Result Update Rating matrix Rating : Hold Target : 1 Target Period : 12-15 months Potential Upside : -8% What s Changed? Target Changed from 124 to 1 EPS FY17E Changed from 2.3 to 2. EPS FY18E Introduced at 2.3 Rating Unchanged Quarterly Performance Q4FY16 Q4FY15 YoY (%) Q3FY16 QoQ (%) Revenue 419. 387.7 8.1 4.1 4.7 EBITDA 97.4 16. -8.1 13. -5.4 EBITDA (%) 23.3 27.4-41 bps 25.7-249 bps PAT 23.4 47.9-51.2 47.4-5.6 Key Financials Crore FY15 FY16 FY17E FY18E Net Sales 1,668.3 1,786.9 1,71. 1,824.6 EBITDA 33.1 385.4 342. 368.6 Net Profit 63.1 123.3 115.9 134.1 EPS (Rs) 1.1 2.2 2. 2.3 Valuation summary FY15 FY16 FY17E FY18E P/E 9.5 46.4 49.3 42.6 Target P/E 9.5 46.4 49.3 42.6 EV / EBITDA 17.8 15.4 16.6 15.9 P/BV 2.2 2.2 2.1 2.1 RoNW 2.4 4.7 4.3 4.8 RoCE 5.3 6.9 5.6 6.3 Stock data Particulars Amount Market Capitalization 6173 crore Total Debt (FY16) 48 crore Cash and Investments (FY16) 194 crore EV 6387 crore 52 week H/L 138/96 Equity capital 114.3 Face value 2 Price performance (%) 1M 3M 6M 12M Indian Hotels 9.8 16.2 26. 14.6 Taj GVK 7.8 34.1 1.9 31.8 Hotel Leela -2.7 5. -7.5-3.5 EIH 3.9.5-4.3 4.7 Research Analyst Rashesh Shah rashes.shah@icicisecurities.com Devang Bhatt devang.bhatt@icicisecurities.com May 27, 216 East India Hotels (EIH) 19 Closure of Oberoi Delhi to impact revenues EIH reported a mixed set of Q3FY16 numbers. While revenues were in line with our estimate, EBITDA and PAT were below our estimates due to lower operating margins & exceptional losses Revenues increased 8.1% YoY to 419 crore (in line with I-direct estimate of 418.6 crore) led by higher occupancy On the margin front, EBITDA margin declined 41 bps YoY to 23.3% (vs. I-direct estimate of 26.6%) led by higher raw material expenses (up 12.8% YoY) and other expenses (up 15.4% YoY) Further, diminution in value of investments in Golden Jubilee Hotels led to net exceptional loss of 29.2 crore, which diluted PAT margin. Net profit came in at 23.4 crore (vs. I-direct estimate: 49.7 crore) 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. Hotel closure to adversely impact near term revenues, profitability EIH will close The Oberoi, New Delhi from April 1, 216 for renovation. The hotel is expected to be ready for commercial operation by April 1, 218. The hotel generated revenue of 186.9 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 towards 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. However, we expect revenue and profits to be adversely impacted led by closure of Oberoi Delhi. As a result, we maintain HOLD rating on the stock. We have valued the stock at 16.x FY17E EBITDA (i.e. at 3.2 crore/room and 2.1x FY17E book value) and arrived at a target price of 1/share. ICICI Securities Ltd Retail Equity Research
Variance analysis Q4FY16 Q4FY16E Q4FY15 YoY (%) Q3FY16 QoQ (%) Comments Pick-up in demand from corporate and leisure led to growth in the topline. However, closure of New Delhi property for renovation will impact growth, Total Operating Income 419. 418.6 387.7 8.1 4.1 4.7 going forward Other Operating Income 4.2 7.7 7. -39.9 2.5 69. Raw Material Expenses 59.3 45. 52.6 12.8 55.2 7.5 Employee Expenses 12.5 9. 94. 9.1 12.4.1 Other Exp 163.9 18. 142. 15.4 142. 15.4 EBITDA 97.4 111.3 16. -8.1 13. -5.4 EBITDA Margin (%) 23.3 26.6 27.4-41. 25.7-249.3 Other Income 1.9 6. 