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In fine fettle

Indian Hotels Co. Ltd.’s (IHCL) FY22 Annual Report reiterates the company’s plans to execute its “AHVAAN 2025” strategy which essentially focuses on four key pillars including: 1) reaching a total of 300+ hotels across the portfolio, 2) clocking a consolidated EBITDA margin of 33% by FY26E with 35% EBITDA share from management contracts and new businesses, 3) achieving a 50:50 ratio between owned/leased and management contract room keys and 4) retaining a net cash balance sheet while pursuing its growth plans. The AHVAAN strategy is an extension of company’s earlier “Aspiration 2022” strategy which focused on asset light expansion and improvement in margins. We believe that the growth and margin targets set by the company management are realistic and we estimate FY23E consolidated revenue to grow 54% YoY to Rs46.2bn (104% of FY20 levels) and FY24E revenue to grow 18% YoY to Rs54.5bn at an EBITDA margin of 32%. We reiterate our BUY rating with a revised SoTP-based target price of Rs284/share (earlier Rs292), valuing the stock on 22x Jun’24E EV/EBITDA. Key risks to our rating are fresh Covid waves impacting demand and rise in costs denting margins.

* Focus remains on asset light growth through management contracts: The company reiterates its commitment to 18 new hotel openings in FY23E and maintaining a similar annual run-rate to get to a 300 hotel portfolio over FY23-26E (235 hotels including pipeline as of Mar’22) including 100 Taj hotels, 75 SeleQtions/Vivanta hotels, 125 Ginger hotels and 500+ Ama stays and trails hotels. The asset light management contract route will continue to be preferred with ~74% of incremental key additions.

* Revenue growth and margin expansion to go hand in hand: The company expects revenues from management contracts and new brands (Ginger/Qmin/ama and Chambers) to rise to 25% of consolidated revenue by FY26E vs. 10% in FY19-20 (preCovid) with EBITDA contribution of these segments expected to contribute 35% of consolidated EBITDA vs. 22% pre-Covid. As the EBITDA margin flowthrough from management contract/new brands will be in excess of 60%, the management is targeting EBITDA margins of 33% by FY26E with cost savings (reduction of corporate overheads to 5% of revenue in FY26E from 8% in FY20), focus on optimal staff-to-room ratio and rationalisation of hotel level expenses to drive EBITDA margin expansion.

* Revenue/margin guidance is realistic and achievable in our view: Apr/May’22 revenue for IHCL is 10% higher than pre-Covid levels and with sustained pickup in business travel along with leisure, we expect FY23E revenue and FY24E revenue at 104% and 122% of pre-Covid (FY20) levels, respectively. The company had achieved Q3FY22 consolidated EBITDA margin of 29% and we build-in an EBITDA margin of 32% in FY24E vs. company guidance of 33% by FY26E factoring in inflation impact.

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