Indian Hotels Company: Cost Optimization - Driver of Profitability

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Institutional Equities

Indian Hotels Company


5 September 2019

Reuters: IHTL.NS; Bloomberg: IH IN

Cost optimization - driver of profitability BUY


We recently met the management of Indian Hotels Company Limited (IHCL). Management indicated
that it is focusing on a four pronged strategy for earnings growth. The key drivers of the profit growth Sector: Hotel
are expected to be: (1) RevPar growth (2) Cost optimization (3) Growth in Food and Beverages (F&B)
(4) Increase in memberships of club ‘Chambers” and (5) Increase in management contracts. RevPar CMP: Rs133
and F&B growth YTD has been relatively muted due to slower growth from MICE and corporate
segments. Target Price: Rs168
Management stated that growth for 2QFY20 till date has been muted relative to expectations due to: (1)
Flat RevPar in July 2019 and slow RevPar growth in August 2019 (2) Continued underperformance by Upside: 26%
Corporate and MICE segments (3) Flat occupancies; marginal reduction in ARR (4) International
operations (UK) performing better due to sports events. Amit Agarwal
Management Meet Update

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

Please refer to the disclaimer towards the end of the document.


Institutional Equities
Impact of Changes
Particulars FY20E FY21E FY22E
RevPar (Rs)
Earlier 4,332 4,679 5,053
Growth (%) 8% 8% 8%
Revised 4,212 4,465 4,688
Growth (%) 5% 6% 5%
EBDITA (Rs mn)
Earlier 10,437 12,699 15,423
Revised 8,938 10,119 11,118
EBDITA Margins (%)
Earlier 21.1% 23.6% 25.7%
Revised 18.6% 19.7% 20.0%
Net Debt (Rs mn)
Earlier 18,664 13,198 6,492
Revised 18,997 14,589 10,080
Operating Cashflows (Rs mn)
Earlier 8,439 10,529 12,144
Revised 7,561 8,977 9,582
EPS (Rs)
Earlier 3.63 5.05 6.71
Revised 2.81 3.60 4.24
Net Asset Value (Rs mn)
Earlier 2,45,492
Revised 1,99,176
Source: Company, Nirmal Bang Institutional Equities Research

