Equity Research: INDIAN HOTELS COMPANY LIMITED

Summary

The Indian Hotels Company Limited (IHCL), a South Asia’s largest hospitality-focussed enterprise with Indian origins is part of this group. IHCL has a portfolio of total 235 hotels, where 175 of these hotels are operational over 100 locations at 12 different countries across 4 continents and has 28,107 keys (including hotels under various stages of development). Also, on 31st March 2022 IHCL has 26 subsidiaries, 7 associates and 6 joint venture companies.

ABOUT:

• The Indian Hotels Company Limited (IHCL), a South Asia’s largest hospitality-focussed enterprise with Indian origins is part of this group. IHCL has a portfolio of total 235 hotels, where 175 of these hotels are operational over 100 locations at 12 different countries across 4 continents and has 28,107 keys (including hotels under various stages of development). Also, on 31st March 2022 IHCL has 26 subsidiaries, 7 associates and 6 joint venture companies.
• These chains of hotels and their allied services are operated by different brand names such as Taj, SeleQtions, Vivanta, Ginger, Expressions, and TajSATS. Taj, SeleQtions, Vivanta, and Ginger, whereas Expressions and TajSATS are brand names for its retail services and volume catering business, respectively. IHCL has the major business from iconic luxury to upscale and budget stopovers as well as in-flight catering.
• The major source of revenue of IHCL is from  products and services such as room revenue, food & beverages and banquets, shop rentals, membership fees, and management & operating fees, where  81% and 19% of its revenue from its domestic and overseas operations, respectively, in overseas revenue the major contribution is of United States and the United Kingdom

MANAGEMENT:

The management recently launched Ahvaan 2025 which maps IHCL’s three-pronged strategy to grow profitably in the coming years. IHCL aims to capitalize on demand from the mid-scale segment, expanding its presence in high-growth markets with leases and management contracts under the Ginger brand. Further, they envisage establishing and scaling up new businesses developed under the brands of Qmin & amã Stays and Trails.

SHAREHOLDING PATTERN:

INDUSTRY: (SOURCE: HVC ANAROCK & ICICI SECURITIES)

Aug’22 industry RevPAR 9% above pre-Covid levels: In Aug’22, while industry ARRs were 9% higher than Aug’19 levels at Rs5,850, overall occupancy remained flatat 61% in Aug’22 compared to Jul’19 levels resulting in Aug’22 industry RevPAR of Rs3,539 or 109% of Aug’19 levels. In Aug’22, Mumbai recorded the highest occupancy rate among cities at 74%, followed by New Delhi at 70% and Hyderabad at 69%. MICE destinations such as Goa and Chandigarh are continuing to show strong growth in average rates, helping the India average. While the Apr-Jun’22 period was a blowout quarter for the hotel industry, the clear trend is that hotels are holding on to higher rates in anticipation of a strong H2FY23. 

Business travel continues to see improvement: While rising costs remain a key monitorable for Indian and global corporates, with physical occupancy in offices across India’s Tier I cities continuing to rise every month and virtual events return to physical mode, we believe that the MICE segment will ensure robust demand in H2FY23. 

Leisure segment demand contingent on a number of variables: With a number of long-haul international destinations from India such as Europe/USA/Canada now open for travel, there has been a surge in enquiries from Apr’22 owing to pent up demand after a two-year hiatus. However, soaring international airfares and longer waiting times for travel approvals amid rising inflation may lead to Indians continuing to prefer domestic leisure destinations (staycations/workcations/weddings) and short-haul international routes (South East Asia/Middle East) in FY23E. Further, inbound travel to India in H2FY23 may see a surge owing to pent-up demand and a weak currency. 

Industry ARR/occupancy trends from Dec’19 to Aug’22

FINANCIALS:

