Permanent reduction in costs and new revenue initiatives should improve profit margin. Buy rating, Rs 160 TP, and forecasts unchanged; stock looks oversold and tailwinds seem to have been ignored.
By HSBC Global Research
Buy. Oversold on worries; growth strategy plausible. Increase in Covid-19 cases could extend demand weakness, but strategic growth looks set to strengthen the equity story. Permanent reduction in costs and new revenue initiatives should improve profit margin. Buy rating, Rs 160 TP, and forecasts unchanged; stock looks oversold and tailwinds seem to have been ignored.
Increase in Covid-19 cases could have an impact on demand; IHCL looks set to benefit from strong brand: Due to an increase in Covid-19 cases, the government has imposed travel restrictions across many states in India, which could have an impact on demand.
Some states require a negative RT-PCR report for entry by any mode of transport. Yet, some leisure traffic and the lower end of corporate traffic continues. However, most customers now prefer hygiene over pricing and that should benefit Indian Hotels.
Strategic growth set to strengthen the equity story: We highlighted previously that the industry has seen some exits, primarily in the non-branded category, with only few in the branded space. The likely extended weakness in demand could result in a few more consolidations (or exits) in the branded space, too, over the next few quarters. Property prices remain depressed and Indian Hotels has used this opportunity to grow by acquiring assets at depressed price. While this reflects management’s confidence, it also reflects a good strategy of maintaining an asset light model. The company acquired seven new properties in FY21, but all were on management contracts.
Cost restructuring should improve profit margins: Indian Hotels has been restructuring its cost significantly. It cut operating costs by almost 30-40% during the first nine months of FY21. The company has also been redeploying some of its manpower from existing to new hotels, reducing its staff-to-room ratio from 1.53 in April to 1.14 in December. Some of these costs will return to the business as soon as demand returns and businesses reopen. However, some costs should be out of the business on the permanent basis, improving is profitability post the Covid-19 pandemic.
New revenue initiatives set to create value: Indian Hotels launched new revenue initiatives earlier last year, including food delivery, staycation packages, and chambers membership.