Indian Hotels ARR continues to inch higher. Buy for Target Price of INR410 (+36%): Motilal Oswal

ARR continues to inch higher

Operating performance beats estimate on higher-than-expected ARR

► Indian Hotels (IH) reported the highest ever consolidated revenue/EBITDA in 3QFY23 (up 23%/40% v/s 3QFY20) fueled by strong 25% ARR growth (v/s 3QFY20) to INR15,456 while occupancy stood at 72% (down 120bp v/s 3QFY20). Management contract revenue surged 86% v/s 3QFY20 to INR1.2b.

► Occupancy (like-for-like) in the business remained 4pp above 3QFY20 levels to 77% in 3QFY23, while the same for Leisure/Palaces/Ginger was lower by 1pp/6pp/7pp to 65%/57%/61%, respectively.

► Factoring in the 3QFY23 performance, we raise our FY23/FY24/FY25 EBITDA estimates by 7%/6%/5%, respectively, aided by robust demand due to increase in inbound travel, India assuming the G20 presidency (meetings across India) and major events in the coming years such as the ICC ODI cricket World Cup. Maintain BUY with an SoTP-based TP of INR410.

Robust demand drives earnings

► IH’s consolidated revenue in 3QFY23 grew 52% YoY/37% QoQ to INR16.9b (est. INR15.8b). EBITDA jumped 86% YoY/2x QoQ to INR6b (est. INR5.4b). Adjusted PAT surged 4.6x/3.4x to INR3.8b (est. INR2.7b) in 3QFY23. IH witnessed an EBITDA flow through of 55% from 3QFY20 levels.

► Standalone revenue/EBITDA in 3QFY23 surpassed pre-Covid levels by 24%/ 38% to INR10.6b/INR4.4b (up 43%/68% YoY and 41%/2x QoQ), respectively, propelled by a strong ARR growth (up 25% v/s 3QFY20) to INR15,456 while occupancy was at 72% (down 120bp v/s 3QFY20). IH witnessed an EBITDA flow through of 59% from 3QFY20 levels.

► The subsidiary (consolidated less standalone) sales grew 69% YoY/29% QoQ to INR6.2b. Revenue from PIEM/Roots/ Benares jumped 23%/39%/34% YoY v/s 3QFY20 levels. Subsidiary EBITDA surged 2.6x YoY/95% QoQ to INR1.6b during the quarter.  For 9MFY23, revenue/EBITDA soared 92%/5.2x YoY to INR41.8b/INR12.7b, respectively. Net cash stood at INR7.38b v/s net debt of INR19b in 9MFY22.

Highlights from the management commentary

► The management expects FY24 domestic business to be healthy driven by large events such as G20 and ICC ODI World Cup cricket among others.

► International locations are also expected to perform better in 4QFY23. The management indicated that in FY24, occupancy of international business will touch or even exceed the pre-pandemic level.  Sea Rock hotel update – IH received a formal letter from the Maharashtra Coastal Zone Management Authority (MCZMA). The company will apply for fresh applications to MOES and BMC as the next step in the process.

Valuation and view

► We expect the strong momentum to continue in FY23-25, led by: a) a further improvement in ARR and occupancy due to favorable demand-supply dynamics; b) higher income from management contracts; and c) unlocking value by launching the reimagined and new brands.

► Factoring in the 3QFY23 performance, we raise our FY23/FY24/FY25 EBITDA estimates by 7%/6%/5%, respectively, aided by robust demand due to the wedding season, increase in inbound travel, India assuming the G20 presidency (meetings across India) and major events in the coming years. Maintain BUY with an SoTP-based TP of INR410.