• Sales Growth: - In FY22, the net sales of the company were ₹ 3,056 cr, increasing by 94 % YoY. The growth was seen across all subsidiaries and the occupancy rate, average room rate, and revenue per available room increased on a YoY as well as a sequential basis. Key markets contributed to improving revenue.
• EBITDA Growth: - EBITDA in FY22 was ₹405 cr and grew by 211.9% YoY on the back of an increase in net sales. The total expenses increased by 27% YoY on account of increased variable costs (employee costs, other operating & general expenses, F&B consumed) consequent to increased business activity.
• The company continued to optimize costs including redeploying headcount amongst new hotels and businesses with the Tata Group and took advantage of packages announced by governments from time to time.
• PAT Growth: - In FY22, the loss was reported at ₹222 cr which was reduced by 68% on a YoY basis. There was an exceptional item of ₹15.6 cr which included exchange gain/loss on long-term borrowings/assets, change in fair value of derivative contracts, and profit on the sale of hotel property in a subsidiary. Other income saw a decline on a YoY basis, on account of decreased exchange gain (net). There was an interest on income tax refunds of ₹56 cr included in other income.
• EBITDA Margin: - FY22 margin stood at 13.2%. Employee benefits expenses & payments to contractors, finance costs, and other expenses which comprise the major portion of expenses increased on a YoY basis.
• ROCE: - In FY22, the return on capital employed increased on a YoY basis on account of improvement in operating efficiencies, repayment of debt, and issue of equity shares via rights issue & QIB (qualified institutional buyer). They would continue to explore portfolio acquisitions in India.
• ROE: - ROE stood at negative 4.15%. During FY22, the company infused equity of ₹4,000 cr, by issuing shares to existing shareholders on a rights issue basis and to qualified institutional buyers. The proceeds of these issues were utilized to repay debt and consolidate its strategic investments in order to simplify its holdings.
• In FY22, net cash flow from operations (CFO) was ₹672 cr on account of a reduction in losses on a YoY basis. Further, there was an adjustment of increase in other financial assets & liabilities of ₹25 cr and ₹104 cr, respectively. Outflow from investing activities was ₹1,642 cr, majorly pertaining to net purchase of current investments of ₹517 cr, bank balances not considered as cash & cash equivalents ₹345 cr, net purchase of property, plant & equipment of ₹285 cr, and option deposit against the purchase of shares repaid ₹71 cr. Cash inflow from financing activities was ₹1,659 cr, constituting proceeds from the issue of ordinary shares of ₹3,982 cr. Cash outflow was pertaining to net repayment of long-term borrowings of ₹1,533 cr and net repayment of short-term borrowings of ₹123 cr.
• Solvency on the basis of its Debt to Equity: The debt-to-equity ratio stood at 0.28x in FY22. As on 31st Mar 2022, the long-term borrowings and short-term borrowings stood at ₹1,387.9 cr and ₹597 cr, respectively. The company utilized the QIB & rights issue proceeds to reduce its debt. 

FUTURE PROSPECTS:

• The company is hopeful of the completion of its flagship for Ginger brand at Santacruz (371 rooms) where construction has already reached the first floor and they anticipate the same to be finished by the end of December 2022/ January 2023.

• Taj Madras Flight Kitchen Private Ltd earlier a subsidiary of the company was amalgamated with Taj SATS Air Catering Ltd. Two new companies viz. Genness Hospitality Private Limited and Qurio Hospitality Private Limited were incorporated as WOS for the purpose of developing 4-star (Vivanta) and 3-star (Ginger) hotels in Gujarat, Kevadia. Zarrenstar Hospitality Private Ltd earlier a joint venture with the company has now been classified as an associate of the company.

• The company would continue to grow through management contracts and thus drive management fee growth. They envisage on taking the same from ₹231 cr presently to ₹400 cr in the next four years. They received letters of award for four projects, two in Lakshadweep and two in Diu.

• During FY22, it continued its path of growth by signing 19 hotels and opening 13 new hotels and 27 amã properties. New hotels opened during FY22 included a 325 room, Taj Exotica Resort & Spa, The Palm, Dubai, and India’s first all-women-run luxury residence, Taj Wellington Mews, Chennai. They opened 27 properties under amã Stays & Trails taking the portfolio to 80 bungalows including 47 bungalows in operation and 33 in the pipeline. IHCL remains focused on restructuring the balance sheet by managing assets, monetizing non-core assets, and maintaining a healthy capital structure.

• They would progress in a balanced manner to achieve a portfolio mix of 50:50 owned v/s managed. They are presently at 46% managed portfolio including hotels under development.

• In key metro cities, the Ginger hotels are expected to contribute 55% towards EBITDA margin and 40%-45% is anticipated to be contributed by others.

ANALYST COMMENT:

PE Ratio:- IHCL’s PE ratio is 222.3x. TTM earnings of the company are subdued on account of the pandemic-related restrictions, pushing the multiple upwards. The company’s continued endeavor to re-engineer margins with an emphasis on sustained revenue growth, cost optimization, and operational excellence is conjectured to further strengthen the balance sheet, thereby leading to focus on cash flows and helping the company to be debt free.

SOURCE:

• Stocx.
• https://www.ihcltata.com/investors/
• ICICI DIRECT