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Pricing power shines through

Indian Hotels Co. Ltd.’s (IHCL) Q2FY23 consolidated revenue of Rs12.3bn was 3% higher than I-sec estimate led by stronger than expected ARRs. However, Q2FY23 EBITDA of Rs2.9bn was 13% lower than I-sec estimate of Rs3.4bn owing to higher employee/other expenses. With the company indicating that demand momentum is sustaining in Q3FY23 as well till date, we raise our FY23-25E consolidated revenue estimates by 2-3% factoring in higher standalone FY23E RevPAR of Rs8,563 vs. Rs8,104 earlier and similar increase in domestic subsidiaries (Ginger/ PIEM/ Benares/ United hotels). However, considering wage inflation and higher operating expenses to cater to increased demand, we have cut our FY23-24E EBITDA estimate by 5% each but increased FY25E EBITDA estimate by 2% as operating leverage plays out. We revise our SoTP-based target price on IHCL to Rs351/share (earlier Rs332) as we roll forward to Sep’24 EV/EBITDA (earlier Jun’24 EV/EBITDA) and increase our EV/EBITDA multiple to 23x from 22x earlier considering strong ARR trajectory. However, post the 14% appreciation in stock price over the last three months, we downgrade our rating to ADD from BUY. Key risks to our rating are fresh Covid waves and rise in costs denting margins.

* Strong pricing focus remains, higher employee/other expenses dent margins: The company reported Q2FY23 consolidated revenue of Rs12.3bn (decline of 3% QoQ) which was 3% higher than I-Sec estimate of Rs12.0bn. However, consolidated EBITDA of Rs2.9bn (decline of 22% QoQ) was 13% lower than I-sec estimate of Rs3.4bn owing to higher employee costs and other expenses (Q2FY23 EBITDA margin of 23.9% vs. Isec estimate of 28.4%). Q2FY23 standalone RevPAR stood at Rs7,681 which is 29% higher than Q2FY20 (pre-Covid levels) with Q2FY23 occupancy at 70% (up 200bps from Q2FY20 levels of 68%) while Q2FY23 ARR of Rs11,003 was 27% higher than Q2FY20 levels. This is in line with the observed industry trend of higher focus on ARRs since April'22. As per management, increments and bonuses are implemented in the Jul-Sep period every year and some spill over from delayed increments owing to Covid led to higher employee expenses which should stabilise in H2FY23.

* Demand trends remain intact in Q3FY23 till date: As per company management, the occupancy and room rates seen in the first half of Q3FY23 (Oct’22-mid Nov’22) indicate that RevPAR is growing at double digits vs. the similar period seen in Q3FY20 which was the strongest pre-Covid quarter for the company and industry. The revenue continues to be driven largely by higher ARRs as seen in H1FY23 and a demand-supply gap and management’s strategy will continue to be focused on higher room rates vs. occupancy in India. For international business as well, a similar strategy is being employed and is in line with the industry trends seen in those geographies (UK/USA).

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