Royal Orchid Hotel Research Report By ICICI-Direct

Valuations indicate further room for upside

We had come out with an I-direct Instinct on Royal Orchid Hotel (ROHL) in September, 2017. In a recent development, the hotel industry occupancy has reached an inflection point that may trigger a sharp rise in ARR and EBITDA margin in FY19E. Further, the company expects to clock EBITDA of ~Rs 50 crore on a consolidated basis in FY19E. Based on this, the stock is available at EV/EBITDA of 14x (vs. industry average of 25x). Hence, we note that despite the recent run up, the company is still available at attractive valuations. On an EV/room basis, the stock is trading at Rs 1.7 crore/room (below industry average of Rs 2.5-3.0 crore/room). Given this, we arrive at a target price of Rs 300-305/share (i.e. EV/adjusted room of Rs 2.2 crore/room).

Royal Orchid Hotels targets 80-90 properties by 2020 https://t.co/uao25CQLi2

— EconomicTimes (@EconomicTimes) April 1, 2018

Triggers

•Asset light strategy: In FY09-13, the company aggressively expanded its room count from 900 to 1,885 by incurring heavy capex of over Rs 265 crore, primarily financed through debt. Post FY13, ROHL adopted an asset light model and sold off loss making properties that helped it to pare down its debt burden significantly to Rs 88 crore in FY17. Since FY14, it has added ~1200 rooms all under management contract. As of Q3FY18, 70% of total rooms are under management contract

•Sale of non-core assets key trigger for debt reduction: The company owns two land parcels: one in Mumbai (of 1.15 acre) another in Tanzania. The Mumbai land parcel is in Powai and was earlier under a JV with Amar Tara hospitality Pvt Ltd, in which ROHL had 75% share. In January 2017, the company bought the entire 25% stake from its JV partner and became sole owner. The combined value of Mumbai, Tanzania properties is upwards of | 80-90 crore. Sale of these properties may make the company debt-free and lead to a significant increase in earnings per share

•New GST rate to make Royal Orchid more competitive: In the pre- GST regime, the company used to pay 21.3%. However, the same has come down to 18% under GST. We believe this will enable ROHL to effectively compete against unorganised segment

Valuation & Outlook

The company’s ability to rapidly scale up through management contracts augurs well in improving demand dynamics. Further, comfortable debt levels and favourable tax rate are key positives. ROHL’s five star property at Bengaluru (195 rooms) is worth over Rs 600 crore vs. current EV of Rs 703 crore. Hence, we arrive at a target price of Rs 300-305/share.