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Travel and Tourism to cater growth in hotel business
Indian Hotels Company Limited (IHCL) is an Indian hospitality company that manages a portfolio of hotels, resorts, jungle safaris, palaces, spas and in-flight catering services. It is a subsidiary of the Tata Group conglomerate, which was incorporated in 1899 by Jamsetji Tata, and is headquartered in Mumbai. With 157 hotels at 82 locations in India and presence in 4 continents across globe - all totaling to 18,020 rooms, IHCL is South Asia’s largest hospitality company with a legacy of 115 years. Brands such as Taj, seleQtions, Vivanta, Ginger, Expressions and TajSATS together constitutes a market share of 25% in India, thereby making IHCL the hospitality leader. The revenue from accommodation business accounts for 41.5% of total revenue while from catering business accounts for 40%. Focus on assets light model and cost optimization are expected to improve margin, additionally the company, being the industry leader, is likely to get benefit from favorable industry scenario and latest reduction in tax cut. We assign a ‘Buy’ rating on the stock with a potential price of Rs. 166.
Strong prospects of global tourism
There are visible signals of improvement in the travel and tourism industry across most markets. According to the data collated by United Nations' World Tourism Organization (UNWTO), global international tourist arrivals have grown by 5.9% for year FY19 as compared to FY18. This trend is likely to continue going forward as a 3x increase in number of international tourist arrivals is expected in India till FY22. Rapidly growing number of visas in India, higher air travel and traction in e-commerce indicate an improving consumption trend that will drive growth of the domestic travel and tourism industry. All these factors will augur well for hospitality companies.
IHCL market leader in hotel industry
Brands of IHCL constitutes a market share of 25% in India due to high quality of service. Even after charging high average room rates at Rs. 8,860 per room as compared to average industry room rates of Rs. 5,790, the occupancy rate was 68% in FY19 as compared to average industry occupancy of 66% which indicates strong pricing power and robust consumption growth.
Implementation of strategies for innovation and growth
Rapid urbanization is increasingly making Tier 3 markets more relevant for hotel brands, with nearly a third of their new hotel signings emerging from these cities. Hotel booking apps are being used increasingly by consumers since they are easy to handle and provide users with the most suitable options based on their requirements. Revenue, EBITDA and PAT of IHCL are expected to grow at CAGR of 6.2%, 15.5%, 21.0% respectively in the period FY19-FY22E on the back of healthy growth in room keys and cost optimization initiatives.
Asset light business model and management’s optimism
IHCL has entered into an agreement with GIC Singapore for acquisition of properties and running business on ‘Asset light model’ in the next three years starting from FY19. The SPV is formed as an investment platform for a value of Rs. 40,000 mn or USD 600 mn with IHCL’s equity stake being 30% and remaining 70% of GIC, and with whole management of properties lying in hands of IHCL. In accordance with management’s Aspiration 2022 plan, IHCL plans to acquire 40- 45 hotels in top 10 cities of India in the next three years and with this view, management asserted that 60% of the properties will not be owned by IHCL by FY22. Due to this initiative of running business on asset light model, the cash savings will be used to repay debts and focus will be on core business instead of blocking funds in properties. Most of the Capex is expected to be supported by cash flows generated from non core asset sale (residential apartments).
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