Focus on efficiency to yield returns in long run…
EIH Ltd reported a weak set of Q1FY21 numbers as business remained almost shut on account of lockdown. Revenues for the quarter fell ~90.2% YoY to | 28.5 crore. The business was restricted to stranded guests and accommodation requirements of guest rendering essential services during the quarter. The company managed to curtail operating expenditure by over 57% YoY to | 154 crore. The major reduction was in other expenses that were down 51% YoY to | 61 crore. This helped restrict EBITDA losses to | 125 crore for the quarter. After adjusting for tax expenses, net loss came in at | 118.2 crore for the quarter.
Efforts to be more efficient to get visible from FY22E onwards
FY21 has brought in new challenges to operate in the pandemic environment. In the first full quarter of lockdown, most of EIH’s properties remained closed. Also, currently it is doing business of only 15-18% of its normal run rate. While there is uncertainty on the recovery, which is solely dependent on the launch of vaccine, the company has initiated major steps to bring down costs and come out stronger and more efficient once normalcy resumes. During the quarter, the company managed to reduce fixed overhead by 20%, major being salary and resorted to process efficiency like back-office automation, using AI, paperless processing, focus on solar panel to bring down power costs, etc, expertise driven services in finance and data management. While over 50% of fixed cost reduction done during the quarter is sustainable, we expect over 7-8% reduction in total costs. Hence, in our view, while FY22 would see cost led margin expansion, it would accelerate further led by traction in room rates post FY22E.
Strong B/S to help weather Covid storm in medium-term
While operational losses were | 121 crore for the quarter, net CF from operating activities were down only | 26.5 crore, led by effective working capital (WC) management, which was financed by debt of | 32 crore. On the liquidity front, current debt on books is at | 620 crore with comfortable D/E of 0.16x. Further, EIH has access to sanctioned borrowing facilities for WC requirements worth | 550 crore of which | 335 crore was unutilised as on June 30, 2020, which makes it comfortably placed in terms of liquidity.
Valuation & Outlook
The current pandemic environment has thrown up severe challenges to the entire hotel industry. However, we believe strong players would emerge even stronger out of this crisis once normalcy resumes. EIH, with its strong B/S and strategic property locations across key destinations is among them. At the CMP of | 79, the stock offers healthy upside potential and is currently trading at a significant discount (i.e. at ~50% of replacement value). Hence, we upgrade the stock to BUY with a revised target price of | 95/share (i.e. @ 19x FY22E EV/EBITDA).
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