Profits miss our estimate; inventory pipeline strong
Revenue for Royal Orchid Hotels (ROHL) grew 5.7% YoY to INR70cr (est. INR75cr) in Q2FY25 on a 5.9%/3.3% growth in RevPAR/JLO inventory. Occupancy fell 2pp YoY due to renovations. ARR grew 9% YoY on healthy demand. Higher repairs and maintenance cost and manpower additions for the upcoming expansion impacted EBITDA (down 26% YoY), which stood at INR11cr (est. INR18cr). EBITDA margin contracted by 695bp. PAT grew 10% YoY. To capitalise on favourable industry dynamics, it added 923 rooms (JLO/managed: 41/882) in the last 12 months, taking its total inventory to 6,556 rooms (JLO/managed: 1,279/5,277).
It plans to add ~1,600 rooms across 21 hotels in the next 12 months. We see a 5% growth in ARR in FY25 on the back of healthy domestic demand, constrained supply in the industry, and likely improvement in the product mix. We see ROHL as one of the key beneficiaries of sectoral tailwinds. We downgrade our FY26 EBITDA/PAT estimate by 9%/10% to account for near term margin pressures due to refurbishment and renovations and a slightly lower-than-expected occupancy. We revise our TP to INR431 (12x FY26E EV/EBITDA). Maintain ‘BUY’.
Higher staff and repair costs impacts profitability
Revenue from room rent/F&B grew 4.5%/12.8% YoY to INR37cr/INR26cr, while other services saw an 8.3% fall to INR8cr. Occupancy fell by ~2pp YoY to 70% due to room renovations and a high base. ARR (JLO rooms) grew 9% YoY to INR5,114 on healthy demand and constrained supply. EBITDA saw a sharp 25.9% YoY drop to INR11cr (est. INR18cr) on front-loading of staff cost and higher refurbishment expenses. EBITDA margin contracted by 695bp YoY to 16.3%. Supported by a one-off of ~INR3cr, PAT grew 10% YoY to INR8cr, still falling behind our estimate of INR10cr on lower EBITDA. Revenue fell 3.6% QoQ on a 1%/29.5% dip in ARR/other operating income. EBITDA fell 31.2% QoQ, with a 652bp margin contraction. PAT fell 14.8% QoQ on lower EBITDA.
Strong inventory addition pipeline with a tilt towards management contracts
By H1FY26-end, ROHL plans to add 1,600 rooms across 21 hotels which will take its room inventory to ~8,156. It will add ~1,176/424 rooms under management contracts/leases. We conservatively estimate 6,726 rooms by FY25-end. This strong front ended room additions will place the company ahead of the curve and will be a key growth driver.
Expect revenue/EBITDA/PAT CAGR of 15.1%/17.3%/17.8% over FY24–27
We expect 15.1% revenue CAGR over FY24–27 on: i) a 5% CAGR in ARR; ii) addition of over 1,450 rooms; iii) strong growth in F&B income on expansion in its restaurant and banquet portfolio, improving MICE activity, and a revival in weddings; and iv) higher in-resort spends. Margin will be under pressure in FY25 (21.6%) on: i) higher fixed costs to aid its quick-paced expansion (new properties need 9–12 months to ramp up), ii) elevated refurbishment costs, and iii) lower occupancy (over 100 rooms under refurbishment). We expect refurbishment cost to normalise from H2FY26 and see margin recovering thereon. We see EBITDA margin settling at 26.8% in FY27. Over FY24–27, we expect 17.3%/17.8% EBITDA/PAT CAGR.
Higher EBITDA to drive cash flows and deleveraging
We expect a cumulative OCF of INR265cr over FY25–27, of which ~INR149cr will be used for room additions and maintenance capex. The balance will aid deleveraging. We expect net D/E ratio to improve to -0.33x in FY27 from 0.08x in FY24. With a large part of the room additions under the asset light model, we expect RoCE to improve to 29.2% in FY27 from 21.8% in FY24.
Maintain ‘BUY’ with a revised TP of INR431
ROHL is going through an investment phase and is taking steps in the right direction by: i) refurbishing its existing inventory, ii) shifting its focus from volume to value (expansion in the five-star segment), and iii) hiring the right talent. These changes will help ROHL to immensely benefit from the current upcycle. We see the valuation gap with peers narrowing as the restructuring plays out. As we are cognizant of near-term margin pressures, we have revised our TP to INR431 (12x FY26E EV/EBITDA) from INR477 earlier. Maintain ‘BUY’.
Leave a Reply