Visitors and residents pass by the famous Taj Mahal Hotel on the waterfront in Mumbai, India November 5, 2004. When privatization was the Indian government’s prevailing ideology, the state sold controlling stakes in 22 hotels. Indian Prime Minister Manmohan Singh says his government wouldn’t pursue privatization “as an ideology or a panacea.” Photographer: Robert Stewart/Bloomberg News
The Indian hotel industry has been consolidating over the last six months although most of the exits have been reported in the lower end category of hotels, driven by weak liquidity. According to hotelierindia.com (13 August), 25-30% of room supply will not open again. This will allow stronger players to grow, with opportunities for less expensive acquisitions.
We think Indian Hotels (IHCL) is right in its strategy to grow. It recently opened new hotels and has signed for three hotels that will increase its capacity by 7-8%. It is also expanding its footprint under “ama” brand. These expansions should not only lift profits but also erase investors’ concerns regarding slower growth.
COVID-19 vaccine should boost demand: Given that occupancy levels in India have lagged those of Asian peers, that points to strong growth potential, and we believe demand could get a boost from the announcement of a vaccine approval. Strong pick-up in leisure demand and banquet business, along with cost cuts, should support profits during the quarter to December.
New initiatives set to support profitability: The company started new initiatives earlier this year. On the revenue side, it launched 4D (staycation packages) and the QMIN food delivery app. These initiatives have been value accretive since there is not much incremental cost involved.
On the cost side, the company cut almost 51% of its costs during the first half. While a significant part of this was variable cost, it also lowered its fixed costs by about Rs 230 m, implying a 12% y-o-y improvement in its H1FY20 Ebit. So while the structural changes are set to benefit the company, its self-help should also support its profitability.
Forecasts and valuation adjusted: We have adjusted our forecasts slightly, mainly increasing occupancy levels slightly. However, with improving trading, we value the consolidated business using the sector average EV/Ebitda for FY22e, which is 22.0x, up from our previously used down-cycle average EV/Ebitda of 18.5x. This increases our TP from Rs 120.50 to Rs 151.0. We maintain our Buy rating.
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