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Cost savings and operating leverage lower operating loss

Revenue/EBITDA above our estimate

* Despite the second COVID wave, standalone RevPAR nearly doubled as compared to last year due to ARR growth and occupancy improvement, as the impact this time around was less severe and the recovery was faster as compared to the first wave. Additionally, IHIN’s operating performance was strong on the back cost saving measures and operating leverage.

* Revenue/EBITDA in 1QFY22 was above our estimate. Factoring the same, we have increased our FY22E revenue/EBITDA estimate by 2%/4%, and have maintained our estimate for FY23E. We maintain our Buy rating on the stock, with a Sept’23E SoTP-based TP of INR183.

RevPAR led recovery

* Consolidated revenue grew 140% YoY to INR3,446m (est. INR2,800m). On a QoQ basis, revenue declined by 44%. Operating loss reduced to INR1,488m v/s a loss of INR2,660 in 1QFY21 and our estimate of INR1,592m. It reported a net loss of INR2,926m v/s a loss of INR3,445m in 1QFY21.

* IHIN’s domestic network Hotels have outperformed the industry in all key cities in RevPAR recovery (as a percentage of LY).

* Standalone revenue grew 118% YoY (-55% QoQ) to INR2,074m, led by an 101% improvement in RevPAR. The growth was due to 7.9pp improvement in occupancy (to 28.2%) and ARR growth of 45% YoY (to INR7,024). Operating loss stood at INR965m v/s an operating loss of INR1,619m in 1QFY21. EBITDA stood at INR1,047m in 4QFY21.

* The performance was aided by a monthly fixed cost reduction of INR1,260m in 1QFY22 v/s INR1,630 in FY20. This was aided by a reduction in staff to room ratio and corporate overheads, which fell 39% in FY21 and declined further by 12% YoY in 1QFY22.

* In Jun’21, staff-to-room ratio stood at 1.09x, which declined from 1.53x in Mar'20 (1.14x in Mar’21) due to redeployments, multi-skilling, and new ways of working. The management expects the ratio to be sustainable.

* Subsidiary (consolidated less standalone) sales grew 184% YoY (-9% QoQ) to INR1,372m. Operating loss at its subsidiary stood at INR523m v/s a loss of INR1,041m last year (loss of INR334m in 4QFY21).

Highlights from the management commentary

* Consolidated gross/net debt as on Jun’21 stood at INR40.4b/INR36.1b v/s INR36.3b/INR31.1b in 4QFY21.

* In a couple of weeks, the company will finalize the quantum of capital raise and details on the same.

* It has guided at a capex of INR2.5-3b in FY22.

* Cost rationalization at The Pierre includes: i) manpower rationalization, ii) lease renegotiation, and iii) surrender of the leased ballroom. This will result in permanent cost savings of ~USD5m per annum.

Valuation and view

* Faster demand revival in the Leisure Travel segment has aided IHIN’s performance in FY21. The second COVID wave has delayed recovery in the Hospitality sector. However, the impact this time is less severe and the recovery is quick when compared with last time.

* While FY21 earnings are weak, we expect a gradual/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.

* New revenue generating avenues have a higher EBITDA margin, and this is being done without deploying capital or with very minimal capital, which bodes well for RoCE.

* Revenue/EBITDA in 1QFY22 was above our estimate. Factoring the same, we have increased our FY22E revenue/EBITDA estimate by 2%/4%, and have maintained our estimate for FY23E. We maintain our Buy rating on the stock, with a Sept’23E SoTP-based TP of INR183.

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