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Firm b/s to help weather medium term challenges…

EIH’s operational performance in Q4FY21 was impacted by impairments and rise in other costs despite improvement in revenues. This led the company to report a net loss of | 68.1 crore vs. loss of | 41.5 crore in Q3FY21. Pickup in leisure segment in January-February led to 20.5% QoQ growth in revenue to | 187.9 crore (vs. I-direct estimate of | 149 crore).

However, it was down 46.5% YoY as foreign tourist arrivals continued to be affected by Covid induced restricted travel. There was a sharp rise in other expenditure (up 26.8% QoQ to | 107.2 crore) due to spillover of some expenses related to previous quarter and some statutory dues. However, lower employee costs restricted total increase in expenses to 17.1% (lower than topline growth). This helped restrict EBITDA losses to | 26.7 crore vs.

EBITDA loss of | 27.3 crore in Q3FY21 and | 42.9 crore in Q2FY21. Net loss was higher at | 68.1 crore (vs. net loss of | 41.5 crore in Q3FY21) as it included impairment loss of | 28.7 crore pertaining to non-current investments. Total debt on the books reduced by | 144 crore to | 277 crore with the help of fund raising of | 349.7 crore through rights issue in October 2020.

Benefit of efficiency measures to be visible from FY23E onwards

With the vaccination drive launched by many developed countries including India, we expect FY22E to be the year of strong recovery after severe challenges faced by hotel companies in FY21 due to Covid. To cope up with this, the company has initiated major steps to bring down costs and come out stronger and more efficient. During the quarter, EIH managed to reduce fixed overhead by 22%, major being salary and admin related. With over 20% of total cost reduction done during FY21 being sustainable, we expect over 5-6% reduction in total costs on a sustainable basis. Hence, in our view, while FY22E would see cost led margin expansion, it would accelerate further with traction in room rates post FY22E.

Strong balance sheet to help weather medium-term challenges

The second wave of the pandemic has again started impacting domestic demand, which poses a near-term challenge. As the company derives majority of revenues from the domestic market with Mumbai and Delhi being the key revenue contributor, we expect a recovery to further get delayed due to the ongoing second wave of pandemic. However, EIH, despite this challenge, is relatively insulated from the risk of medium term slowdown owing to better liquidity and comfortable debt position.

Valuation & Outlook

With a strong balance sheet and strategic property locations across key destinations, the company is best positioned to ride the long-term growth story. At the CMP of | 92, the stock trading at adjusted EV/room of | 1.8/room (i.e. at 51% of its fair value). Hence, we maintain our BUY rating with an unchanged target price of | 125 (@ 23.5x FY23E EV/EBITDA).

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