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Hold Indian Hotels Company Ltd For Target Rs.203

Leisure surge drives outperformance

Indian Hotels (IHCL) reported better-than-expected recovery in India (77% of Q2FY20 versus 65% estimated) with leisure travel surge being the key driver (refer to exhibit 3). Also, IHCL is increasing fund-raise from INR30bn (only rights) to INR40bn (rights + QIP), and will make Roots Corp (Ginger) a 100% subsidiary (60% earlier).

With the covid situation normalising and recovery timelines looking more certain, we are lowering the cost of capital assumptions and rolling forward to Sep-22E, which yield a revised DCF-based TP of INR203 (INR146 earlier), implying 25x FY23E EV/EBITDA, higher than its pre-covid average (20x, peak 23x). Maintain ‘HOLD’. IHCL’s leisuredriven outperformance is close to peaking, and will moderate ahead.

Strong overall recovery driven by leisure surge

IHCL posted a strong performance with consolidated revenue up 184% YoY (down 28% versus Q2FY20). Standalone revenue shot up 179% YoY (down 23% versus Q2FY20). July/Aug/Sep contributed 31%/34%/35% to revenue. Demand was mainly led by leisure travel, clearly visible in the city-wise performance (see exhibit 3).

As per IHCL, the uptick in corporate travel is also visible. RevPar stood at ~INR4,700 in Q2FY22 with occupancy at 57% and ARR at ~INR8,300. Subsidiariesreported a higher 192% increase YoY (down 35% vs. Q2FY20). While costs did increase QoQ, savings on pre-covid continued, with fixed costs down from INR1.6bn/month to INR1.3bn. We are currently building in sustainable annual savings of INR2bn.

Increased capital-raise; Ginger to become a wholly owned subsidiary

Net debt was constant QoQ at INR35.7bn (Q1FY21: INR36.1bn). IHCL has raised the fund-raising amount from INR30bn (rights issue total) to INR40bn (50% rights issue, 50% QIP). The company will acquire the remaining 40% of Roots Corporation Limited from existing shareholders; Ginger, as a result, would become a wholly owned subsidiary. The purchase consideration thereof would not exceed ~INR5bn. While IHCL is to still disclose the exact usage of the higher fund-raising, it is targeting to become a net debt free company.

Outlook and valuation: Recovery factored In; maintain ‘HOLD’

Factoring in the outperformance in Q2FY22, we are raising FY22/23E EBITDA by 5%/3%. With the covid situation normalising and recovery timelines looking more certain, we are lower the cost of capital assumptions and rolling forward the valuation to Sep-22E, which yield a revised DCF based TP of INR203. Retain ‘HOLD’.

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