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Resilience amid turbulence

We initiate coverage on Indian Hotels Co. Ltd. (IHCL) with a BUY rating and SoTPbased target price of Rs237/share valuing its hotel business at 21x Mar’24E EV/EBITDA. We believe IHCL is well poised to benefit from the expected recovery in the hotel business cycle from H2FY23 (Oct’22) which factors in the impact of an Omicron wave. We are enthused by the company’s efforts to leverage its existing brand equity to focus on new business segments, focus on cost optimisation, asset-light management contract model to expand room portfolio, and taking steps to de-lever its balance sheet through the recent rights issue and possible QIP fund raise. Key risks are further Covid waves globally and in India impacting demand and rise in operating costs denting margins.

* Asset-light expansion focus and new brands to usher in growth: The company’s focus remains on expansion through the asset-light management contract model (78% of room pipeline) and would result in 50% of IHCL’s rooms being operational under this model by FY23-24E. The company has also identified growth from re-imagined and new brands by upscaling the Ginger budget hotel brand, re-launch of Chambers (exclusive business club), launch of Qmin, a food delivery app which has clocked H1FY22 revenue of Rs0.5bn and branded homestays under “amã Stays & Trails”.

* Demand recovery and cost optimisation to drive earnings growth: We expect a recovery in occupancy and ARRs from H2FY23E to pre-Covid levels with FY23E revenue to grow 41% YoY to Rs38.5bn or 86% of FY20 levels and FY24E revenue of Rs51.2bn building in ARRs growing 3-5% above FY20 (pre-Covid) levels and contribution from new businesses. The company’s efforts to bring down fixed costs and staff-to-room ratio are expected to result in EBITDA margins recovering to 23.9% in FY23E and 29.9% in FY24E.

* De-leveraging efforts bearing fruit: The company’s consolidated net debt has risen to Rs35.7bn as of Sep’21 vs. Rs19.2bn as of Mar’20 owing to successive Covid waves in FY21 and FY22 impacting cash flows. However, the company’s recent fund raise of Rs19.8bn in Dec’21 through a rights issue (Rs13bn to reduce debt and balance proceeds for acquisitions) brings relief. Further, with IHCL’s plans to raise another Rs20bn through a QIP, debt levels may come down significantly.

* Valuations: Hotels are a deep cyclical business, which is usually hit the first during an economic downturn and is the last to recover in an upcycle. We expect a similar story to play out post Omicron covid wave with industry occupancies/ARRs expected to reach pre-Covid levels in H2FY23. We value IHCL at 21x Mar’24E EV/EBITDA, which is in line with the long-term listed peer multiple. We initiate coverage with BUY and an SoTPbased target price of Rs237/share.

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