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Omicron led restriction impacts Q4; outlook stays strong

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 2) Taj – Fisherman’s Cove.

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

Company update:

Oriental Hotel’s revenue for Q4FY22 declined 13% QoQ to | 66.1 crore due to lockdown during January 2022 on account of omicron. Margins were also lower by 800 bps QoQ to 17.5%. This led to a marginal PAT of | 4 lakh vs. | 9.2 crore reported in Q3. For the full year FY22, revenues grew 189% YoY to | 219.4 crore though it was still 34% lower than pre-pandemic levels

In our view, this minor blip in revenue is temporary as forward hotel booking data suggests strong buoyancy in demand with hotel booking for MarchMay crossing pre-pandemic levels led by wedding season, vacations and IPL matches. Further, with the opening of international borders for foreign tourists and resumption of corporate offices, we expect sharp traction in the revenues from H1FY23E onwards

In terms of rooms supply, we expect launch of new hotel projects to get delayed due to higher land and input costs that would augur well for existing branded players. Further, hotel players are now leaner in terms of costs that are sustainable in nature. We expect healthy 29.2% revenue CAGR over FY22-24E. We expect the company’s business to recover fully in FY23E while EBITDA to surpass pre-Covid levels in FY23E. Margins are seen at 18.1% and 20.2% for FY23E and FY24E, respectively

The company enjoys strong patronage from IHCL. Operationally, OHL’s properties are managed by IHCL apart from over 39% holding by 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 ~| 1.6 crore which is still at ~40% discount to current replacement costs.

We remain positive on the company and maintain our BUY rating

Target Price and Valuation: We value the company at | 80 i.e.21x FY24E EV/EBITDA or | 2.0 crore EV/room (vs. earlier target price of | 73/share)

Alternate Stock Idea: Apart from Oriental Hotels, we also like TajGVK Hotels.

Like Oriental Hotels, its properties are strategically located in South India. It has a strong balance sheet

BUY with a target price of | 210/share

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