Domestic hospitality major The Indian Hotels Company (IHCL)reported a healthy 8.7 percent year-on-year growth in its revenue for the quarter ended March, primarily due to increased revenue from domestic operations.
The Tata Group company’s earnings before interest tax depreciation and amortization (EBITDA) margin improved 350 basis on year on account of higher revenue per available room (RevPAR), which rose 6 percent as against an industry average of around 3.2 percent.
The company also managed to reduce its debt, which led to a 33 percent reduction in cost of borrowing. Its other income was higher during the quarter, compared to the same quarter last year. As a result, net profit improved 70 percent to Rs 79.3 crore.
Improving demand supply scenario
Low occupancy because of excess supply had been taking away pricing power from hotel companies, thereby keeping average daily room rates (ADR) low. However, demand for rooms picked up in FY18 and grew at a faster pace than supply. This led to improved room occupancy and average revenue per room. In the current fiscal year, we expect companies to improve their occupancy further and grow their RevPARs.
New initiatives to improve margins
The IHCL management has come up with a new strategy to improve its margins by rationalising costs and reducing overall debt by FY22. The company plans to expand its operations through franchisees and management contracts, and improve its fee-based income.
In the self-owned property model, the company aims to improve RevPAR, and optimise its employee costs and corporate overheads, which in turn will improve its margins.
In a bid to monetise its strong brand image, the company signed close to 10 new management contracts during the year, and according to the management, 20 more are in the pipeline.
Moreover, planned renovations at major properties are now complete and the complete portfolio of rooms will now be available, which should boost the company’s revenue.
Balance sheet clean up
With the proceeds from the sale of international ventures and the rights issue done in November, the company paid off a substantial portion of its debt and its balance sheet seems a lot leaner now. Overall restructuring of operations will also help bring the working capital liability down.
The company plans to further prune its debt by monetising non-core assets like ITDC shares, residential apartments and land.
Given a seasonally-robust second half of FY18, a revival in occupancy, improving domestic room rates (ADR) and RevPARs, rise in domestic leisure spend, and renovated properties back in supply with only a limited amount of capacity left to be added, the company reported a healthy performance in the quarter gone by.
We expect the good show to continue in the coming year. With reduced leverage and improved operational efficiency, we expect a significant improvement in margins and return ratios, which have been subdued in the past. The stock is currently trading at an EV/room of Rs 1.15 crore, which is below the industry average, and we see room for further growth.
Overall, the initiatives on rigorous restructuring, exits from non-core non-profitable businesses, and increased focus on improving margins appear to be bearing fruit, as is evident in the company’s quarterly earnings.
The stock has reacted strongly to a good set of numbers and has run up 11 percent over the last fifteen days. It is currently trading 7.5 percent below its 52-week high. With improved operational performance, we see earnings improving further and the stock getting re-rated at some point.
Given the overall positive outlook for the industry, we recommend keeping IHCL on the radar and buying it on corrections.