Indian Hotels Company lacks valuation comfort despite strong outlook

IHCL continues to expand its network and has opened six hotels in Q1FY25, crossing the milestone of 325 hotels

Tata Group-backed Indian Hotels Company Limited (IHCL), one of the country’s largest hotel brands, reported a flat June quarter (Q1FY25) performance, weighed down by multiple headwinds on the revenue front.

Consolidated revenue growth at 5.7 per cent year-on-year (Y-o-Y) was lower than in previous quarters and was impacted by general elections, heat wave and fewer wedding days. On a sequential basis, growth fell about 31 per cent.

In the June quarter, while average room rates (ARR) were up 2 per cent Y-o-Y, revenue per available room (RevPAR) performance too was muted with an increase of 4 per cent.

Growth rates Y-o-Y for the two parameters were the lowest in at least 10 quarters.

Occupancies increased by 130 basis points to 76 per cent in the quarter.

Rajiv Bharati and Ashish Vanwari of Nuvama Research believe that this phenomenon can be attributed to reduced demand and influx of supply in pivotal markets such as Mumbai, leading hoteliers to accept lower-yielding contracts.

Though the Q1 show missed Street estimates, the stock spurted 7.6 per cent in trade and was the largest gainer in the BSE100 basket.

Expectations of strong growth in the September quarter and a double digit growth guidance for FY25 helped boost sentiment for the hospitality major. The company highlighted that July saw a bounce back with domestic revenue for the month to date rising 20 per cent Y-o-Y and the company remains confident of achieving its revenue growth guidance for the year. 

Indian Hotels continues to expand its network and has opened six hotels in Q1FY25, crossing the milestone of 325 hotels. It plans to open 19 more in the rest of the financial year taking the total in FY25 to 25 hotels.

The management indicated that it would launch full service hotel Gateway in the upscale segment with a portfolio of 15 hotels and this is to be expanded to 100 hotels by 2030.  

Though brokerages are positive on the outlook for the sector and the stock, they are neutral to negative on the stock due to premium valuations.

Emkay Research believes that the company is in a strong position given its diversified revenue stream, operational efficiency, and strong balance sheet.

It has an add rating and believes that valuations are rich which limits the upside from current levels.

ICICI Securities too has cut its rating and reduced its revenue and operating profit estimates for FY25-27 by 4 per cent each. This factors in lower ARR growth of 7 per cent as compared to 9 per cent earlier. Incorporating TajSATS consolidation as a special purpose vehicle from August 1 and post the 20 per cent rise in the stock price over the last 3 months, we cut our rating to add from buy, say Adhidev

Chattopadhyay and Saishwar Ravekar of the brokerage. 

Elara Securities points out that there is continued growth momentum given the favourable supply situation. This comes despite an increased pace of new signings in the industry. The brokerage expects the company to post a 9 per cent growth in room additions during FY25-26 with an ARR growth of 8 per cent during FY24-26. Despite healthy earnings growth, it has a sell rating given that the stock is trading at rich valuations.