Significant room for upside in Indian Hotels stock, say analysts

Analysts estimate annual growth of 15% in revenue and 20% in Ebitda during FY23 to FY25, and have target prices ranging Rs 375-380

There was a mixed trend in the results of the hospitality sector for the October-December quarter of the 2022-23 financial year (Q3), which indicates a somewhat K-shaped recovery. While the luxury segment saw high average room rates (ARRs), occupancy rates improved sequentially but were still low compared to the pre-Covid-19 levels. The festival and holiday season meant that business travel was down.

While premium hotels are expected to report decadal-high ARRs and occupancy rates, the budget segment is likely to see ARR trend at 20 per cent higher than the pre-pandemic (FY20) number but with occupancies below the pre-pandemic level. This is similar to other discretionary consumption sectors -- such as automobiles -- where premium sales of vehicles are much better than budget vehicles.

The ARR of premium hotels increased 13 per cent year-on-year (YoY) in FY22 and is expected to rise 19-21 per cent in FY23 to a decadal high of Rs 7,500-10,000. The occupancy level, which was at 50 per cent in FY22, will also touch a decadal high of 67-72 per cent in FY23 according to Crisil.

All major players reported YoY and quarter-on-quarter (QoQ) rise in earnings before interest, tax and depreciation (Ebitda) margins even if the increase was not very large in all the cases. This was driven by strong ARR and Revenue/Available rooms (RevPAR), coupled to control of costs. Even compared to pre-Covid (October-December 2019), margins were good.  

Over calendar years 2018–22, room inventory increased at a 7.7 per cent compound annual growth rate (CAGR) but the pace of room growth is expected to moderate to around 1 per cent CAGR. Indian Hotels (IHCL) appears well-placed to maintain its leadership position in the segment. It has an industry-leading pipeline of about 8,800 rooms, which is over 35 per cent of its current room under operations and 40-plus new hotels are expected to open in the next two years.

Another trend, which insiders are optimistic about, is a pick-up in foreign travelers which is still well below pre-Covid levels at around 70 per cent of FY20, according to Ministry of Tourism data. The G-20 Summit and the World Cup are both expected to boost the number of overseas travelers. Hence, FY24 is expected to see revival in foreign travellers with subsequent normalisation. This, of course, assumes no black swans such as another pandemic.

The IHCL Q4 revenues could be down QoQ by about 12-15 per cent to Rs 1,480 crore (the Q4s of FY20, FY21 and FY22 are not comparable due to the impact of Covid-19), due to seasonality in the international markets. Domestic occupancy in Q4 is expected to rise to 75 per cent, versus 71 per cent QoQ whereas international occupancy would be 52-53 per cent (against 60 per cent). The Q4 Ebitda margins have been historically low in QoQ terms due to seasonality in international business. Hence, margins could be down by up to 150-200 basis points to 33.5 per cent in Q4, against 35.4 per cent in Q3.

In the longer-term, analysts expect IHCL to see revenue CAGR of 15 per cent between FY23 to FY25 and Ebitda CAGR of 20 per cent in the same period. Analysts are seeing targets of around Rs 375-Rs 380 for the stock, which is a significant upside from the current Rs 313.