Indian Hotels is rapid scaling up margin-accretive new businesses. Buy for target price of Rs 390: Motilal Oswal

Rapid scaling up of margin-accretive new businesses

Indian Hotel’s (IH’s) new and re-imagined businesses Ama Stays, Qmin, Chambers, and Management contracts are expected to scale up rapidly on the lower base and high growth runway. These businesses are margin accretive with higher margin flowthrough, thereby driving up the RoCE. The new business is expected to contribute ~26% to the company’s operating profits by FY25.

▪ Amã stay portfolio is expected to grow 5x in the next two-three years with robust revenue growth, driven by the thriving industry and synergy with the group businesses. Further, it is aided by the company’s asset light model. The business has higher a flowthrough of ~60-65%.

▪ IH is establishing its Qmin brand across verticals of food delivery/QSR/ Restaurants. Growing food delivery industry (~30% CAGR) and Qminization of Ginger (from 8 to ~90 hotels) is expected to drive the growth ahead.

▪ Member additions are expected to drive the incremental growth for Chambers (initiation fees forms ~50% of Chamber’s revenue in 1HFY23). Also, the addition of new clubs such as the one planned in New York and Bengaluru will aid in growing the company’s membership base.

▪ While IH’s managed room portfolio stood at ~46% (including pipeline) in 1HFY23, it is expected to reach ~50% by FY25/26. The increasing inventory under management contract is margin as well as RoCE accretive for the business.

Amã stay – Rapid expansion with an asset light model

▪ Amã stay has a portfolio of more than 100 homestays as on 2QFY23 with 57 in operations, while others are in various phases of development/ licensing. Management expects to increase the portfolio to ~500 homestays by FY25/26.

▪ The business operates on an asset light model with IH charging ~18% of topline from the owners of the property (15% – management fees and 3% – marketing and reimbursement fees).

▪ Ama stay, located within a two-hour driving distance from company’s hotels witnesses’ operational efficiency and low operating cost resulting in a ~60-65% flow through rate for the business. Ama stay is expected to register revenue CAGR of ~123% over FY22-FY25.

▪ As per industry reports, India still needs to add ~2.5 million rooms in the homestay segment to keep up with the increasing demand. Further, a precovid survey by online travel aggregator ‘MakeMyTrip’ indicates that one in every two Indian travelers (especially millennials) is looking to book an alternative accommodation such as villas/homestays.

▪ Thus, the increasing demand and limited supply in the industry will aid IH in growing its revenue, led by rapid additions of properties.

▪ Stay Vista (over 500 holiday homes across 50 destinations; focused on luxury villa segment) and Saffron stays (over 250 homes) are some of the key players operating in the homestay management segment.

▪ Synergy with the existing group businesses has provided a strong competitive advantage to the company while sustaining its asset light model. (mentioned in detail below)