Revenue for Royal Orchid Hotels (ROHL) grew 13% YoY to INR82cr in Q3FY24 on sharp room additions and higher F&B income. ARR fell 4% YoY to INR5,656, while occupancy was strong at 76% (JLO rooms). EBITDA grew 4% YoY to INR25cr. However, margin contracted by 251bp YoY to 30.2% on lower ARR and higher fixed cost due to rapid room additions. PAT grew 6% YoY to INR15cr on higher other income and steady depreciation. Revenue/EBITDA/PAT grew 23%/60%/125% QoQ on a seasonal improvement in RevPAR. To capitalise on favourable industry dynamics, it added 990 rooms (JLO/managed: 114/876) in the last one year, taking the total inventory to 5,795 (JLO/managed: 1,279/4,516). It crossed the 100-hotel mark in Q3FY24. By FY25-end, it aims to add ~2,300 rooms across 38–40 hotels, of which it has already signed 1,600 rooms. Given the traction from domestic demand, revival in MICE activity, and constrained supply additions in the industry, we expect ARR to trend upwards, with occupancy at near-optimal levels. We see ROHL as one of the key beneficiaries of the sectoral tailwinds. We expect a revenue /EBITDA/PAT CAGR of 21%/16%/20% over FY23–26. We roll over our valuation to FY26E and revise our TP to INR535 (earlier INR498, 11x FY26E EV/EBITDA). Maintain ‘BUY’.
Revenue missed our estimate on lower ARR, EBITDA and PAT in line
Revenue grew 13% YoY to INR82cr on strong room additions and higher income from F&B and other services. Revenue from room rent/F&B/other services grew 6%/16%/52% YoY to INR41cr/INR30cr/INR13cr. ARR for JLO rooms fell 4% YoY to INR5,656 (against a 10% growth estimate) due to change in the product mix and higher revenue from immature properties. Occupancy was robust at 76% (Q3FY23/Q2FY24: 76%/73%). Despite lower revenue, EBITDA was in line at INR25cr, up 4% YoY, on margin outperformance (30.2% versus our estimate of 25.8%) led by cost rationalisation. PAT grew 6% YoY to INR15cr (est. INR16cr) on higher other income and steady depreciation. Revenue/EBITDA/PAT grew 23%/60%/125% QoQ on seasonal improvement in ARR (up 11%) and cost rationalisation.
Strong room addition pipeline one of the key growth drivers
As of December 2023, ROHL operated 5,795 rooms (own/JV/leased/managed: 398/193/688/ 4,516 rooms) across more than 100 hotels. It added 990/162 rooms in the last one-year/Q3FY24. By FY25-end, it plans to add 2,300 rooms across 38–40 hotels (1,600 are already signed), which will take its total room inventory to ~8,100. We conservatively estimate a total of 6,841 rooms by FY25-end. Nearly 80%/20% of expected additions will be under management contracts/ revenue sharing leases. The strong front-ended room addition pipeline will place ROHL ahead of the curve and will act as a key driver of growth ahead.
Expect revenue/EBITDA/PAT to clock 21%/16%/21% CAGR over FY23–26
We expect 21% revenue CAGR over FY23–26 on: i) 9% ARR CAGR, with strong occupancy (led by favourable demand-supply dynamics and robust demand from local tourists); ii) addition of over 2,300 rooms over FY23–26; iii) strong growth in F&B income, with a revival in large-scale weddings, expansion in its restaurant and banquet portfolio, and improving MICE activity; and iv) boost in-resort spends by offering value-add services. We expect EBITDA margin to settle at a sustainable 27% in FY26 given: i) the rise in fixed cost on strong room additions which will impact unit profitability as new properties take three-to-four quarters to ramp up, and ii) the higher revenue share from leased hotels, which earn a lower margin. We expect 21% PAT CAGR over FY23–26, aided by lower interest cost.
Higher EBITDA to drive cash flows and deleveraging
With a stable working capital cycle (~23 days), we expect the lion’s share of EBITDA to flow to OCF (12% CAGR over FY23–26). We expect a cumulative OCF of INR286cr in FY24, FY25, and FY26, of which ~INR180cr will be used for room additions and maintenance capex. The balance will aid deleveraging. We expect the net D/E ratio to improve to -0.29x in FY26 from 0.02x in FY23. With a large part of room additions under the asset light model, we expect RoCE to improve to 28.8% in FY26 from 25.6% in FY23.
Maintain ‘BUY’ with a TP of INR535
We are positive on the sector due to the favourable industry dynamics in the near-to-medium term. A lower base, an extensive room addition pipeline, and better brand recognition will help narrow the valuation gap with its peers. We roll over our valuation to FY26 and assign an 11x EV/EBITDA multiple. We upgrade our TP to INR535 from INR498 earlier. Maintain ‘BUY’.
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