IGI Logo

When strategy meets execution!

Management contracts to ‘light up’ the business

Investment rationale: We reiterate Indian Hotels (IHIN) as our top pick in the hospitality industry driven by its continuous focus on: a) leveraging its brands, d) expanding its operations through management contracts, c) unlocking value by launching new/ reimagined brands, d) creating a hospitality eco-system across the country, e) reducing costs sustainably, and f) deploying capital judiciously to improve return ratios.

A focused and scalable asset-light operating model to underpin growth

* There has been a major transition in IHIN’s business strategy from an assetheavy model (adding owned rooms that entail higher capex and debt) to an asset-light operating strategy (adding rooms under management contracts by leveraging its brand). We believe this shift will foster business expansion for IHIN. Notably, it reported industry-leading hotel signings and openings in CY20.

* Moreover, we anticipate unbranded and distressed hotel owners to approach branded players (such as IHIN) for partnerships in the post-COVID era, to leverage the latter’s established distribution network.

* The share of IHIN’s management contract rooms has improved to 46% of its overall room portfolio at present (including pipeline) from 32% in FY18. Management aims to expand the ratio to 50% going forward.

* During FY18-21, IHIN added 2,079 management contract rooms that are yet to generate revenue due to the pandemic. Further, IHIN signed 68 hotels/8,986 rooms over FY19-21 (refer to Exhibit 3). All these additions are likely to drive management contract revenue in the long run.

* The company generated INR2.2b of revenue in FY20 from management contracts, which is expected to rise to INR3.5b in future. Notably, the EBITDA generated from management contract income stands at 70–80% without deploying capital/with minimum capital and is, thus, highly RoCE accretive.

* We expect the contribution of contract income EBITDA to the consolidated EBITDA of IHIN to be at 20% in FY24.

Unlocking value by launching reimagined and new brands

* IHIN reimagined Ginger, and repositioned the brand to yield higher ARRs. Ginger reported positive EBITDA in FY21. Currently, Ginger has 80 hotels (with 36% of Lean Luxe Hotels) under its umbrella and the management aims to increase the tally to 100 in the long run.

* The Chambers – Taj’s exclusive business club – was relaunched with enhanced features. It has over 2,200 members currently, and IHIN intends to increase the count to over 4,000. Management expects this margin-accretive business to generate revenue of INR1.5b.

* IHIN launched Qmin – a food delivery app – in mid-2020 that has witnessed over 0.3m/0.1m app downloads / orders since its launch. The app is now available in 15 cities, with a target of over 25 cities. IHIN charges 22% fees on the gross merchandise value (GMV) for sales made through its contract hotels. Qmin’s GMV potential is INR5b, with an EBITDA generating ability of 50%.

* IHIN has entered the homestay segment with amã Stays & Trails label, the first branded homestay in India. It has a group of heritage bungalows, guesthouses and homestays at unique locations across the country. As of 30 Sep’21, 33 bungalows were operational. The management targets to increase the count to 100 by FY22-23E (with a potential of 500 bungalows). The homestay chain has a revenue potential of INR5b with an EBITDA generating ability of 80% backed by the management fees earned.

* All of the above initiatives have the potential to generate incremental revenue with a higher EBITDA flow, without the need to deploy capital.

Costs to reduce structurally!

* The staff-to-rooms ratio contracted to 1.1x in Sep’21 from 1.53x in Mar'20 led by a) the redeployment of 206 associates and b) reimagining method, such as multi-skilling, the cluster approach, and shared services.

* IHIN’s total operating cost declined 45% to INR19.2b and fixed cost per month decreased 28% to INR1.2b in FY21 – backed by manpower optimization and a reduction in corporate overheads. Corporate overheads dipped 39% YoY to INR2.1b in FY21 aided by: a) redeployments and restructuring, b) prudent resource allocation, and c) synergies. Management expects to keep the overheads below INR2.5b in future.

* In Pierre Hotel (New York), IHIN is taking judicious measures (such as manpower rationalization, lease renegotiation and surrendering the leased Ball room) to trigger a cumulative annual cost savings of USD5m.

Undertaking a prudent capex policy; focus is on improving RoCE

* In the past, IHIN’s capex strategy towards international operations (in the US) and Sea Rock Hotel backfired and impacted its business. However, after appointing Mr. Puneet Chhatwal as the CEO, IHIN has altered its strategic direction to focus on: a) the asset-light operating model (management contract route), b) incremental capital allocation (in projects that yield returns without deploying capital), c) non-core asset divestments (residential houses) and d) assets monetization (sold and leased hotels in Vizag through Oriental Hotels and monetized the Santacruz, Mumbai land by building the 371-room Ginger Hotel at a cost of INR2b).

* For the Sea Rock Hotel, IHIN intends to rope in a financial partner to avoid debt for inorganic acquisitions.

* Thus, incremental capital allocation for projects that yields returns without deploying capital/with minimum capital is highly ROCE accretive.

* The Board has approved INR40b in fundraise – INR20b would be raised through a rights issue and the remaining INR20b through QIP, subject to requisite approvals. The funds would be used for debt reduction, capex, and acquisition of a balance stake in Roots Corporation.

Valuation and view: Maintain BUY with an SoTP-based TP of INR258

* Though the ongoing third COVID wave poses a threat to near-term earnings of the hospitality sector, higher vaccination and lower hospitalization rates will lead to a much stronger rebound than the second wave. Thus, we view this weakness as a buying opportunity.

* We believe IHIN’s asset-light model as well as the new/reimagined revenue generating avenues with higher EBITDA margins bodes well for RoCE expansion.

* Like in FY22, we anticipate a strong recovery in FY23E/FY24E as well on: a) ARR improvement, once the economic activities normalize, b) improved occupancies driven by business travel as well as leisure segment, c) cost rationalization efforts, d) an increase in F&B income as banqueting/conferences resume, and e) higher income from management contracts.

* We value the stock at 21x FY24E EV/EBITDA to arrive at our SoTP-based TP of INR258, implying a 24% potential upside. We maintain our BUY rating on IHIN.

* Key risks to our call: a) prolonged delay in demand revival due to the pandemic, b) intensified competition in acquisition of rooms under management contracts and c) failure in scaling up new businesses.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer