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Focusing on management contracts…

…and new/reimagined brands bodes well for return ratios

IH hosted its investors meet, where it articulated its strategy to capitalize on business recovery, focus on new brands and businesses, pursue asset light growth, sustain spend optimization, strengthen the Balance Sheet, and focus on RoCE. Key highlights from the meet are:

To stay asset light through management contract room additions

* In FY18, management contract Hotels formed 32% of the overall portfolio, which has now increased to 46% (including Hotels in the pipeline). IH targets to take it to 50% going forward. About 78% of current pipeline Hotels are under management contracts.

* As per ‘Aspiration CY22’ announced in CY18, it looked to sign 15 Hotels under management contract annually. However, it added 22/29/17 Hotels in FY19/FY20/FY21.

* IH recorded the highest number of new Hotel signings and openings in the industry during CY20, with 17 signings and seven new Hotel openings.

* It generated a revenue of INR2.2b from management contracts, which it intends to take to INR3.5b.

* It is to be noted that EBITDA flow through in management contract income is 70-80% and that too without deploying capital, thus the said initiative is RoCE accretive.

Unlock the potential from reimagined and new brands

* IH reimagined Ginger, which ensured: i) revenue at 63% of pre-COVID levels, ii) doubling of F&B revenue, iii) positive EBITDA in FY21, and iv) 78 hotels at present (targets to take it to 100), with 36% Lean Luxe Hotels.

* The Chambers — Taj’s exclusive business club — was relaunched with enhanced features. It has over 2,200 members currently, and IH intends to increase the same to over 4,000. Currently, seven Chambers are operational, with two in the pipeline. It has the potential to become an INR1.5b business, which is also margin accretive.

* IH launched Qmin – a food delivery app. It has witnessed over 0.3m/0.1m app downloads/orders since its launch (now in 15 cities, targets over 25 cities). IH charges 22% fees on the gross merchandise value in case of sales made through management contract Hotels. The GMV potential of the Qmin brand is INR5b, with an EBITDA follow through of 50%.

* amã Stays & Trails is India’s first branded homestay. It currently has a portfolio of 44 bungalows, which can be scaled up to 500. IH doesn’t own the properties. It simply manages the same through Hotels located in the vicinity, thereby ensuring asset light growth (18% management fees are charged, of which 3% are reimbursement

* Apart from the above, several initiatives have been taken by IH in TajSATS and 7Rivers.

* All of the above measures have one thing in common, incremental revenue with higher EBITDA flow though can be generated without deploying capital.

Cost savings are here to stay

* Total operating cost fell 45% to INR19.2b and fixed cost per month declined by 28% to INR1.2b in FY21 on the back of manpower optimization and reduction in corporate overheads. Staff/room ratio has reduced substantially for IH across brands via: i) redeploying 206 associates, and ii) reimagining ways of working, which includes multi-skilling, a cluster approach, and shared services. Corporate overheads have reduced 39% YoY to INR2.1b in FY21 on: i) redeployments and restructuring, ii) prudence in resource allocation, and iii) synergies. IH doesn’t expect corporate overheads to increase over INR2.5b.

* IH has undertaken cost rationalization initiatives at The Pierre through: i) manpower rationalization, ii) lease renegotiation, and iii) surrender of the leased ballroom.

To be selective on capex, focus is on improving RoCE

* Majority of room additions will be through the management contract route only as IH intends to be selective in terms of owned room additions. It is constructing a 371-room Ginger Hotel in Santa Cruz at a cost of INR2b. It already owns the land, and so went ahead with the construction of the hotel. It will incur a capex of GBP7m in St. James Court, London towards chambers and a new coffee shop, and USD6m in The Pierre, New York towards renovation of the ballroom.

* Of the total capital employed of INR96b, 50% pertains to domestic Hotel assets, which generate 15% RoCE (on FY20). Around 28% of the consolidated capital employed is deployed towards international Hotels. Including the same, RoCE generated by the Hotel assets is 9%.

* IH does not intend to deploy capital towards building the Sea Rock Hotel. It rather intends to bring in a financial partner. The management said it would not increase debt for inorganic acquisitions.

Valuation and view

* IH started on its journey of re-imagination in CY18. It launched Aspiration CY22 and delivered onto the same. However, COVID-19 impacted the Hotel industry.

* To ride out the COVID-19 outbreak, the management has laid down a new strategy 'RESET 2020' (R: Revenue growth initiatives, E: Excellence initiatives, S: Spend optimization initiatives, E: Effective asset management, T: Thrift and financial prudence).

* Through the RESET strategy in FY21, IH ensured: i) incremental revenue growth of INR2.6b, ii) spends optimization of INR4.2b, iii) effective asset management (sale of residential apartments and lease cost savings) of INR700m, and iv) financial prudence in corporate expenditure of INR1.4b.

* While FY21 earnings are weak, we expect a sharp recovery in FY22E/FY23E 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 contracts.

* The company is in the right direction in growing its EBITDA as new revenue generating avenues are having a higher EBITDA margin, and this is done without deploying capital or with very minimal capital, which bodes well for RoCE.

* We value the stock at 19x Jun’23E EV/EBITDA and arrive at a SoTP-based TP of INR180. We maintain our Buy rating.

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