2 Indian Hotels Company


Institutional Equities
Financial statement
Exhibit 1: Income statement Exhibit 2: Cash flow
Y/E March (Rsmn) FY18 FY19 FY20E FY21E FY22E Y/E March (Rsmn) FY18 FY19 FY20E FY21E FY22E
Net sales 41,036 45,120 48,083 51,266 55,482 PAT after MI & share in associates
1,009 2,868 3,337 4,281 5,042
Growth YoY (%) 2.3 10.0 6.6 6.6 8.2 & JV
COGS 3,764 4,041 4,508 4,778 5,152 Depreciation 3,012 3,279 3,733 3,893 4,158
Operating costs 16,057 14,708 18,431 19,353 20,866 Finance costs 2,690 1,901 1,733 1,373 1,013
Other expenses 14,510 18,074 16,207 17,017 18,348 Other income 617 834 875 919 965
EBITDA 6,703 8,297 8,938 10,119 11,118 Working capital changes 1,998 (367) 350 334
(2,080)
EBITDA growth (%) 10.0 23.8 7.7 13.2 9.9
Operating cash flow 4,014 9,211 7,561 8,977 9,582
EBITDA margin (%) 16.3 18.4 18.6 19.7 20.0
Capital expenditure (6,115) (4,901) (4,500) (3,900) (4,800)
Depreciation 3,012 3,279 3,733 3,893 4,158
EBIT 3,691 5,019 5,205 6,225 Net cash after capex (2,102) 4,310 3,061 5,077 4,782
6,959
EBIT (%) 9.0 11.1 10.8 12.1 12.5 Other income/(expense) (389) 15 537 564 592
Interest expense 2,690 1,901 1,733 1,373 1,013 Issue/(buyback of equity) 14,914 (0) - - -
Other income 617 834 875 919 965 Proceeds/repayment of borrowings (9,556) (1,015) (1,600) (4,500) (4,500)
Others 225 66 - - - Finance costs (1,901) (1,733) (1,373) (1,013)
(2,690)
Earnings before tax 1,843 4,017 4,347 5,772 6,912 Others (1,720) 134 140 148
(74)
Tax- total 1,211 1,571 1,435 1,905 2,281
Cash flow from financing 2,595 (4,636) (3,199) (5,732) (5,365)
Rate of tax (%) 65.7 39.1 33.0 33.0 33.0
Total cash generation 105 (311) 399 (92) 8
Net profit 632 2,446 2,913 3,867 4,631
Adjusted PAT 1,009 2,868 3,337 4,281 Opening cash balance 2,471 2,703 2,409 2,663 2,571
5,042
% growth N/A 184.3 16.4 28.3 17.8 Closing cash & bank balance 2,703 2,409 2,663 2,571 2,579
EPS (FD) 0.85 2.41 2.81 3.60 4.24 Source: Company, Nirmal Bang Institutional Equities Research
% growth N/A 184.3 16.4 28.3 17.8
* Adjusted PAT - After minority interest and Share of associates and JV
Source: Company, Nirmal Bang Institutional Equities Research
Exhibit 3: Balance sheet Exhibit 4: Key ratios
Y/E March (Rsmn) FY18 FY19 FY20E FY21E FY22E
Y/E March FY18 FY19 FY20E FY21E FY22E
Share capital 1,189 1,189 1,189 1,189 1,189
Profitability and return ratios
Reserves and surplus 40,622 42,291 45,628 49,909 54,951
EBITDA margin (%) 16.3 18.4 18.6 19.7 20.0
Net worth 41,812 43,480 46,818 51,098 56,140
EBIT margin (%) 9.0 11.1 10.8 12.1 12.5
Loans 24,274 23,260 21,660 17,160 12,660
Net profit margin (%) 2.5 6.4 6.9 8.3 9.1
Minority interest 7,774 7,999 7,999 7,999 7,999
RoE (%) 2.4 6.6 7.1 8.4 9.0
Provision 836 1,023 1,074 1,128 1,185
RoCE (%) 5.8 7.8 7.6 9.1 10.1
Deferred tax liability 3,563 3,768 3,956 4,154 4,362
Working capital & liquidity ratios
Other non-current liability 2,536 1,798 1,735 1,822 1,913
Receivable (days) 29 26 30 30 30
Total capital employed 80,794 81,328 83,242 83,361 84,258
Inventory (days) 33 29 40 40 40
Goodwill on consolidation 5,655 5,835 5,835 5,835 5,835
Payable (days) 134 119 120 120 120
Property, plant and equipment 57,941 59,550 60,318 60,324 60,966
Current ratio (x) 0.9 0.8 0.9 0.8 0.8
Investments 11,809 11,239 11,239 11,239 11,239
Valuation ratios
Loans 151 157 157 157 157
EV/sales (x) 4.6 4.1 3.8 3.5 3.2
Other non-current assets 5,994 7,469 7,842 8,234 8,646
EV/EBITDA (x) 22.5 20.9 18.2 16.2 14.1
Total non-current assets 81,550 84,250 85,391 85,790 86,843
P/E (x)* 156.3 55.0 47.2 36.8 31.3
Trade payables 3,513 3,253 3,539 3,731 3,990
P/BV (x) 3.8 3.6 3.4 3.1 2.8
Other current liabilities 8,055 9,696 10,183 10,692 11,227
Source: Company, Nirmal Bang Institutional Equities Research
Provisions (current) 1,384 1,476 1,550 1,628 1,709 *P/E is calculated on adjusted PAT
Total current liabilities 12,952 14,425 15,272 16,051 16,926
Inventories 857 804 1,180 1,244 1,330
Investments 3,305 2,112 2,218 2,329 2,445
Trade receivables 3,286 3,214 3,952 4,214 4,560
Cash and bank balance 2,703 2,409 2,663 2,571 2,579
Loans and advances 91 34 34 34 34
Other current assets 1,953 2,930 3,076 3,230 3,392
Total current assets 12,195 11,504 13,123 13,622 14,340
Net current assets (757) (2,922) (2,149) (2,429) (2,585)
Total capital employed 80,794 81,328 83,242 83,361 84,258
Source: Company, Nirmal Bang Institutional Equities Research

3 Indian Hotels Company


Institutional Equities
Rating track
Date Rating Market price (Rs) Target price (Rs)
25 March 2019 Buy 148 195
8 April 2019 Buy 155 195
2 May 2019 Buy 154 195
5 July 2019 Buy 152 206
6 August 2019 Buy 135 206
5 September 2019 Buy 133 168

Rating track graph


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Not Covered Covered

4 Indian Hotels Company


Institutional Equities
DISCLOSURES

This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as “NBEPL”) for private circulation. NBEPL is a
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5 Indian Hotels Company


Institutional Equities
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Girish Pai Head of Research girish.pai@nirmalbang.com +91 22 6273 8017 / 18

Dealing
Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com +91 22 6273 8230, +91 22 6636 8833
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Michael Pillai Dealing Desk michael.pillai@nirmalbang.com +91 22 6273 8102/8103, +91 22 6636 8830

Nirmal Bang Equities Pvt. Ltd.


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Board No. : 91 22 6273 8000/1; Fax. : 022 6273 8010

6 Indian Hotels Company

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