Asset Light Model to drive margins – Indian Hotels

Update on the Indian Equity Market:

On Wednesday, NIFTY lost over 200points from the day’s high to close at 16,026 (-0.6%). ASIANPAINT (-8%), ADANIPORTS (-5.6%), and DIVISLAB (-4.1%) dragged the index down. NTPC (+3.9%), HDFCLIFE (+2.9%), and SBILIFE (+1.9%) led the gainers. Among the sectoral indices, FINANCIAL SERVICES (+0.7%), FINANCIAL SERVICES 25/50 (+0.7%), and PRIVATE BANK (+0.3%) led the gainers, while IT (-3.4%), REALTY (-2.9%), and MEDIA (-2.9%) led the losers.

Excerpts of an interview with Mr. Puneeet Chhatwal, MD & CEO, Indian Hotels Company Ltd (IHCL) published in the Economic Times on 24^th May 2022: 

• The Company has launched the Ahvaan (Call to Action) Plan 2025, which is a combination of key strategic imperatives. It remains confident of adding 60 hotels to its portfolio in the next three-and-a-half years, thus reaching the 300^th It plans to add more than 400 villas and bungalows to its homestay business.
• Most of the growth is based on an asset-light model, the management fee incomes and incomes from its old and newly re-imagined businesses like Chambers, home delivery, and homestays will help IHCL increase its margin by another 800 bps. At the end of the business cycle, the company is expecting Pre-Covid margins of 25% to increase to 33%.
• The backbone of IHCL is the Taj brand, which is complemented by its distribution platform of the selections which has individual properties which are strong names in their respective markets. In addition, there is Vivanta which is an upscale segment.
• The Ginger business has been re-imagined in the last four years. Qmin, the home delivery, and Ama, homestay businesses are also digital businesses, which will be supported by AI initiatives. IHCL has a separate app that has been very successful in driving more than 50% of the revenue in Qmin and that is the Qmin app. IHCL wants to also move as much as possible with Ama on the digital platform and that will help to grow that brand.
• Being on the Tata Neu platform which has a loyalty program increases the reach of all of the brands by a significant multiple, which the company would not have been able to achieve on its own.
• The company is confident that its asset-light model, strict check on corporate overhead, and control of fixed costs have helped it achieve margins above 25% in 4QFY22.
• Notwithstanding the external shocks, the Company’s brands and their repositioning are driving market share and RevPAR (Revenue per Available Room) up.
• The supply in the last several years has been constrained and now the demand is beginning to come back both in the corporate and the leisure segments. Leisure domestic has been quite resilient, international is beginning to pick up and government delegations are beginning to pick up.
• IPL assisted in April and May and when demand goes up and supply stays limited, the rates and the occupancy increases are witnessed.

Asset Multiplier Comments

• There is an overall recovery in demand for the hotel industry expected in FY23 and FY24, contingent on the virus-related disruptions abating. The pent-up demand coupled with increased priority on the quality of stay post-Covid-19 is expected to propel the industry growth.
• IHCL with its array of hotels catering to different budgets is expected to be a beneficiary of this recovery, in line with the industry.
• The management’s asset-light strategy and new revenue-generating avenues bode well for margin and return ratio expansion.

Consensus Estimates: (Source: market screener website)

• The closing price of Indian Hotels Company Ltd was ₹ 222/- as of 25-May-2022.  It traded at 57x/ 38x the consensus earnings estimate of ₹ 3.9/ 5.9/- for FY23E/FY24E respectively.
• The consensus target price of ₹ 271/- implies a P/E Multiple of 46x on the FY24E EPS estimate of ₹ 5.9/-.

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