After slipping into losses in FY21 and FY22, The Indian Hotels Company (IHCL) has managed a stellar turnaround in its financials in FY23. The stock, which has delivered 77 per cent CAGR in the last three years at nearly thrice the rate of the Sensex, is near all-time highs. But given that tourism in India seems to be at inflection point, with IHCL amongst the best-placed to capitalise on it, we believe there is more gas left in the tank for the IHCL stock.  

Investors with medium-risk appetite and a three-year plus horizon can buy IHCL shares, trading at a forward price to earnings multiple of 36 times FY25 estimates. This valuation seems acceptable, given that the expected CAGR revenue growth of about 12 per cent in the next two years is higher than the 9 per cent run-rate of past three years, 30+ per cent EBITDA margin outlook compared to volatile trends in the past, and vastly improved finances.

Our positive business view on IHCL is based on the substantial additions to rooms and properties expected over the next few years and sustained operating margin improvements resulting from  asset-light growth, even as developments such as Government’s intent to leverage the G20 Summit to boost inbound tourism, the men’s cricket ODI World Cup in October 2023 and the recovering international tourist footfalls post-Covid promise to make the next few years good ones for premium hospitality players.

Improving financials

With the Covid pandemic becoming a thing of the past, and travel taking up a large share of the affluent Indian’s wallet, the 21,000-room-strong IHCL appears to be in a good place to capitalise on discretionary consumption trends. It has properties across the budget, premium and super-premium segments of the Indian hospitality market.

Apart from the iconic Taj brand, upscale offering Vivanta, premium properties under SeleQtions and the budget range under Ginger are positioned across price points for the domestic and international traveller. Occupancies and room rates are expected to sustain even as the company plans to add nearly 9,900 rooms (75 hotels) in a staggered manner by March 2027 in the backdrop of demand outpacing room supply. Over 70 per cent of room additions will be based on management contract model. This should support current EBITDA margins (32-33 per cent) over the medium term, helped by the asset-light management contract route.

IHCL is the oldest operating company of the salt-to-software Tata Group. IHCL’s current portfolio of 263 properties, globally, includes Taj (11,726 rooms/100 hotels), Vivanta (3,800 rooms), SeleQtions (1,346 rooms) and Ginger (4,814 rooms/85 hotels). Apart from this, it has a flight kitchen business (Taj Sats) and new/ancillary businesses such as Qmin – a gourmet delivery platform, amã Stays & Trails (experiential homesteads) and The Chambers (exclusive business clubs). On a consolidated basis, room revenue accounts for 48 per cent of sales, followed by F&B revenue at 36 per cent, management fee at 7 per cent and the rest making up 9 per cent. About 87 per cent of IHCL’s portfolio and revenues come from India, making it a proxy for domestic discretionary consumption. This is a seasonal business, with Q1 and Q2 typically slower than Q3 and Q4.  

Post Covid, revenue growth and profitability of IHCL surged sharply, in line with the smaller competitors such as EIH. While annual revenue has surpassed pre-Covid levels, operating margins are 9-10 percentage points above pre-Covid levels. Three factors have contributed to this – higher room rates on supply shortfalls in rooms (15-20 per cent higher than pre-Covid levels), healthy FY23 occupancies (71.7 per cent – standalone domestic) and operating leverage arising from the two. This has contributed to IHCL reporting its best-ever full-year performance in FY23 (see table).

IHCL has also used the last few years to remedy the acquisition mistakes of the past and to deleverage its balance sheet. Year-end outstanding borrowings have more than halved to ₹818 crore in FY23, from ₹2,326 crore in FY19. Significant ramp-up in free cash flows (over ₹1,000 crore in FY23) has helped it pay down its borrowings. Interest cover ratio has gone up to a very healthy 8.2 times in FY23 (from 4.8 times in FY19).

The company has a three-pronged strategy under way to chart its expansion plans over the next 3-4 years. It aims to have a total of 300+ hotels, clock 33 per cent EBITDA margin and have 35 per cent EBITDA contribution from new businesses and management fees by FY26. Plus, there is a plan to offload stakes across selected hotels and land banks.

Sector tailwinds

We are positive on the prospects of IHCL stock on account of three factors.

Margin tailwinds: Courtesy Covid, not many hotels got built in the last three years. This imbalance in demand and supply has helped drive occupancies as well as room rates in the hotel sector. Demand for rooms is expected to grow at 10 per cent CAGR over FY23-26 against a room supply CAGR of below 5 per cent over the same period. This should be supportive of room rates holding up even if they don’t increase at the pace of the past two years.

The rising proportion of domestic individual consumers and SMEs using premium hotel bookings, as opposed to large corporates with higher bargaining power, is also helping sustain pricing for IHCL. Its standalone domestic average room rate was ₹13,736 in FY23 against ₹10,734 in FY20. Hotels being a high operating leverage business, EBITDA margins  (FY20: 24 per cent to FY23: 33 per cent) of IHCL have seen a substantial improvement with rising occupancies and tariffs. Margin gains should be retained even as IHCL adds over 2,000 rooms annually over the next 3-4 years (see table).

Asset-light route: While this is traditionally a capital-intensive business with a long gestation, IHCL has been increasingly using the management contract model where it receives a fee for taking over and running an existing premium property. It aims to achieve a 50:50 mix between its owned/leased and managed hotels, management fees (₹400 crore) doubling in six years.

Travel boost: Indian hotel properties should see strong demand continue in FY24, with large events such as G20 and ICC ODI Cricket Men’s World Cup coming up. While regular events such as weddings do support premium players such as IHCL, inbound international travel is a key demand driver too for these players. The WHO recently declared that Covid no longer constitutes a public health emergency of international concern and this should incrementally boost confidence among travellers. It is expected that foreign tourist arrivals will touch pre-Covid levels by October 2023, from 60 per cent of that level now.

As per Ministry of Tourism data, foreign tourist arrivals in the first nine months of fiscal 2023 were about 54 lakh –  70 per cent of FY20 levels. Foreign guests can boost both occupancies and room rates, especially for IHCL’s luxury properties such as royal palace hotels (₹38,000/night in FY23).

Valuation, risks

At an estimated FY25 EPS of ₹10 per share, IHCL stock trades at 36 times price to earnings. This is not cheap. But the premium valuation accorded to IHCL is unlikely to de-rate, given that this is the biggest proxy to the rosy long-term prospects for global travel and tourism. IHCL’s $6.2-billion mcap positions it among the promising hotel stocks globally and like-sized peers such as Whitbread and Wyndham face weaker prospects in the next two years. Larger players such as Accor and Hyatt operate at less than 10 per cent PAT margin, half of IHCL’s levels.  

Risks to our call are black swan events such as Covid, weak global macros that will impact both corporate travel and price elasticity in the leisure segment, and any renewed actions by the Tata group to revive an overseas acquisition spree.

Why buy
Demand outlook robust
Margin improvement to sustain
Size and scale makes it best ‘hotel’ play