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Midcap Mania: Is it right time to check into EIH Associated Hotels Ltd?

Updated : December 03, 2018 05:46 PM IST

Last month, Motilal Oswal Securities, said the Indian hospitality industry is set to enter into an upcycle, led by favourable demand-supply dynamics, and expects average industry occupancy levels to hit the near 2004-2008 highs.

 

Domestic brokerage said the historical data suggests that once occupancies reach optimum levels, hotel companies usually see themselves as having passed a crucial threshold level to begin pursuing a rate-based strategy to boost yields.

Further, fundamentals of the Indian hospitality industry are turning favorable, with demand growth (10-12 percent) likely to outpace supply growth (5 percent over FY18-23).

The robust level of new inventory (room supply growth of 10.6 percent against room demand growth of 10.2 percent over FY08-18) was keeping hotel room rates in check (Industry average room rates (ARR) declined at a compounded annual rate of 3 percent over FY08-18).

In this backdrop, the company on Midcap Mania today is EIH Associated Hotels Limited, an associate company of EIH Limited, which is the flagship company of The Oberoi Group.

The company runs The Oberoi Cecil, Shimla; The Oberoi Rajvilas, Jaipur; Trident, Agra; Trident, Bhubaneshwar;  Trident, Chennai; Trident, Jaipur; Trident, Udaipur and Trident, Cochin.

EIH Associated Hotels’ financials have not been very impressive in the recent past as the topline has grown at a mere 4.5 percent in past five years, but margins have held at around 26 percent to 30 percent odd mark.

However, the company is absolutely debt free and its interest costs has reduced from Rs 22 crore to zilch in the past five years. A zero debt hotel company is always a boon, given the huge entry barrier in setting up new a hotel that includes massive land and construction cost.

Moreover, EIH Associated Hotels’ return on capital employed (ROCE) stood at 18.5 percent and operating cash flow yield of 6.8 percent is very impressive for any company as there is no debt in books.

The company has consistently been paying 30 percent plus of profits as dividends in the past few years and given that the promoters hold 75 percent, expect them to maintain a relatively high dividend payout ratio.

The other large shareholders include National Westminster Bank Plc (Trustee of the Jupiter India), Jupiter South Asia Investment and marquee investors like Hemendra Mathradas Kothari, Usha Kamal Kabra  and Kamal Kabra. As of annual report 2018, Radhakishan Damani also holds 0.83 percent.

A key risk to the hotel industry on the whole remains new platforms like AirBnB, which can impact conventional hotel industry.
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