Motilal Oswal Institutional Equities report predicts corporate demand recovery

The Hotel industry has witnessed demand revival in the Leisure Travel segment. However, the management expects corporate travel demand to return by 1Q/2QFY22. Revival in corporate demand would remain a key trigger to watch out for going forward.

Motilal Oswal Institutional Equities recently released sector update report on hotels. The report reveals that the 3QFY21 aggregate revenue of hotel players IH, CHALET, LEMONTRE, and EIH declined 62 per cent YoY, but grew 105 per cent QoQ. On a QoQ basis, the best performance was reported by EIH, which reported revenue growth of 149 per cent. IH’s revenues grew 118 per cent QoQ, and the revenues of each CHALET and LEMONTRE grew 44 per cent QoQ. 

Excluding Lemontre and Chalet, all hotel players reported operating loss in 3QFY21. However, operating loss declined across players sequentially. Lemontre’s EBITDA grew 142 per cent QoQ to INR 201m. CHALET posted operating profit of INR104m in 3Q (v/s loss of INR23m in 2QFY21). 

IH’s consolidated operating loss in 3Q reduced to INR 167m (from loss of INR1,503m in 2QFY21); EBITDA from standalone operations stood at INR 480 m (v/s loss of INR 877 m in 2Q). EIH’s EBITDA loss has reduced to INR 268m in 3Q (v/s loss of INR1,000m in 2Q). 

Aggregate operating loss for hotel players reduced to INR 131 m in 3Q (v/s loss of INR2,443m in 2Q). On a QoQ basis, total expenditure grew 33 per cent for hotel players, with revenue growth of 105 per cent, which helped reduce operating loss. 

Among the key players, EIH reported the highest incremental EBITDA to incremental revenue on a QoQ basis, at 68 per cent in 3QFY21 (v/s 97 per cent in 2QFY21). LEMONTRE came in second highest with 57 per cent (similar to 2Q levels). IH/CHALET reported EBITDA flow through of 44 per cent /48 per cent in 3QFY21 (102 per cent/60 per cent in 2QFY21). 

As far as occupancy-driven RevPAR growth (QoQ) are concerned, IHIN shined on RevPAR performance. Hotel occupancy in India plummeted to 7 per cent in Apr’20 from ~75 per cent in Apr’19. A 55– 60 per cent plunge is expected in ARR in 2020. As per Hotelivate, estimated loss of revenue for the Hotel industry over Jan–Dec’20 stands at a whopping INR1,430 b. 

Across players (ex-EIH), RevPAR grew on a QoQ basis on the back of improved occupancy levels. IH has outperformed peers in RevPAR growth. IH saw the highest QoQ improvement in RevPAR (143 per cent /125 per cent for its domestic network / standalone operations). This was led by a 17.2pp (domestic network) / 15.1pp (standalone operations) revival in occupancy levels. On a QoQ basis, ARR grew 51 per cent /53 per cent for its domestic network / standalone operations. 

LEMONTRE’s RevPAR was up 25 per cent QoQ to INR1,073 in 3QFY21, led by a 10pp improvement in occupancy to 42.4 per cent (ARR de-grew 5 per cent QoQ). Whereas, CHALET’s RevPAR grew 31 per cent QoQ to INR1,318 on an 800bp improvement in occupancy to 33 per cent (ARR was flat QoQ).

Management commentaries

Common commentary across players: a) Corporate rates have not been revised, b) expect corporate travel demand to return by 1Q/2QFY22, c) some amount of Sector Update | 24 February 2021 Hotels Aggregate revenue grew 105 per cent QoQ % Change YoY Change QoQ IH -59 118 EIH -65 149 CHALET -69 44 LEMONTRE -66 44 Aggregate -62 105 EBITDA performance has improved across players in FY21 (INR m) 1Q 2Q 3Q IH -2,660 -1,503 -167 EIH -1,408 -1,000 -268 CHALET -60 -23 104 LEMONTRE 44 83 201 Aggregate -4,085 -2,443 -131 25 February 2021 4 project-based business travel is reported, and d) some of the cost rationalization measures would continue beyond the COVID-19 pandemic. 

IH: (i) In 9MFY21, IH reduced its fixed cost per month by 27 per cent YoY to INR1.2b. (ii) In Apr’20, the staff-to-room ratio stood at 1.53x, which declined to 1.14x in Dec'20 – on account of redeployments, multi-skilling, and new work methods. The ratio is expected to increase as occupancy rises. However, some reduction is expected in the staff-to-room ratio v/s pre-COVID levels. (iii) Around 86 per cent of IH’s domestic hotels (excluding Ginger) turned EBITDA positive in Dec’20. (iv) Corporate customers are renewing their contracts at FY20 rates. 

LEMONTRE: (i) Some cost-cutting measures would persist post COVID-19, which should increase the EBITDA margin by 500–700bp – driven by a) employee cost (decline of 400bp, driven by lower staff-to-room ratio), b) power cost (decline of 200bp due to the higher use of renewable energy sources), c) F&B cost (as a percentage of sales, this would decline 100bp, on the back of menu rationalization). (ii) The debt repayment schedule stands at INR1,150m for FY22 and INR1,400m for FY23. (iii) Room night bookings from Retail/Corporate customers were up 11 per cent YoY / 90 per cent QoQ in 3QFY21. (iv) Given its liquidity position, LEMONTRE is unlikely to raise funds (as planned earlier). 

CHALET: (i) The debt repayment schedule for FY22 and FY23 stands at INR2.5– 2.75b for each year. Estimated capex stands at INR5.5b for FY22 and INR2.75b for FY23. (ii) The company has received in-principle approval for a term loan of USD50–55m (@8–8.25 per cent interest rate) from IFC and an additional loan of INR5b (@8–8.5 per cent interest rate) from HDFC. Both the loans would be used to finance capex. (iii) Re-strategizing is underway at The Orb, by Sahar Retail – the company is looking to convert this into a commercial center owing to huge demand for commercial spaces. (iv) It reported a 0.73x staff-to-room ratio in Dec’20 (v/s 1.18x in Dec’19); in a stable business scenario, the ratio would increase to 0.9x (incl. contractual employees). 

Valuation and view

EIH: (i) Luxury/Quality hotels are coming up for sale, but valuations are a little high. (ii) Breakeven occupancy at the hotel level is less than 40 per cent. (iii) The Corporate business is likely to see an uptick over the next couple of quarters

The Hotel industry has witnessed demand revival in the Leisure Travel segment. However, the management expects corporate travel demand to return by 1Q/2QFY22. Revival in corporate demand would remain a key trigger to watch out for going forward. The return of demand would drive up occupancy, with ARR growth following suit. 

While FY21 earnings are estimated to remain weak, we expect sharp recovery in FY22 on a) a low base, b) improvement in ARR as normalcy returns, c) improved occupancy, d) positivity in cost rationalization efforts in FY21, and e) an increase in F&B income as banqueting/conferences resume. 

We assign a Buy rating to IH, with an FY23-based Target Price of INR143 (one year forward EV/EBITDA multiple of 18x). 

We assign a Buy rating to LEMONTRE, with an FY23-based Target Price of INR50 (one-year forward EV/EBITDA multiple of 18x).


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