Inflation Is A Snag In Indian Hotels’ Plan

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The hospitality industry is recovering fast as fears of the covid-19 pandemic recede and restrictions ease. Against this backdrop, The Indian Hotels Co. Ltd laid out its growth plan Ahvaan 2025 on Monday. Among the key highlights were sustaining double-digit revenue growth, improving operating margin, and expanding the portfolio through the asset-light model.

At its Capital Markets Day, the company told analysts that amid strong demand, industry’s average room rates (ARR), occupancies and revenue per available room (RevPAR) could improve. Over FY20-FY26, average annual demand growth for hotel rooms is expected to be higher than supply. The company’s RevPAR has recovered 76% in FY22 compared to pre-covid levels, it said. It has also outperformed the industry’s 65% RevPAR.

Bouncing back 

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Bouncing back 

The company aims to expand its consolidated Ebitda margin to 33% by FY26 with 35% Ebitda contribution from new businesses and management fees by FY26. Ebitda is earnings before interest, tax, depreciation, and amortization. This is a 900 basis points (bps) jump compared to the 24% margin seen in FY20. One basis point is 0.01%.

The company plans a 50:50 hotel mix split between owned/leased and managed hotels. Analysts note that the rising share of management contracts would be accretive for the company’s return on capital employed. Around 74% of projects under its pipeline are management contracts. Also, it aims to take its total hotel count to more than 300.

Indian Hotels intends to have a strong balance sheet (zero net debt).

The sharp recovery in the industry augurs well for meeting targets, but sustained levels of high inflation could play spoilsport, at least in the near term, caution analysts.

Analysts at ICICI Securities Ltd are of the view that the growth and margin targets set by the company management are realistic. “We estimate FY23 consolidated revenue to grow 56% year-on-year (y-o-y) to Rs4,780 crore (107% of FY20 levels) and FY24E revenue to grow 18% y-o-y to Rs5,650 crore at an Ebitda margin of 32%,” they said in a report on 24 May.

Indian Hotels’ shares fell by 2.5% on Tuesday to Rs225.50. However, in the last one year, the stock has risen by 74%, beating the Nifty500 index by a huge margin.

Motilal Oswal Financial Services expects a strong recovery for the company in FY23 and FY24, led by an improvement in ARR once economic activity normalizes, improved occupancies, led by business travellers and the leisure segment, cost rationalization efforts, an increase in food and beverage income as banqueting and conferences resume, and higher income from management contracts.

However, there are hurdles on the path to recovery. “We are still seeing some countries restricting citizens from travelling to India. There is war going on in another part of the world. So, on the international demand front, the outlook is not as bright. Domestic demand could be impacted by inflation-led lower spending power and postponement of discretionary demand,” said an analyst requesting anonymity. Further, in the services industry where competition is tough and variable expenses, especially manpower costs, are high, there is not much scope for cost rationalization beyond a point. For now, strong demand is keeping investor sentiment upbeat. ICICI Securities’ sum-of-the-parts-based target price is Rs292 per share, valuing the stock on 22x Mar’24E EV/Ebitda. “Key risks to our rating are fresh covid waves globally and in India impacting demand and rise in costs denting margins,” according to the brokerage.

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