Indian Hotel Industry - A jab on recovery
Past recessions warranted examining every data point to determine the pace of economic recovery. This time the effectiveness of the vaccine roll-out is more important than the data on near term industrial production. A successful rollout will bring the much-affected service sector back in focus. It has still not recovered to anywhere near past levels.
Hotels have been one of the most severely affected sectors because of the pandemic. Marred by heavy fixed, labour intensive operations, prone to high physical interaction and inertia towards bringing the operating cost down has wiped away the free cash flow (FCF) generated in the last few years. We have structured this report around answering scenario on things that could go wrong and see if there is hope.
1. WHAT IF…The demand dynamics have changed permanently
a. what was the nature of pre-Covid demand?
b. what is the recovery playbook seen in other markets?
c. what is the air-traffic data suggesting?
d. can the digital adoption be reversed?
2. WHAT IF…Demand falls below supply growth
3. WHAT IF…Big Average Room Rate (ARR) growth doesn’t materialize at all
4. WHAT IF…Interest rate cycle reverses by the time normalcy return
Thus far the recovery playbook is led by domestic leisure and marriages.
Drive-to destinations globally have shown marked recovery, at times at higher ARRs (seen in Airbnb’s data on page 5). As per our channel check and commentary from various stakeholders the overall operating performance of hotels can take 18-24 months to recover to pre-Covid levels. Hence, we are preferring companies with lower financial leverage and with better access to capital. We are initiating coverage on East India Hotels (EIH) and Indian Hotels Company Ltd (IHCL) with a BUY rating. Key risks to our assumptions are yet another nationwide lockdown and delay in vaccine roll out.
Company wise investment synopsis
East India Hotels (EIH): We like EIH for its Mumbai-Delhi exposure, considering it draws over 50% of its revenue from these two markets. We believe Mumbai-Delhi should be the earliest participant to business travel recovery. Further, high employee-per-room ratio and high head office costs make EIH ripe candidate to utilize the current opportunity to bring down the operating cost down, given the inertia shown by the industry in the past. EIH’s history of maintaining low-financial leverage and high dividend payout ratio is a rarity in the hotels space, although it has been rather slow on room inventory expansion, as compared to the peer set
Indian Hotels Company Ltd (IHCL): We like IHCL for its delivery on measurable goals (especially since 2017). Pre-Covid it was on track to achieve the 800bps margin expansion. Secondly, it has been aggressively expanding on management contract model to regain its numero-uno status in India (conceded to Marriott after Starwood merger). Thirdly, it has been able to resolve a few overhanging issues like acquisition of Sea Rock, regaining lease of Taj Mansingh and restructuring overseas holding. IHCL is also likely to receive a margin boost on the pre-Covid revenue level from the cut backs effected during the lockdown
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