Buy EIH; target of Rs 110: Citigroup

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Buy EIH; target of Rs 110: Citigroup

Citigroup Research is bullish on EIH and has recommended buy rating to the stock with target price of Rs 110.

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Citigroup Research is bullish on EIH and has recommended buy rating to the stock with target price of Rs 110.

Citigroup Research report on EIH:

Strong results:

EIH standalone 4QFY07 ahead of estimates, largely due to strong revenue growth and higher EBITDA; earnings grew 52% YoY in-line; but for swap loss of Rs 147 million (adjusted in other income) growth would be higher. With swap loss to reduce significantly ahead, we expect earnings to pick up.

Solid margin expansion:

EBITDA grew 500bps to 40.5% (vs. our 38.4%) on ARR growth of ~32% YoY and higher occupancies in the quarter. Improved performance of Villa properties (~10% of revenues) also contributed to this, but except for some impact due to rupee appreciation, which is expected to continue in the current year, growth would be stronger.

New developments

1) EIH announced a dividend of Rs 1.4 per share for FY07, 2) set to launch a 25-suite luxury cruise (Zahra) on the Nile in Egypt, 3) 440-key Trident Hilton at Bandra-Kurla, Mumbai is progressing satisfactorily and 4) EIH still to crystallize on plans to raise ~Rs 4 billion in equity, announced in Mar'07.

Capex in pipeline

1) Six new hotels in India; 2) hotels in Dubai, Maldives and Cambodia; and 3) a luxury train through a JV with Indian Railways and the government of Rajasthan; given long gestation period of 2-3 years for setting-up new hotels, most of the growth should kick in after 2009.

Investment thesis

We rate EIH Buy/Low Risk with target price Rs 110 based on 20x FY08E EPS, at a premium to sector valuations of 16.5x. EIH's hotels are concentrated in Delhi, Mumbai and Bangalore markets, with strong ARR and occupancy growth. Focus on enhancing service incomes from management contracts and air catering should drive growth and profitability. With sustained high growth in ARRs, we forecast earnings CAGR of 25% for FY08E. The stock trades at 18x FY08E P/E, at marginal premium to sector. With growth fundamentals intact and recurring extraordinary incomes from some unlocking of rich real estate assets, an incremental earnings driver; we believe the stock deserves to trade at higher valuations.

Valuation

Our target price of Rs 110 is based on 20x FY08E PE. This places the stock at a premium to sector valuations of 16.5x, but discount to Indian Hotels (22x), offering larger scale and stronger business model. The premium is attributed to the following: 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. The stock trades at 18x FY08E EPS (at the lower end of its 2-year historical trading range, 16-25x). With growth momentum intact, likely extraordinary gains from unlocking of real estate assets to result in healthy payouts, we believe the stock deserves to trade towards at least the mean of its historical trading range.