6.7 61.9 5.9 84.8 Interest 4.6 6.4 6.4-28. 6.3-26.7 Depreciation 28.5 3.8 29.1-1.8 3.7-7. PBT 45.8 8.1 77.2-4.7 71.9-36.2 Total Tax 22.5 3.4 29.3-23.5 24.5-8.3 PAT 23.4 49.7 47.9-51.2 47.4-5.6 EPS.4.9.8-51.2.8-5.6 Diminution in value of investments in Golden Jubilee Hotels led to net exceptional loss of 29.2 crore, denting the PAT margin. Net profit came in at 23.4 crore (vs. I-direct estimate: 49.7 crore) Change in estimates FY17E FY18E ( Crore) Old New % Change Old New % Change Comments Revenue 1,78.8 1,71..1 N.A 1,824.6 N.A EBITDA 388.8 342. -12. N.A 368.6 N.A EBITDA Margin (%) 22.8 2. -275 bps N.A 2.2 N.A We have revised our margin estimates downwards led by increase in operating expenses with respect to renovation of Delhi property PAT 129.7 115.9-1.6 N.A 134.1 N.A EPS ( ) 2.3 2. -11.8 N.A 2.3 N.A ICICI Securities Ltd Retail Equity Research Page 2
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 revenue from these business destinations to drive the 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 9.7% in FY11-16 25 2 15 1 5 1126.3 147.2 1468.5 1539.1 1668.3 1786.9 FY11 FY12 FY13 FY14 FY15 FY16 Revenue ( crore) - LHS Exhibit 2: Hotel details Location Number of Hotels Rooms Owned Mumbai 3 1278 Delhi 2 338 Bengaluru 1 16 Kolkata 1 29 Udaipur 1 87 Ranthambhore 1 25 Total Owned 9 297 JV 1376 Total Domestic 3473 International 941 Management Contract 338 All Total 4752 Exhibit 3: Trend of ARR, occupancies at business destinations 1 8 867 7577 7393 8867 8933 76 7557 854 8875 1 8 ARRs of business destinations declined.7% YoY while occupancy levels improved 588 bps to 77% during the same period ( ) 6 4 2 6 4 2 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 (%) ARR (LHS) Occupancy (RHS) Source: Crisil, ICICIdirect.com Research Exhibit 4: Trend of ARR, occupancies at leisure destinations Leisure destinations witnessed an increase of 24.9% YoY in ARR while occupancy improved 348 bps YoY to 76% during the quarter 1 8 6 4 2 6794 4656 4412 8172 6489 4717 4644 8372 839 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 ( ) Q3FY16 Q4FY16 8 6 4 2 (%) ARR (LHS) Occupancy (RHS) Source: Crisil, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 3
Exhibit 5: Q4FY16 revenue up 8.1% YoY with marginal pick-up in demand Expect revenue CAGR of 1.% in FY16-18E For FY16, revenues grew 7.1% 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 EIH s revenues to grow at a modest CAGR of 1.% during FY16-18E. Exhibit 6: Expect revenue CAGR of 1.% during FY16-18E 5. 4. 3. 2. 1.. 355.6 378.2 387.7 4.1 419. 15. 28.9 287.8 299.4 298.1 9. 1. 1.3 8.1 5.2 8.5 5.8 5. 6.6 3.7 3.6. Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 165 125 85 45 5 845 FY1 1126 FY11 147 1468 1539 1668 1787 171 FY12 FY13 FY14 FY15 FY16 FY17E 1825 FY18E 35 25 15 5-5 -15-25 Quarterly sales ( crore) - LHS YoY Growth (%) - RHS Revenue ( crore) - LHS Growth (%) - RHS FY17E margins to decline led by higher operating expenses The EBITDA margin has increased from 19.8% in FY15 to 21.6% in FY16 led by an improvement in occupancies and ARRs. However, we expect FY17E margins to decline to 2.% led by higher operating expenses and closure of Oberoi, Delhi. Exhibit 7: Quarterly trend in margins Exhibit 8: Annual trend in margins (%) 4. 3. 2. 1.. 22.1 1.1 14.4 2.3 9.6 -.5 28.6 27.4 11.5 12.1 13.4 12.8 2.9 3.6 25.7 23.3 11.8 5.5 (%) 3. 2. 1.. 28.4 6.4 23.4 -.4 22.4 8.7 18.9 21.2 19.8 21.6 2. 2.2 7. 6.9 6.8 7.4 2.8 3.8-1. Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16-1. FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Operating margin (%) PAT margin (%) Operating margin PAT margin ICICI Securities Ltd Retail Equity Research Page 4
