Royal Orchid Hotels Ltd. (Orchid) operates a chain of business hotels in India. It has a mix of businesses all concentrated in hospitality industry. It owns hotels assets, has interest in associate companies driven by branding, and contract management of third party hotels. It has 24 associated subsidiaries within the corporate structure.
Orchid had been on my list for further evaluation for quite sometime, but I never felt excited about the company. Recently, one of my readers (Sumi) left a comment requesting my views on this company, more so because it seems to be paying impressive dividends. My objective in this analysis to see if Orchid is a good fit for my portfolio (and hopefully it will also take care of my reader’s request).
The whole reason for any business to exist is to generate sales revenue and make more profits. At a minimum, the parameters listed below should have continuously increasing trends. All the data below is based on last 8 years i.e. from 2000 to 2008.
- Revenue: Increasing trend with average growth of 64% (SDev. 52%). Very high volatility. Not a good observation.
- Earnings per share: It begins with negative to increase by 2005. After than it is more of less flat. EPS has grown with average of 100% (SDev. 245%). This means it has had negative earnings in recent past. Graph shows the decrease in earnings. Not a good observation.
- Net cash flow from operations: I could not find cash flow information prior to 2005. The cash flow drops in 2008. Not a good observation.
- Profit/Loss from operations: Increasing trend, with sudden jump in 2005. I like to see gradually increasing trends (no jumping around). Not a good observation.
- Reported net profit: After a sudden jump in 2005, increasing trend. Neutral observation.
- Gross margins: Consistent and stable. With erratic EPS how are they maintaining gross margins? Neutral observation.
- Operating margins: Stable operating margins. With erratic EPS, how is the company able to maintain operating margins? Neutral observation.
Quality of Dividends
In this part of my analysis, I am trying to understand dividend growth rate, consistency, and ability of the corporation to demonstrate sustainability. In is also an indirect way to gauging management’s policy vis-à-vis sharing the profits with common shareholders.
- Dividend per share: Chart 3 shows dividend is more or less flat. Not a good observation.
- Payout factor: This is ratio of dividends per share divided by EPS. This has been consistently 50% or more. Not a good observation.
- Dividend growth rate: Non existent. No sufficient dividend history. Not a good observation.
- Ratio of cash from operations to reported net profit: Trending below 1.0. Where is the profit coming form, when its cash flow from operations is less? Not a good observation.
- Ratio of profits from operations to reported net profit: Trend downwards but still more than one. But I cannot explain this with other data points like less operational cash flow, less EPS, and no significant change in profitability. Not a good observation.
- Ratio of Cash from operations to total debt: This ratio is near one but not consistent or long enough to make any conclusion. Good observation.
Projected Beta-based Expected Return
I measured Beta of Orchid’s stock risk (or price movement) relative to the S&P CNX NIFTY (or index movement). Here, I am trying to understand how a stock price behaves relative to the market and how to factor in the capital appreciation into my expected returns.
- The stocks three year Beta value is (0.03) i.e negative. This means Orchid stock is very less volatile w.r.t. S&P CNX NIFTY index.
- The expected return is 6.7% relative to market index.
After going through this analysis so far, I do not believe Orchid can fit into my portfolio.
- It seems that the company raised its equity base in 2004/2005 time period. This has given it a bump in revenue and profits (?). I did not confirm more details on this aspect because it was not worth the time and effort.
- The promoters have 69.43% holdings (of which approx. 1% increase came in Jan/March 2009). Seems like promoter’s took advantage of bear market pricing. Its dividend payout is factor is 50% or more. In a nutshell, majority portion of the yearly earnings per share is going back to the promoter’s kitty. It appears that the raising of equity allowed it to increase its asset base, revenue, and earnings. I could not understand how will the company grow? I could not understand how my dividends will grow.
- For the last three years, the cash flow from operations is consistently less than net profits. Now if there is no cash flow from business operations, where are profits coming from?
- Indian economy boomed from 2005 to 2008. However, Orchids earning per share did not grow (although revenue is growing). Intriguing!
This is another example where, the dividend rupees and dividend yield appeared very attractive. But there are lots of gaps to make this dividend on firm footing. As I have said on many occasions on this blog, dividend investing is not about current yield. It is about what future yield you can get.
Suffice to say, I cannot understand Orchid properly. I am not convinced that management considers common shareholders as important part of company ownership. I will not buy common shares of Royal Orchid Hotels Ltd. It does not meet my investing objectives.
Disclaimer: This analysis is in the context of my long term investment philosophy. It is in line with my investment objectives and my personal risk profile. Please do your own research before making an investment decisions for Royal Orchid Hotels Ltd.
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