EIH Limited Research Report By Nirmal Bang

Reduced pandemic impact, cyclical upswing, strong brand and locational advantage to drive growth

We initiate coverage on EIH Ltd with a Buy rating and a target price (TP) of Rs116 based on 16x FY23E EV/EBITDA. The strong impact of Covid 19 outbreak led to a sharp decline in the company’s stock price by 63% from Rs149 in January 2020 to Rs55 in May 2020. While the stock price has increased to Rs97 now, in our view, it does not fully incorporate the strong growth in earnings post the pandemic.

On an overall sectoral basis, our optimism is driven by strong pricing power and better occupancies in branded hotels due to the expected closure of 10-20% of the branded room supply in the wake of the pandemic, as per hotel experts. Further, expectation of sustained cost reduction of 10-20% will help grow earnings since the hotel sector has high operating leverage.

Our sectoral optimism is further supported by key strengths of EIH Ltd which include the following: (1) Better locations and strong brand have ensured healthy occupancy levels (2) An experienced promoter has helped in acquiring properties at good locations (3) A strong balance sheet with negligible net debt to equity ratio at 0.11x in FY20 has helped alleviate stress caused due to the Covid 19 impact. We expect net debt to equity of 0.19x in FY21 (4) Expected strong growth in operating cash flow and FCF yield.

We have valued EIH Ltd at 16x FY23 EV/EBITDA and arrived at a TP of Rs116, which implies an upside of 19% from the current market price (CMP). In our valuation, we have not included some of the forthcoming hotels due to lack of data from the company. Currently, the company has 4,572 rooms, which are expected to increase to 4,824 rooms in FY23E.

Pandemic impact expected to reduce room supply by 10-20% as per experts; will help improve pricing power which will drive ARR and occupancy in existing hotels: Post pandemic, industry experts have opined that the demand-supply scenario will become more favaorable for the survivors since ~10-20% of the branded room supply in India is expected to be removed due to the impact of the pandemic. Further, pre-pandemic demand-supply ratio had already turned favorable, which had led to continued improvement in pricing power. This favorable demand-supply ratio will get accentuated due to the reduction in number of branded rooms. The changing supply-demand mix led to an increase in the overall occupancy level from 57% in FY13 to 68% in FY18 and is expected to rise further. EIH Ltd had an average ARR of Rs12,200 in FY19 and Rs11,970 in FY20 (pre pandemic), relative to average industry ARR of Rs10,656 for five star deluxe category in CY2019 (Source: 2019 Indian Hospitality Trends & Opportunities, Hotelivate) due to: (1) The good locations of its properties (2) Strong brands like “Oberoi” and “Trident”.

Strategy focused on luxury, super luxury range; beneficiary of strong experience of promoter, strong brand and advantageous locations: EIH Ltd is primarily focused on luxury and super luxury hotels with brands like “Oberoi” and “Trident”. The company’s brand equity has been built over the past 61 years in India and has been extremely judicious and conservative in expansion. Consequently, it has built a relatively small but marquee properties across India with strong locational advantage. As per its expansion plans, the company plans to add only 252 rooms in 2 hotels across India and abroad by FY23E. Further, the company plans to build 6 hotels which have not been included in our valuations due to lack of data.

EBDITA margin to expand to 24.5% in FY23E – driven by revenue growth, sustained cost reduction: With gradual but steady normalization of the economy, we expect strong revenue growth (from Rs5.4bn in FY21E to Rs19.3bn in FY23E), driven by the anticipated normalization of demand from MICE and corporates FY22 onwards, which has been muted due to the impact of the pandemic. The strong revenue growth is expected to be supported by robust revpar growth due to the closure of some hotels, as mentioned above. With the cyclical upturn in the industry, the company is expected to benefit from more favorable industry dynamics.

This is supported by the anticipated sustained cost reduction, which is expected to drive EBITDA from Rs(2.5)bn in FY21E to Rs4.7bn in FY23E. This would imply EBITDA margin expansion to 24.5% by FY23E vs. EBITDA margin of 18.2% in FY20. We expect the cost reduction to be driven by (1) Reduction in employee cost due to reduction in employee/room ratio (2) Sustained reduction in heat, light and power costs.