securities Ltd Retail Equity Research Page 5

6 Company snapshot Target Price: Aug-8 Nov-8 Feb-9 May-9 Aug-9 Nov-9 Feb-1 May-1 Aug-1 Nov-1 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Jul-7 EIH announces it has decided to terminate its strategic alliance for marketing and co-branding with Hilton International Co (Hilton) for the 'Trident Hilton' brand in India May-1 Board of Directors of the company approves the acquisition of the 45.85% equity interest of Amex Investment Ltd, Hongkong (Amex) in its international hotel joint venture company. EIH Holdings Ltd British Virgin Islands for $45 million Jul-1 EIH International, the wholly-owned subsidiary of the company. Completes the acquisition of the 49% equity interest of Amex Investment Ltd (Amex) in its international hotels joint venture company EIH Holdings for US$45 million as approved by the EIH Board. With this acquisition EIH Holdings becomes a wholly-owned subsidiary of EIH International. The acquisition includes equity investments in existing Oberoi Hotels in Mauritius, Bali Indonesia, Lombok Indonesia and Sal Hasheesh Egypt and hotel management contracts Aug-1 Reliance Industries announces that it has acquired through its wholly-owned subsidiary Reliance Industries Investment and Holding Pvt Ltd, from Oberoi Hotels Pvt Ltd and certain other promoters of EIH Ltd, shares in EIH Ltd representing 14.12% of EIH Limited at a total cost of 1,21 crore Sep-12 Elephant Capital plc announces that on September 1, 212 Elephant Capital disposed of its remaining investment of 5,744, EIH Ltd shares for the US$ equivalent of 4,712,. The US$ proceeds are to be converted to GBP after the trade settlement date of September 17, 212 Jan-16 Closure of Oberoi Delhi for renovation from 1April 216 till 1 April 218 Top 1 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Oberoi Group 3-Sep Reliance Industries Ltd 3-Sep ITC Ltd 3-Sep Life Insurance Corporation of India 3-Sep Reliance Capital Asset Management Ltd. 3-Sep The New India Assurance Co. Ltd. 3-Sep General Insurance Corporation of India 3-Sep Mukherji (Shib Sanker) 3-Sep Madhok (Deepak) 3-Sep Russell Credit, Ltd. 3-Jun Shareholding Pattern (in %) Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Promoter FII DII Others Source: Reuters, ICICIdirect.com Research Recent Activity Investor name Investor name Investor name Value Shares Investor name Value Shares Russell Credit, Ltd. 1.15m 6.56m Life Insurance Corporation of India -.49m -.33m ITC Ltd 9.79m 6.56m Royce & Associates, LLC -.13m -.7m Oberoi Group 3.5m 2.34m Madhok (Deepak) 2.72m 1.82m Mukherji (Shib Sanker) 2.72m 1.82m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 6

7 Financial summary Profit and loss statement Crore (Year-end March) FY14 FY15 FY16E FY17E Total operating Income 1, , , ,78.8 Growth (%) Raw Material Expenses Employee Expenses Other Exp Total Operating Expenditure 1, , , ,32. EBITDA Growth (%) Depreciation Interest Other Income PBT Others Total Tax PAT Growth (%) LP EPS ( ) Cash flow statement Crore (Year-end March) FY14 FY15 FY16E FY17E Profit after Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity.... Inc/(dec) in loan funds Dividend paid & dividend tax Inc/(dec) in Sec. premium.... Others CF from financing activities Net Cash flow Opening Cash Closing Cash Source: ICICIdirect.com Research Balance sheet Crore (Year-end March) FY14 FY15 FY16E FY17E Liabilities Equity Capital Reserve and Surplus 2,495. 2, , ,624.3 Total Shareholders funds 2,69.3 2,61. 2, ,738.6 Total Debt Deferred Tax Liability Minority Interest / Others Total Liabilities 3, , , ,31.5 Assets Gross Block 3,88.6 3, , ,622.2 Less: Acc Depreciation , ,36. 1,48.3 Net Block 2, ,66.1 2,91.2 2,141.9 Capital WIP Total Fixed Assets 2, , ,41.2 2,451.9 Goodwill on consolidation Investments Inventory Debtors Loans and Advances Other Current Assets Cash Total Current Assets Creditors Provisions Total Current Liabilities Net Current Assets Others Assets Application of Funds 3, , , ,31.5 Key ratios (Year-end March) FY14 FY15 FY16E FY17E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 7

8 ICICIdirect.com coverage universe (Hotels) CMP M Cap EPS ( ) P/E (X) EV/EBITDA (X) RoCE (%) RoE (%) Sector/Company ( ) TP( ) Rating ( Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Indian Hotel (INDHOT) HOLD NA EIH (EIH) HOLD TajGVK Hotels (TAJGVK) 9 1 BUY N.A N.A ICICI Securities Ltd Retail Equity Research Page 8

9 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research [email protected] ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 [email protected] ICICI Securities Ltd Retail Equity Research Page 9

10 ANALYST CERTIFICATION We /I, Rashesh Shah, CA, and Devang Bhat, PGDBM, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a SEBI registered Research Analyst having registration no. INH99.ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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