Indian Hotels Company: Cost Optimization - Driver of Profitability
Indian Hotels Company: Cost Optimization - Driver of Profitability
Indian Hotels Company: Cost Optimization - Driver of Profitability
While the RevPar and F&B growth YTD FY20E has been muted, management is hopeful that 2HFY20 Research Analyst
will grow at a stronger pace. Historically, second half of the year has contributed to 70% of the full year
profits.
amit.agarwal@nirmalbang.com
Post our discussion with management and with other industry experts, we have revised our estimates +91-22-6273 8033
for IHCL. Post revision, EBITDA is expected to grow at a three year CAGR (FY19 – FY22E) of 10% to
Rs11,118mn in FY22E. Key Data
We have retained our Buy rating on the stock with a revised target price (TP) of Rs168 (Rs206 earlier). Current Shares O/S (mn) 1,189.3
We have rolled over from FY21E to midpoint FY22E and valued the company at 21x mid year FY22E
EV/EBITDA. The downward revision of TP is attributable to downward revision of RevPar estimates. Mkt Cap (Rsbn/US$bn) 158.2/2.2
Revenue to be impacted because of muted RevPar and F&B: Weakness in Corporate and MICE segments till 52 Wk H / L (Rs) 164/109
date is expected to maintain pressure on RevPar in 2QFY20E. Although the RevPar is expected to post a YoY growth
in 2QFY20E, growth would be lower than earlier expectations. The company expects to maintain the occupancy level Daily Vol. (3M NSE Avg.) 940,060
but ARR is expected to trend marginally lower. Because of the slow growth of Corporate and MICE segments, the
F&B segment is also expected to post lower revenue. However, revenue growth is expected to be supported by
increase in management contracts and increase in membership of ‘Chambers’ Price Performance (%)
EBITDA to be driven by cost optimization: EBITDA is expected to grow at a three year CAGR (FY19 – FY22E) of
10% to Rs11,118mn in FY22E; Revenue CAGR during the three year (FY19-22E) is expected to be 7%. This is 1M 6M 1 Yr
driven by cost optimization measures undertaken by management. Some of the measures undertaken include: (1)
Utilities - A joint venture with Tata Power Company for solar energy and also working with Siemens to take measures Indian Hotels (1.8) (4.3) 3.5
for reducing energy consumption. (2) Manpower - While the company plans to maintain its manpower-to-room ratio at Nifty Index (0.2) (1.3) (5.5)
1.9:1, it expects the costs to gradually reduce with the retirement of high-cost senior employees and also hiring of
relatively low-cost employees (3) Cluster-based shared services like common accounting, finance etc, (4) Synergies Source: Bloomberg
to be created by merging of the sales force of Taj and Ginger hotels. (5) Standardisation of equipment to get the
benefits of discount through bulk buying of items like glasses, chairs etc.
Capex of Rs4,500mn in FY20: Management indicated that capex of Rs4.5bn for FY20E is expected to be driven by
capex for Ginger, Santacruz, Taj Mansingh, SeleQtions Connaught, Holiday Village, maintenance activities and other
hotels.
Gross debt to marginally decline during FY20: Management has indicated that the gross debt is not expected to
increase in FY20E. Most of the capex is expected to be supported by cash flows generated from non core asset sale.
Monetization of non-core assets on track: Management strategy to monetize non-core assets is on track.
Management informed that it has monetized non-core assets worth Rs750mn during the year and is hopeful of sales
of Rs2.5bn for FY20E.
Maintain Buy with revised TP of Rs168 (earlier Rs206): We have rolled over our valuation from FY21E to midpoint
FY22E. Our revised TP of Rs168 (earlier Rs206) for IHCL is based on 21x mid year FY22E EV/EBITDA, which is
supported by EBITDA CAGR of 10% over FY19-FY22E. The muted growth YTD FY20 in RevPar has led to our
reduction in RevPar growth from 8% annually (FY20-22E) to 5%-6% annually (FY20-22E). However, we maintain that
the hotel sector is in a cyclical upswing with improvement in RevPar albeit lower than expected, and also increase in
the number of rooms driving higher revenue. Higher revenue, together with a relatively muted rise in costs and high
operational leverage are expected to lead to strong growth in EBITDA. Our optimism is further supported by a healthy
balance sheet and negative working capital.
Y/E March (Rsmn) FY18 FY19 FY20E FY21E FY22E
Revenues 41,036 45,119 48,083 51,266 55,482
YoY (%) 2.3 10.0 6.6 6.6 8.2
EBITDA 6,703 8,297 8,938 10,119 11,118
EBITDA Margin (%) 16.3 18.4 18.6 19.7 20.0
PAT 632 2,445 2,913 3,867 4,631
YoY (%) NA 287 19.1 32.8 19.7
Adjusted PAT 1,009 2,868 3,337 4,281 5,042
YoY (%) NA 184.3 16.4 28.3 17.8
EPS (Rs)* 0.85 2.41 2.81 3.60 4.24
RoE (%) 2.4 6.6 7.1 8.4 9.0
EV/EBITDA (x) 27.7 20.0 18.2 16.2 14.1
P/E (x) 179.0 63.0 47.2 36.8 31.3
Source: Company, Nirmal Bang Institutional Equities Research
*Note: EPS is calculated on Adjusted PAT
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This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as “NBEPL”) for private circulation. NBEPL is a
registered Research Analyst under SEBI (Research Analyst) Regulations, 2014 having Registration no. INH000001436. NBEPL is also
a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments.
NBEPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have
different or contrary views on stocks and markets.
NBEPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in
securities Market. NBEPL, its associates or analyst or his relatives do not hold any financial interest in the subject company. NBEPL or
its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the
subject company. NBEPL or its associates or Analyst or his relatives do not hold beneficial ownership of 1% or more in the subject
company at the end of the month immediately preceding the date of publication of this research report.
NBEPL or its associates / analyst has not received any compensation / managed or co-managed public offering of securities of the
company covered by Analyst during the past twelve months. NBEPL or its associates have not received any compensation or other
benefits from the company covered by Analyst or third party in connection with the research report. Analyst has not served as an
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Analyst Certification: I, Amit Agarwal, research analyst the author of this report, hereby certify that the views expressed in this
research report accurately reflects my personal views about the subject securities, issuers, products, sectors or industries. It is also
certified that no part of the compensation of the analyst was, is, or will be directly or indirectly related to the inclusion of specific
recommendations or views in this research. The analyst is principally responsible for the preparation of this research report and has
taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.
Team Details:
Name Email Id Direct Line
Rahul Arora CEO rahul.arora@nirmalbang.com -
Dealing
Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com +91 22 6273 8230, +91 22 6636 8833
Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com +91 22 6273 8100/8101, +91 22 6636 8831
Michael Pillai Dealing Desk michael.pillai@nirmalbang.com +91 22 6273 8102/8103, +91 22 6636 8830