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. However, we expect revenue and profit to be adversely impacted led by closure of Oberoi Delhi. As a result, we maintain HOLD rating on the stock. We have valued the stock at 16.x FY17E EBITDA (i.e. at 3.2 crore/room and 2.1x FY17E book value) and arrive at a target price of 1/share. Exhibit 9: One year forward EV/EBITDA 14. 12. 1. 8. 6. 4. 2.. May-7 Nov-7 May-8 Nov-8 May-9 Nov-9 May-1 Nov-1 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Exhibit 1: Valuation Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE (Rs cr) (%) (Rs) (%) (x) (x) (%) (%) FY15 1668.3 8.4 1.1-41.1 97.8 19.2 2.4 5.3 FY16 1786.9 7.1 2.2 95.3 5.1 16.6 4.7 6.9 FY17E 171. -4.3 2. -6. 53.2 18.6 4.7 6.1 FY18E 1824.6 6.7 2.3 15.7 46. 17. 4.8 6.2 ICICI Securities Ltd Retail Equity Research Page 5
Company snapshot 2 18 16 14 12 1 Target Price: 1 8 6 4 2 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 Feb-17 May-17 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 acquisition of 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 31-Mar-16 29.6 169.3. 2 Reliance Industries Ltd 31-Mar-16 18.5 15.9. 3 ITC Ltd 31-Mar-16 15. 85.6. 4 Life Insurance Corporation of India 31-Mar-16 5.6 32.1. 5 The New India Assurance Co. Ltd. 31-Mar-16 1.9 1.7. 6 General Insurance Corporation of India 31-Mar-16 1.8 1.. 7 Mukherji (Shib Sanker) 31-Mar-16 1.6 9.1. 8 Madhok (Deepak) 31-Mar-16 1.6 9.. 9 Russell Credit, Ltd. 31-Mar-16 1.2 6.6. 1 Oberoi (Arjun Singh) 31-Mar-16 1.1 6.5. Source: Reuters, ICICIdirect.com Research Recent Activity Investor name Investor name Value Shares J.P. Morgan Asset Management (Hong Kong) Ltd..33.21 Dimensional Fund Advisors, L.P..12.7 The New India Assurance Co. Ltd..2.1 Morgan Meighen & Associates Ltd... Edelweiss Asset Management Ltd... Shareholding Pattern (in %) Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Promoter 35.25 35.25 35.25 35.27 35.27 FII 3. 3.3 3.1 3.95 3.17 DII 12.93 13.14 13.42 12.95 13.94 Others 48.82 48.58 48.23 47.83 47.62 Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 6
Financial summary Profit and loss statement Crore (Year-end March) FY15 FY16 FY17E FY18E Total operating Income 1,668.3 1,786.9 1,71. 1,824.6 Growth (%) 48.1 7.1-4.3 6.7 Raw Material Expenses 221 237 236 252 Employee Expenses 426 467 451 487 Other Exp 691 698 681 717 Total Operating Expenditure 1,338.1 1,41.4 1,368. 1,456. EBITDA 33.1 385.4 342. 368.6 Growth (%) 9.6 16.8-11.3 7.8 Depreciation 167.8 17.3 164.4 168.1 Interest 46.2 42.4 44.1 37.9 Other Income 28.9 44.9 46.3 47.7 PBT 145.1 217.7 179.9 21.3 Others 3.9 16.2-6.6-6.3 Total Tax 78.3 78.1 7.5 82.4 PAT 63.1 123.3 115.9 134.1 Growth (%) LP 95.3-6. 15.7 EPS ( ) 1.1 2.2 2. 