Hold EIH; target Rs 115: Citigroup

Citigroup has maintained hold rating on EIH with target price of Rs 115. The stock is trading at a 19% premium to sector valuation.

Citigroup report on EIH:

Strong results, better than expectations

Stand-alone 1QFY08 revenues increased 15% YoY to Rs 2155 million while net profit (before extraordinary items) grew 82% to Rs 367 million largely on account of a sharp increase in other income, due to lower swap loss of Rs 9.7 million (adjusted in other income) vs. Rs 72.4 million in 1QFY07.

EBITDA grew 14%

Margins, however, reduced 100bps YoY to 31%, with stand-alone ARR growth being 12% and occupancies at 67% in the quarter, due to off season for its leisure properties; this should improve in the 2HFY08E.

Earnings growth front loaded

We estimate consolidated earnings growth of 33% based on 13% growth in ARR and occupancy of 69% in FY08E. ARR and occupancy will, however, be adversely affected in FY09E and FY10E given potential supply - therefore we estimate a modest 15% earnings CAGR for FY07- FY10E.

Capex in pipeline

1) Six new hotels in India; 2) hotels in Dubai, Maldives and Cambodia; 3) a luxury train through a JV with Indian Railways and the Govt. of Rajasthan; and 4) a luxury Nile Cruiser in Egypt. However, given long gestation period of 2-3 years for new hotels, we believe most of the growth will kick in after FY10E.

Maintain Hold (2L)

With the stock trading at a 19% premium to sector valuation, we believe most of the strong growth expected in FY08E is priced in. We maintain a Hold (2L) rating for the stock.

Investment thesis

We rate EIH a Hold/Low Risk (2L) with a target price of Rs 115 based on 19x Sept'08E P/E, at a premium to sector valuations of 16x. Although the growth outlook for the company appears strong in FY08E, with the stock's 13% run-up over the past four-months and valuation at 17.5x Sept'08E P/E - a 10% premium to sector valuations - upside appears limited. While we forecast strong 33% growth in FY08E, with potential supply likely to adversely impact ARRs and occupancy growth in FY09-10E, we expect earnings CAGR to moderate to 15% over FY07-10E. Although the company has aggressive capex plans, most of the growth from new properties should kick in post FY10E. We believe most of the growth potential is priced in, however likely extraordinary gains from potential unlocking of some real estate assets, remains a silver lining.

Valuation

Our target price of Rs115 is based on 19x FY08E P/E. Our 19x target multiple factors in the risk of increased supply of rooms coming in starting 2008-09, which would slow ARR growth and dampen occupancy rate. This still places the stock at a premium to sector valuations of 16x Sept'08E P/E, but at a discount to Indian Hotels (21x), offering scale and a stronger business model. The premium to the sector is attributed to: 1) Premium positioning with ‘The Oberoi' brand in the luxury hotel segment; and 2) It is the second largest hotel chain in India. We use P/E as our primary valuation tool, as this captures the rapid earnings growth potential. With the stock trading at 17.5x Sept'08E P/E at a 10% premium to sector valuations of 16x, most of the growth appears priced in, but with growth intact for FY08E and likely extraordinary gains from unlocking of real estate assets, we see moderate upside potential.