Published on 1/07/2020 10:23:52 AM | Source: Motilal Oswal Financial Services Ltd

Buy Indian Hotels Ltd For Target Rs.111 - Motilal Oswal

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Cost initiatives to support operating performance

In-line operating performance

* COVID-19 severely impacted occupancies at IHIN’s hotels in March, consequently affecting overall operating performance for the quarter.

* IHIN has been steadily walking the talk to achieve its Aspiration 2022 goal; however, with the COVID-19 crisis having had a first-hand impact on the Hospitality industry, IHIN has redefined its goals, aligning them with the current times, and framed a new strategy: ‘RESET 2020’.

* We maintain our Buy rating on the stock, with an SOTP-based TP of INR111.


COVID-19 crisis severely impacts performance

* Consolidated revenue declined 15% YoY to INR10.6b (est.: INR10.2b), with L2L (adj. for Ind-AS impact) EBITDA de-growing 42% YoY to INR1.6b. However, adj. PAT de-grew 57% YoY (to INR442m v/s est. of INR311m) on higher interest cost and depreciation, offset by a lower tax rate.

* For FY20, consolidated revenue de-grew 1%, whereas EBITDA and PAT grew 17% and 15% YoY, respectively.

* Standalone revenue de-grew 15% YoY to INR7.2b, with L2L EBITDA declining 35% YoY to INR1.9b. Occupancies for the quarter declined 11.4pp (to 61.9%), with ARR remaining flat YoY (at INR12,687); this led to RevPAR de-growth of 15% YoY (to INR7,853). COVID-19 impacted RevPAR for the quarter as RevPAR for Jan/Feb’20 was flat, whereas it plummeted 52% in March (primarily on account of 35pp decline in occupancies to 32%).

* For FY20, standalone occupancies declined 110bp YoY (to 66.7%), with ARR declining 2.4% YoY (to INR10,734). This led to RevPAR decline of 4% YoY (to INR7,159).

* Subsidiary sales (consolidated less standalone) de-grew 14% YoY (to INR3.4b), and L2L EBITDA loss stood at INR279m v/s INR102m last year.


Highlights from management commentary

* The company plans to incur capex for completion of: a) the hotel at Connaught Place, New Delhi, b) renovation at the Taj Mansingh hotel, and c) a micro-brewery pub in Bangalore; excluding the said projects, no major capex is planned currently.

* In FY20, IHIN generated cash of INR2.1b via: a) monetization of land in Pune (INR630m), b) the sale of 24 residential apartments (INR1,050m), and c) sold shares of Taj Madras Flight Kitchen (INR298m).

* Consolidated gross debt as of FY20 stood at INR26b v/s INR23b last year; net debt remained flat YoY at INR1.9b.

* The domestic customer mix varies with each brand: a) Ginger: 99%, b) Vivanta: 80–85%, c) Taj: 75%, and d) Palaces: 50%.

* Fixed cost per month has been reduced by INR350–400m. Overall cost in the domestic business has been reduced by ~40%, whereas on the international front, cost reduction is at 65%.


Valuation and view

* The Hotel industry has been the first to witness the COVID-19 impact, and would be the last to recover from it; demand recovery would happen in a phased manner.

* Near-term demand would remain under pressure as passenger movement in airways and railways would be partially restricted or people would avoid traveling. Business travel would only happen in the utmost necessary situations, and MICE/exhibition demand would not exist as large gatherings would be restricted. All of this would adversely impact demand for the Hotel industry in the near term.

* To ride out such times, the management has laid down a new strategy called ‘RESET 2020’ (R: Revenue Growth Initiatives, E: Excellence Initiatives, S: Spend Optimization Initiatives, E: Effective Asset Management, T: Thrift & Financial Prudence). The goals of the strategy would be quantified by the management in the next couple of months, but it did mention the goals of the new strategy would be higher than the earlier ‘Aspiration 2022’ goal.

* While FY21 earnings would remain weak, we expect sharp recovery in FY22 on: a) a low base, b) improvement in ARRs once things normalize, c) improved occupancies, d) positivity in cost rationalization efforts in FY21, e) an increase in F&B income as banqueting/conferences resume, and f) Higher income from management contract.

* Factoring near-term weakness in demand, we have significantly cut our estimates for FY21, but largely maintained estimates for FY22. We maintain our Buy rating on the stock, with an SOTP-based TP of INR111.


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