2.3 Cash flow statement Crore (Year-end March) FY15 FY16 FY17E FY18E Profit after Tax 63.1 123.3 115.9 134.1 Add: Depreciation 167.8 17.3 164.4 168.1 (Inc)/dec in Current Assets -26. -46.8 174.8-227.9 Inc/(dec) in CL and Provisions 55.5-75.9 78.3 31. CF from operating activities 26.4 17.9 533.4 15.4 (Inc)/dec in Investments.. -5. -5. (Inc)/dec in Fixed Assets -18.6-169.6-225. -225. Others 16.4 2.3 8.7 1.2 CF from investing activities -92.2-149.3-221.3-219.8 Issue/(Buy back) of Equity.... Inc/(dec) in loan funds -63.1 33.9-5. -5. Dividend paid & dividend tax -74.. -62.9-62.9 Inc/(dec) in Sec. premium.... Others 11.6-9. -229.9 26. CF from financing activities -125.5-56.2-342.8 147.1 Net Cash flow 34. -4. -3.6 32.7 Opening Cash 164.1 198.1 194.1 163.5 Closing Cash 198.1 194.1 163.5 196.2 Source: ICICIdirect.com Research Balance sheet Crore (Year-end March) FY15 FY16 FY17E FY18E Liabilities Equity Capital 114.3 114.3 114.3 114.3 Reserve and Surplus 2,495.7 2,528.9 2,582. 2,653.3 Total Shareholders funds 2,61. 2,643.2 2,696.3 2,767.6 Total Debt 374.6 48.5 358.5 38.5 Deferred Tax Liability 196.3 25.3 25.3 25.3 Minority Interest / Others 77.7 89.1 97.8 18.1 Total Liabilities 3,258.7 3,346.1 3,357.9 3,389.4 Assets Gross Block 3,197.2 3,197.2 3,421.5 3,646.5 Less: Acc Depreciation 1,131.1 1,131.1 1,295.5 1,463.6 Net Block 2,66.1 2,66.1 2,126. 2,182.9 Capital WIP 31. 39.3 31. 31. Total Fixed Assets 2,376.1 2,375.4 2,436. 2,492.9 Goodwill on consolidation 331.5 331.5 331.5 331.5 Investments 254.1 223.6 228.6 233.6 Inventory 48.5 52.2 36.8 58.2 Debtors 223.1 217.3 215.5 229.9 Loans and Advances 286.6 335.1 177.9 369.5 Other Current Assets.6.9.5 1. Cash 198.1 194.1 393.4 166.1 Total Current Assets 756.9 799.7 824.1 824.7 Creditors 361.2 35.6 379.5 44.9 Provisions 99.3 34.1 83.5 89.1 Total Current Liabilities 46.5 384.7 463. 494. Net Current Assets 296.4 415. 361.2 33.7 Others Assets.6.6.6.6 Application of Funds 3,258.7 3,346.1 3,357.9 3,389.4 Key ratios (Year-end March) FY15 FY16 FY17E FY18E Per share data ( ) EPS 1.1 2.2 2. 2.3 Cash EPS 4. 5.1 4.9 5.3 BV 45.7 46.2 47.2 48.4 DPS 1.1. 1.1 1.1 Cash Per Share 3.5 3.4 6.9 2.9 Operating Ratios (%) EBITDA Margin 19.8 21.6 2. 2.2 PBT / Total Operating income 3.8 6.9 6.8 7.4 PAT Margin 3.8 6.9 6.8 7.4 Inventory days 1.8 1.3 9.5 9.5 Debtor days 48.8 44.4 46. 46. Creditor days 79. 71.6 81. 81. Return Ratios (%) RoE 2.4 4.7 4.3 4.8 RoCE 5.3 6.9 5.6 6.3 RoIC 5.9 7.6 6.7 6.9 Valuation Ratios (x) P/E 97.8 5.1 53.2 46. EV / EBITDA 19.2 16.6 17.9 17.1 EV / Net Sales 3.8 3.6 3.6 3.5 Market Cap / Sales 3.7 3.5 3.6 3.4 Price to Book Value 2.4 2.3 2.3 2.2 Solvency Ratios Debt/EBITDA 1.1 1.1 1..8 Debt / Equity.1.2.1.1 Current Ratio 1.6 2.1 1.8 1.7 Quick Ratio 1.2 1.6.9 1.3 ICICI Securities Ltd Retail Equity Research Page 7
ICICIdirect.com coverage universe (Hotels) CMP M Cap EPS P/E (X) EV/EBITDA ROCE (%) RoE (%) Sector/Company ( ) TP( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E Indian Hotel (INDHOT) 115 125 BUY 8963 -.7.9 1.1. 13. 18.7 24. 19.5 16.9 3.8 5.6 6.8-1.9 2.7 3.2 EIH (EIH) 19 1 HOLD 6287 2.2 2. 2.3 5.5 53.7 46.4 16.7 18.8 17.2 6.9 6.1 6.2 4.7 4.7 4.8 TajGVK Hotels (TAJGVK) 92 11 BUY 581.6 1.5 2.9 162.3 61.9 32.1 14.2 13.2 11.1 6.5 6.5 8.1 1. 2.7 4.9 ICICI Securities Ltd Retail Equity Research Page 8
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 pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 9
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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