How India’s top hotels company just got an upgrade with a new business plan

The hospitality sector was among the most battered business segments in the last two years. The hard lockdown imposed with the onset of the first wave of the coronavirus pandemic in 2020 clearly pulled the rug from under the feet of the hotels business.

Indian Hotels Company Ltd (IHCL), India’s top hotels company by revenue, which runs the iconic Taj Hotels and other hotel banners as part of the Tata Group, was among those most affected by weak business and tourism activity and poor sentiment.

The company’s revenue slipped marginally from a high Rs 4,512 crore in the year ended March 2019 to Rs 4,463 crore as it signed off FY20 with the onset of the pandemic. However, the following year was brutal as revenue crashed by two-thirds to just Rs 1,575 crore and the company sank deep into the red.

The firm’s revenue for the year ended March 31, 2022 remained much below the pre-Covid period and it continued to be in the red. But it has recorded a sharp improvement in metrics and unveiled a new growth plan last week.

Indian Hotels' Game plan

Indian Hotels announced a new strategy—‘Ahvaan 2025’—with an aim to re-engineer its margins, its brandscape and restructure its portfolio. In short, it aims to build a portfolio of 300 hotels, clock 33% EBITDA margin with 35% EBITDA share contribution from new businesses and management fees by 2025-26.

This would come on top of the last five years where Indian Hotels signed over 100 hotels and opened more than 40 properties.

The company has now charted a three-pronged strategy to grow profitably in the coming years.

·       Finance: Emphasis on sustained revenue growth, cost optimisation and operational efficiency, besides strengthening the balance sheet with focus on free cash flows and to be a zero-net-debt company.

·       Brands: Budget brand Ginger will be an important growth vehicle and will scale to 125 hotels, ‘amã Stays & Trails’, a branded offering in the homestay market, will become a portfolio of 500 properties. Qmin, IHCL’s culinary and home delivery platform, will expand to 25 plus cities. All these are low capex projects.

·       Model: IHCL also aims at re-structuring its portfolio and achieve a 50:50 mix between its owned/leased and managed hotels.

Having signed the highest number of new hotels in India over two consecutive years 2020 and 2021, IHCL has a strong pipeline of 60 hotels. IHCL is already present in 100 destinations across India. Taj, the iconic luxury brand, is slated to grow to 100 hotels across the globe, while Vivanta and SeleQtions will scale to a portfolio of 75 hotels.

In effect, IHCL is looking to double the hotel presence from a little over 150 properties currently in operations and those in the works.

Hotel industry landscape

The hospitality industry has seen a recovery, powered by domestic travel due to strong pent-up demand. Experts feel this itself is going to propel the industry in the near term. Return of foreign travel with inbound international tourists can then add sail.

Rating and research agency ICRA has estimated that pan-India premium hotel occupancy has improved significantly to around 40-42% in FY2022, up from 26-28% in FY2021. Demand was impacted in January 2022 and for the first two weeks of February 2022 because of the Omicron wave. But the industry has witnessed healthy recovery after that aided by leisure, transient demand, business meetings and conferences, weddings and a gradual pick-up in business travel.

This recovery has been sharper than that witnessed after the brutal second wave of Covid-19 last year. Pan-India premium hotel average room rates (ARR) stood at Rs 4,200 – 4,400 in FY2022, a 25-30% discount to pre-Covid levels. However, for some high-end hotels and leisure destinations, ARRs have been higher than pre-Covid levels in the last few months.

ICRA expects that with significant improvement in demand, revenue per room (RevPAR) is expected to improve to pre-Covid levels in FY2023.

“Notwithstanding the potential impact on demand with further Covid waves, if any, ICRA expects the industry to return to pre-Covid levels in FY2023, as against FY2024 earlier,” says Vinutaa S, Assistant Vice President and Sector Head at ICRA.

“The demand in the near term is expected to stem largely from domestic leisure travel, although there will be gradual recovery in business travel and FTAs. Hotels are likely to report pre-Covid margins at 85-90% of revenues going forward,” Vinutaa says.

Accordingly, ICRA has revised its outlook on the Indian hotel industry to Stable from Negative in March 2022, following the swift demand recovery.

Should investors check into Indian Hotels?

As the sector leader, IHCL has seen multiple brokerage houses upgrade their rating on the stock to a buy with potential upside of 20-25% on the back of its new strategy that focuses on sustaining double-digit revenue growth, expanding margin and pursuing asset light growth.

The brokerage houses expect the company to shoot past its previous peak revenue clocked three years ago to clock a top line of Rs 4,600-4,900 crore in the current year ending March 31, 2023. This would grow further to Rs 5,300-5,700 crore in FY24.

On the profit front, they have pencilled in a net profit ranging from Rs 480-780 crore in the current year. This could shoot up further to Rs 800-1,150 crore in FY24.

The company has been stuck in the Rs 4,000-4,500 crore revenue range for a number of years. Now, it seems poised to lead the recovery in the sector and break out of the revenue growth trap while building an asset-light and profitable business. The key factor to watch out for is its execution over the short to medium term.