Recommendation From Hospitality Products Sectors

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year

The Indian Hotels Company 

MAKE ROOM FOR INDIAN HOTELS IN YOUR PORTFOLIO 

HERE IS WHY
Healthy margin improvement
Reduction in debt
Prudent management 

The Indian Hotels Company (IHC), along with its subsidiaries, owns, operates and manages hotels, palaces and resorts, both in India as well as internationally. The brands under which it operates hotels include the Taj, Ginger, Vivanta, and The Gateway. 

On the consolidated financial front, the company reported a good set of numbers for the quarter ended December 2018. It recorded revenues of Rs.1,323.45 crore in Q3FY19 as against Rs.1,197.26 crore in Q3FY18, posting a growth of 10.53 per cent. EBITDA registered a growth of 17 per cent YoY, while its EBITDA margin rose by 192 bps YoY to 25.4 per cent. This was mainly driven by the improvement in performance of the international segment, which showcased a margin expansion of 294 bps YoY to 14.4 per cent. The margin of the domestic segment too rose 215 bps YoY to 32.5 per cent. Consequently, PAT climbed to Rs.161.78 crore in Q3FY19 from Rs.107.87 crore in Q3FY18, thereby rising 49.97 per cent. EPS reached Rs.1.36 in Q3FY19 as against Rs.0.95 in Q3FY18, posting a growth of 43.15 per cent. 

The key highlights of its Capital Markets Day included a targeted EBITDA margin expansion of 800 bps to 25 per cent. Moving forward, the margin expansion will be aided by industry tailwinds, improving revenue by 3 to 4 per cent and cost reduction by 3 to 5 per cent. IHC’s ARR increased 8 per cent in the free individual traveller segment. Furthermore, it also took an ARR hike of 8.5 per cent in its corporate segment in January 2019.

A major positive is that the balance sheet of IHC has become leaner. This is because the proceeds from the rights issue assisted in paring down its debt by a colossal Rs.950 crore. As a result, the D/E ratio improved to 0.6x from 1.3x. 

IHC is planning to centralize its laundry and other common facilities for hotels located in the same vicinity. As such, it has hired Siemens to lower power costs at 20 of its chief properties. Thus, this move will not only enable cost reduction, but also permit the company to dedicate more area for rooms and F&B. After re-branding and re-launching the Ginger Goa hotel in December 2018, IHC’s ARR surged by a whopping 30 to 40 per cent. Since the costs have not increased proportionally, we have reason to anticipate an improvement in EBITDA margins. 

Moving forward in FY2020, the company intends to rebrand 14 Ginger hotels and open 4-5 Ginger hotels in important micro-markets. It also aspires to open a 400-room Ginger hotel on its existing land in Mumbai, requiring a capital expenditure of Rs.2 billion. At the Connaught Hotel, it plans to increase its room count from the current 85 to 104 and allocate one floor for commercial leasing in order to ensure judicious utilisation of space. IHC expects to receive the pending approval for its Sea Rock property within a year. It also intends to monetize its 133 residential apartments, of which 3-4 units have already been sold. By virtue of these factors, we believe IHC is well on its way to achieving its Aspiration 2022 goal of being an exemplary and profitable hospitality company. Thus, we recommend our reader-investors to BUY this stock.