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Efficiency to yield better results post end of pandemic

About the stock: Oriental Hotel (OHL) operates in South India with Indian Hotels Company (IHCL) being one of the promoter entities. The company owns and operates seven hotels with ~825 rooms across business & leisure locations in the south. It derives majority of revenues from two of its properties in Chennai, 1) Taj Coromandel and 2) Taj – Fisherman’s Cove.

* Tata Group companies hold ~39.1% stake in OHL while the company is an associate of IHCL (28.6% stake). Apart from the ownership, the company has a strong operational and financial linkage with IHCL

Company update:

* After witnessing severe financial strain in FY21 due to Covid, OHL achieved EBITDA of | 4.6 crore during Q2FY22 (similar to pre-Covid levels i.e. Q2FY20) despite 24% reduction in revenues. The same was attained via a slew of measures undertaken by the company to become more efficient and linear in terms of costs during the Covid era

* We believe the corporate segment, which has remained a laggard so far due to work from home culture till date would likely see healthy traction post end of pandemic with a sharp uptick being expected in the MICE segment

* Further, the ongoing crisis may lead to 15-18% room inventory reduction, which augurs well for the company in the long run. We expect healthy 61.3% revenue CAGR in FY21-23E. We expect OHL’s business to recover fully by FY23E with EBITDA to surpass pre-Covid levels in FY23E; margins seen at over 16% in FY23E that has potential to further expand to 20%+

* The company enjoys strong patronage from IHCL. Operationally, OHL’s properties are managed by IHCL apart from over 39% holding by the Tata group. Hence, in our view, OHL has strong financial flexibility due to comfort arising from being an associate of IHCL

What should investors do? On a replacement basis, the stock is trading at EV/room of ~| 1.5 crore, which is still at ~40% discount to current replacement cost.

* We remain positive on the company and maintain our BUY rating

Target Price and Valuation: We value the stock at | 73 i.e. 30x FY23E EV/EBITDA (vs. earlier TP of | 55/share)

Alternate Stock Idea: Apart from Oriental Hotels, in our hotel sector coverage, we also like TajGVK Hotels.

* It is the premium segment key domestic hotel player. Like Oriental Hotels, its properties are strategically located in south India and it has a strong b/s

* BUY with a target price of | 210/share

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