Indian Hotels (BUY): On a strong footing

ICICI Securities reiterates its rating for IHCL post announcement of Q4 FY22 results

While Q4FY22 was an Omicron-impacted quarter leading to 22% QoQ decline in IHCL’s consolidated revenue, ICICI Securities has reiterated its BUY rating with a revised SoTP-based target price of Rs292/share (earlier Rs285), valuing the stock on 22x Mar’24E EV/EBITDA. It is of the view that IHCL is well poised to benefit from the expected recovery in the hotel business cycle from H1FY23 (Apr’22) and is  enthused by the company’s efforts to leverage its existing brand equity to focus on new business segments, focus on cost optimisation, asset-light management contract model to expand room portfolio and net cash balance sheet post Rs 40bn of equity fund raise through a rights and QIP issue in H2FY22. Key risks to its rating are fresh Covid waves globally and in India impacting demand and rise in costs denting margins. 

Omicron impacted quarter; expect strong demand recovery from Q1FY23: Along expected lines, IHCL reported Q4FY22 consolidated revenue of Rs 8.7bn (Isec estimate of Rs 9.0bn) which declined 22% QoQ owing to Omicron impact in Jan’22. Leisure destinations of Goa/Rajasthan continue to see strong occupancies/ARRs while business hotels are seeing signs of recovery in domestic corporate and MICE segment from Mar’22. Q4FY22 consolidated EBITDA stood at Rs1.6bn with margins of 18% (Isec estimate of 22% margin) owing to employee costs remaining flat QoQ.

Demand recovery and cost optimisation to drive earnings growth: ICICI Securities raised its FY23/24E revenue estimates by 6/2% respectively and EBITDA estimates by 3/4% factoring in a stronger-than-expected demand recovery in H1FY23E (Apr’22 onwards) to pre-Covid levels with FY23E consolidated revenue expected to grow 56% YoY to Rs 47.8bn or 107% of FY20 levels. It expects FY24E revenue to grow 18% YoY to Rs 56.5bn with an assumption of occupancies at 72% vs. 68% in FY19 and ARRs growing 7% above FY20 (pre-Covid levels) and contribution from new businesses driving revenue growth. The company’s efforts to bring down fixed costs and staff-to-room ratio are expected to result in EBITDA margins improving to 28% in FY23E and 32% in FY24E vs. 22% in FY20.

De-leveraging efforts have borne fruit: The company’s consolidated net debt had risen to Rs 35.7bn as of Sep’21 vs. Rs 19.2bn as of Mar’20 owing to successive Covid waves in FY21 and FY22 impacting cash flows. However, the company’s fund raise of Rs 19.8bn in Dec’21 through a rights issue (Rs 13bn to reduce debt and balance proceeds for acquisitions) and a subsequent fund raise of Rs 20.0bn in Mar’22 through a QIP have resulted in IHCL being a marginally net cash company at the end of Mar’22. Going forward, the company may generate annual FCFF (post capex/pre-interest) of Rs 8-9bn annually which can be utilised to tap growth opportunities or serve as a buffer to weather any fresh Covid induced disruptions in the near term.


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