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On the road to recovery…

Oriental Hotels (OHL) operates in south India with Indian Hotels Company (IHCL) being one of the promoter entities. The company owns and operates seven hotels with ~820 rooms across business & leisure locations in south. It derives majority of revenues from two of its properties in Chennai 1) Taj Coromandel 2) Taj – Fisherman’s Cove. After witnessing Covid induced severe financial strain in H1FY21, OHL achieved operational breakeven performance in H2FY21 despite a marginal pick-up in revenues. The same was attained via slew of measures undertaken by the company to become more efficient and linear in terms of costs in the Covid era. The company achieved significant cost reduction of 42% (i.e. | 105 crore) in FY21. With quarterly revenue surpassing | 42 crore from Q3FY21, the company generated EBITDA of | 1.2 crore and | 5.8 crore, respectively in Q3 & Q4FY21, respectively. Going forward, while H1FY22E looks challenging, with easing of restrictions post stabilisation of infections (likely from H2FY22E) and increased vaccinations, going ahead in the country, we expect the hotel sector to witness a sharp rebound in demand from H2FY22E. This should lead to healthy margins and profitability. With the likely recovery on cards, we expect revenue CAGR of 61% in FY21-23E with sharp uptick expected in FY23E and also expect the company to attain highest EBITDA margins in FY23E leading the company to report PAT over | 15 crore.

FY22E to witness recovery, followed by growth, going ahead…

Flagship hotels of the company are Taj Coromandel and Taj- Fisherman’s Cove that collectively accounted for nearly 58% of operating income of OHL in FY20. As the economy is now coming out of pandemic induced pain, the company is also gradually moving to its full functionality. Although, improvement would get visible in tourist destinations from H2FY22E, recovery in corporate travel will take at least eight to 12 months due to ongoing work from home policy. Hence, in our view, while FY22E would witness a strong recovery followed by demand from tourist destinations, it would get a further boost from corporate travel from FY23E onwards.

Strong promoter backing, healthy b/s

IHCL has a stake in OHL both in terms of ownership and management of operations of properties by way of operating agreement. All properties are operated under the brands owned by IHCL (Taj, SeleQtions, Vivanta, Gateway) and offer high level of standardisation in services, experience and products specific to the category under which the particular hotel belongs. Historically, OHL’s balance sheet was heavily levered with net debt/EBITDA touching ~7x in FY17. In line with Aspiration 2022 of the IHCL group, the company sold its Vizag property and garnered | 120 crore in 2018. The proceeds from sale of Vizag property were utilised to retire some portion of the debt in FY19. With the expected recovery in demand, net debt/EBITDA ratio, is expected to improve from 4.9x in FY20 to 3.9x by FY23E. RoCE is expected to remain subdued, albeit, snapping the downward journey to reach over 5% by FY23E.

Valuation & Outlook

OHL has seen its valuations decline owing to high leverage, weak operating performance and contracting returns. Now, the balance sheet and operations, both are expected to improve, going forward. Further, the ongoing crisis may lead to ~15% room inventory reduction, which augurs well for the company in the long run. On a replacement basis, the stock is trading at EV/room of | 1.1 crore. We value it at EV/room of | 1.5 crore with revised TP of | 55 (earlier | 33). We upgrade the stock from HOLD to BUY.

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