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Occupancy and ARR sustain above pre-Covid levels

Operating performance misses estimate on higher-than-expected cost

* Indian Hotels (IH)’s consolidated revenue/EBITDA in 2QFY23 sustained above pre-Covid levels (2QFY20) by 22%/1.8x, led by a strong recovery in standalone occupancy/ARR (up 200bp/27% v/s 2QFY20), respectively.

* Occupancy (like-for-like) in the Business/Leisure segments remained above 2QFY20 levels by 4pp/6pp to 76%/54% in 2QFY23, while the same for Palaces/Ginger is lower by 3pp/10pp to 43%/58%, respectively

* We largely retain our FY23/FY24 EBITDA estimates aided by robust demand in 2HFY23E due to the strong wedding season, increase in inbound travel, and India assuming the G20 presidency (meetings across India). Maintain BUY with an SoTP-based TP of INR365

Resilient demand continues to drive revenue

* IH’s consolidated revenue in 2QFY23 grew 69% YoY (-3% QoQ) to INR12.3b (est. INR11.9b). EBITDA surged 4x YoY (-22% QoQ) to INR2.94b (est. INR3.35b). Adjusted PAT stood at INR1.1b (est. INR1.3b) v/s a loss of INR1.1b in 2QFY22. IH witnessed an EBITDA flow through of 59% from 2QFY20 levels

* Standalone revenue/EBITDA in 2QFY23 surpassed pre-Covid levels by 25%/ 76% to INR7.5b/INR2.2b (up 63%/3.5x YoY, down 1%/18% QoQ), led by a strong recovery in both Occupancy/ARR (up 200bp/27% v/s 2QFY20), respectively. EBITDA jumped 3.5x YoY (-18% QoQ) to INR2.1b. IH witnessed an EBITDA flow through of 61% from 2QFY20 levels

* Subsidiary (consolidated less standalone) sales surged 81% YoY (-4% QoQ) to INR4.8b, led by 16%/43%/62% YoY growth in revenue from PIEM/Roots/ Benares v/s 2QFY20 levels. Subsidiary EBITDA grew 6.6x YoY (-31% QoQ) to INR812m during the quarter

* For 1HFY23, revenue surged 2.3x YoY to INR25b while EBITDA/PAT stood at INR6.7b/INR2.9b v/s loss of INR760m/INR4.1b in 1HFY22, respectively. Net cash stood at INR3.9b v/s net debt of INR35.7b in 1HFY22.

Highlights from the management commentary

* RevPAR growth in key cities such as Mumbai/Bengaluru/Delhi & NCR was higher by 28%/20%/20% in 2QFY23 v/s 2QFY20, respectively.

* As per HVS Anarock and STR Global, all-India RevPAR/Occupancy/ARR are projected to increase 13%/120bp/11% to INR5,085/70%/INR7,260 in 3QFY23 v/s 3QFY20 (pre-Covid level), respectively.

* Higher employee cost in 2QFY23 was attributed to increments coupled with one-time wage settlements taken place during the pandemic (reflecting now). Manpower per room for Taj/Vivanta/Ginger in Sep’22 stood at 1.88x/ 1.2x/0.43x v/s 2.17x/1.48x/0.48x in Apr’22, respectively.

Valuation and view

* We expect the strong momentum to continue in FY23 and FY24, led by: a) a further improvement in ARR and occupancy due to favorable demandsupply dynamics; b) higher income from management contracts; and c) unlocking value by launching reimagined and new brands.

* We largely retain our FY23/FY24 EBITDA estimates aided by robust demand in 2HFY23E due to the strong wedding season, increase in inbound travel, and India assuming the G20 presidency (meetings across India). Maintain BUY with an SoTP-based TP of INR365.

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