Indian Hotels (IHIN) offers a fusion of warm Indian hospitality and world-class service across four continents, 12 countries, and in over 80 locations. It manages a portfolio of Hotels, resorts, jungle safaris, palaces, spas, and in-flight catering services.

Motilal Oswal Financial Services has maintained 'Buy' rating on Indian Hotels (IHIN).

Key highlights and Investment rationale

Demand recovery: Faster demand revival in the Leisure Travel segment has aided IHIN's performance in FY21. The industry is expected to project accelerated growth in 2HFY22 across domestic and international Hotels. Current demand from the Leisure segment is high, while corporate bookings are also gradually picking up, leading to higher bookings in Ginger Hotels. The company also saw increased demand due to ‘staycation’ demand in Tier I and II cities. This trend is expected to continue further, as the company saw a higher occupancy rate, followed by an increase in average rates. Revenge tourism has led to an increase in ‘staycation’ bookings in metros. A similar trend is expected to continue in the medium-term.

Focus on increasing rooms through management contract: Management contract Hotels has increased from 32% in FY18 to now 46% of the overall portfolio (including Hotels in the pipeline). Currently, ~78% of pipeline Hotels are under management contracts. IHIN targets to take it to 50% going forward. EBITDA flow through management contract income is 70-80% and that too without deploying capital, thus the said initiative is RoCE accretive.

International business witnessed traction: Hotels in London and Cape Town saw good demand during the last 10 days of 1QFY22. IHIN has a presence in New York and San Francisco which have shown a higher resilience with respect to spread/control of COVID-19. The US government has allowed fully vaccinated people to travel, which in turn is expected to push international travel. In the medium term, the region is expected to perform well. In the US, revenue contribution from Banquets stood at USD 30 million on a top-line of USD 80 million. Currently, its Banquets are under renovation, thus no revenue will be recorded in FY22. Non-Banquet revenue (USD 50 million) is expected to grow sharply in the US.

Cost savings are here to stay: Total operating cost fell 45% to Rs 19.2 billion and fixed cost per month declined by 28% to Rs 1.2 billion in FY21 on the back of manpower optimization and reduction in corporate overheads. Staff/room ratio has reduced substantially for IH across brands via: i) redeploying 206 associates, and ii) reimagining ways of working, which includes multi-skilling, a cluster approach, and shared services. Corporate overheads have reduced 39% YoY to Rs 2.1 billion in FY21 on: i) redeployments and restructuring, ii) prudence in resource allocation, and iii) synergies.

Valuation and View: Faster demand revival in the Leisure Travel segment has aided IHIN's performance in FY21. Through its RESET strategy in FY21, IHIN ensured: i) incremental revenue growth of Rs 2.6 billion, ii) spends optimization of Rs 4.2 billion, iii) effective asset management of Rs 700 million, and iv) financial prudence in corporate expenditure of Rs 1.4 billion. We expect a gradual/sharp recovery in FY22E/FY23E on: a) a low base, b) improvement in ARR once things normalize, c) improved occupancies, d) positivity in cost rationalization efforts in FY21, e) an increase in F&B income as banqueting/conferences resume, and f) higher income from management contracts. New revenue generating avenues have a higher EBITDA margin, and this is being done without deploying capital or with very minimal capital, which bodes well for RoCE. We maintain Buy rating on the stock.

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