Hold Indian Hotels; target of Rs 80: ICICI Direct

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ICICI Direct's research report on Indian Hotels

With the hotels business almost shut for the entire quarter, IHCL reported a very weak set of Q1FY21 numbers. However, significant fixed cost reduction helped the company to reduce losses for the quarter. IHCL registered a sharp decline of 86% YoY in revenues to Rs 143.6 crore (vs. I-direct estimate: Rs 244.8 crore). Average occupancy fell to 20.5% vs. 63.4% last year while ARR also dropped sharply by 47% YoY to Rs 4848 for the quarter. Out of revenue of Rs 143.6 crore, Rs 55 crore of revenue generated through quarantine facilities, stay for medical professionals also had a negative impact on ARRs. On the other hand, online F&B initiatives like Qmin & H&H services showed good traction. The company reduced total operating expenditure by 51.6% YoY to Rs 409 crore to bring down losses. EBITDA loss came in at Rs 266 crore vs. I-direct estimate of EBITDA loss of Rs 117 crore. IHCL secured significant lease rental waivers that led to cost saving of Rs 52 crore for the quarter. Overall, the company reduced fixed costs by Rs 90 crore while variable expenses declined by Rs 365 crore (in line with reduction in the revenues). At present, there are ~6000 non-operational rooms in total. Occupancy levels of operational inventories are inching up gradually and are at 37%, at present. At the company level, occupancy levels are upwards of 20%. At 50% occupancy levels, IHCL believes it would get back to EBITDA break-even levels with minimised cost, going forward.

Outlook

The sector outlook remains weak as the recovery would be slow and back ended. FY21 would most probably be a washout year for the sector. This prolonged recovery could pose a challenge. However, given the company’s strong parentage and brand visibility along with meaningful cost optimisation measures initiated during the quarter, these concerns have now softened. We now upgrade the stock from REDUCE to HOLD with a target price of Rs 80/share (i.e. 17x FY22E EV/EBITDA).

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