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Resilient demand and cost efficiencies drive earnings

Operating performance better than our estimates

* IH’s consolidated revenue/EBIDTA in 1QFY23 surpassed its pre-COVID levels (1QFY20) by 24%/2.2x, on strong recovery in domestic occupancy/ARR (up 340bp/32%).

* Occupancy (like-for-like) in the Business/Leisure segment has surpassed 1QFY20 levels by 10pp/9pp to 76%/63% in 1QFY23, while the same for Palaces/Ginger is lower by 2pp/7pp to 34%/58%.

* Factoring in a better than expected performance in 1QFY23 from standalone and key subsidiaries such as PIEM and Roots, on the back of higher ARR and occupancy, we raise our FY23/FY24 EBITDA estimate by 22%/11%. We maintain our Buy rating with a SoTP-based TP of INR320 per share

Occupancy and ARR crosses pre-COVID levels, augurs well for operating performance

* Consolidated revenue surged 3.7x YoY and 45% QoQ to INR12.7b (est. INR11.7b) in 1QFY23. EBITDA stood at INR3.8b (est. INR3.2b) v/s an operating loss of INR1.5b in 1QFY22.. Adjusted PAT stood at INR1.8b (est. INR1.1b) v/s a loss of INR2.9b in 1QFY22. IH witnessed an EBIDTA flow through of 83% from 1QFY20 levels.

*  Standalone revenue/EBIDTA in 1QFY23 surpassed pre-COVID levels by 33%/2.4x to INR7.6b in 1QFY23 (up 3.7x YoY, 28% QoQ), led by a strong recovery in both Occupancy/ARR (up 7pp/25% v/s 1QFY20). EBITDA grew 59% QoQ to INR2.6b v/s an operating loss of INR965m in 1QFY22. IH witnessed an EBIDTA flow through of 80% from 1QFY20 levels.

* Subsidiary (consolidated less standalone) sales grew 3.7x YoY and 81% QoQ to INR5b, led by 27%/41%/69% growth in revenue from PIEM/Roots/ Banares from 1QFY20 levels. Subsidiary EBITDA stood at INR1.2b in 1QFY23 v/s an operating loss of INR523m/INR44m in 1Q/4QFY22.

Highlights from the management commentary

* RevPAR: As per STR Global, all India RevPAR improved substantially, surpassing pre-COVID levels by 42% in 1QFY23, against the industry rate of 19%. RevPAR grew 33%/22%/20% in Mumbai/Bengaluru/Delhi and NCR in 1QFY23 from 1QFY20 levels.

* Margin has improved on account of higher management fees, new businesses, cost efficiency, and greater ARR and occupancy. The management expects margin in 2H to be better than 1HFY23 on account of higher room rates. It expects margin to sustain in FY24. IH affirms its FY25/FY26 EBITDA margin guidance of 33% each, with 35% margin accruing in from new business.

* Management contracts: Going forward, the company will maintain a ~4:1 launch ratio of management contracts to owned and leased Hotels. For example, for every owned and leased investment, it will add four-to-five management contract Hotels to maintain the mix.

Valuation and view

* IH's asset-light model as well as new/reimagined revenue-generating avenues, with higher EBITDA margin, bodes well for an expansion in RoCE.

* We expect the strong momentum to continue in FY23 and FY24, led by: a) an improvement in ARR and occupancy on account of favorable demand-supply dynamics; b) ongoing cost rationalization efforts; c) higher income from management contracts; and d) unlocking value by launching reimagined and new brands.

* Factoring in a better than expected performance in 1QFY23 from standalone and key subsidiaries such as Piem and Roots, on the back of higher ARR and occupancy, we raise our FY23/FY24 EBITDA estimate by 22%/11%. We maintain our Buy rating with a SoTP-based TP of INR320 per share.

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