Indian Hotels: Investors look to check in on recovery hopes

Q4 was underwhelming but improving leisure, business travel keeps the spirit up

The stock of Indian Hotels Company, the country’s largest listed hospitality chain, was up 4.6 per cent in trade on Thursday, even as it posted weaker-than-expected March quarter results the previous evening. The stock gained another 6 per cent over the next two sessions, taking the post-results gain to over 10 per cent. These gains are in hopes of strong growth in room revenues and occupancies as recovery takes hold in FY23.

Cost rationalisation efforts, coupled with improved volumes, are expected to result in higher profitability. In addition to improved operational performance, equity infusion and divestment of noncore assets would help the company scale up, while keeping debt levels in control.

While growth metrics should improve as the leisure segment and business travel pick up, the company’s March quarter (Q4) performance was weaker than expected. The impact of the Omicron variant was more pronounced on revenues than what the Street was working with. While revenues were up by 42 per cent over the year-ago quarter, on a sequential basis, they were 21 per cent lower.

Amit Agarwal and Poonam Joshi of Nirmal Bang Research say: “We had expected the impact to be limited to a fortnight in January 2022 but the results indicated that the month was completely washed out. Lower occupancy (41 per cent in January 2022 versus 68.9 per cent in December 2021) implied lower revenue per available room or Revpar. On a standalone basis, Revpar declined from ~7,559 in Q3FY22 to ~6,176 in Q4FY22.” The operating profit for the entity halved on a sequential basis, even as it doubled over the year-ago quarter. Margins at the operating level fell by over 1,000 basis points to 18.2 per cent due to weak operating leverage.

While the March quarter was muted, current demand trends indicate favourable times ahead.

Edelweiss Research points out a pick-up in corporate travel is clearly visible in the performance of cities, such as Delhi and Mumbai, with estimated Revpar for April much higher than the pre-covid levels. Besides, the wedding and MICE (meetings, incentives, conferences, exhibitions) business is coming back. March-may is trending much higher than the similar period of 2019, they add.

If demand trends sustain, what could boost revenue growth is the company’s aggressive expansion plan. The company is eyeing an addition of up to 22 hotels this year, against 13 last year. The pipeline includes 7,500 rooms under various stages of development, with 40 per cent being part of the Ginger brand. About three-fourths of total projects are under management contracts, underlining its focus on asset-light expansion.

Capital infusion has helped the company fund its expansion plan and bring down its debt. The company raised just under ~4,000 crore from a qualified institutional placement and a rights issue, with the funds being utilised to pay a debt of ~450 crore and scale up its business. The company has net cash of ~106 crore in Q4FY22 against net debt of ~1,905 crore in the December quarter.

Analysts at Motilal Oswal Research have a “buy” on the stock, given the asset-light model, which should expand return ratios, recovery in FY23/24 led by rising room rates, occupancies, cost rationalisation, and higher food/beverage and management contract revenues. Investors can consider the stock, which is up 31 per cent since the start of March, on dips.