Royal Orchid Hotels Research Report + Investors Presentation

Initiating coverage report by Stewart & Mackertich

We initiate coverage on Royal Orchid Hotels (ROHL) with a Strong Buy rating. Our rating underpins the company’s rapid expansion in the hospitality space, its rich property portfolio, new hotel launches and strong management bandwidth.

Investment highlights

Diversified portfolio across categories and locations:

The Company has 42 operational properties with a collective inventory of 3,159 rooms spread over 28 cities. The properties are spread across wide price categories ranging from 5-star to budget category rooms targeting leisure as well as business travelers. ROHL is all set to reach to 50 properties by the end of FY18.

Clear focus on management contracts implying asset light strategy:

The Company started its operations through the ownership model by setting up two hotels in Bangalore. However, over the past 3-4 years, it is increasingly focusing on expanding operations through management contracts and leasing rather than owning the properties. Under management contract, the company charges 2-3% of the revenue as management fees and an incentive fee which varies from 6%-8% of the gross operating profit. ROHL bears no expenses and even the onus of renovation of the property is on the property owner. Out of the 3,159 room keys, 2,112 rooms are under management contracts.

Reduction in GST rate to positively impact the Company:

Royal Orchid Hotels used to pay 21% tax under the pre-GST regime. The GST council has reduced the GST rate on restaurants in five-star and luxury hotels (room rent up to INR7,500) from 28% to 18%, bringing it on par with standalone air-conditioned restaurants. This move is expected to benefit the Company as a majority of Royal Orchid’s rooms fall under this bracket.

The business is expected to perk up from FY18

– Asset Light Business Model (insignificant Capex): The Company started its operations through the ownership model by setting up two hotels in Bangalore. However, over the past 3-4 years, it is increasingly focusing on expanding operations through management contracts and leasing rather than owning the properties. Under management con-tract, the company charges 2-3% of the revenue as management fees and an incentive fee which varies from 6%-8% of the gross operating profit. Out of the 3,159 room keys 2,112 rooms are under manage-ment contracts. Under this model, ROHL bears no expenses and even the onus of renovation of the property is on the property owner. In FY17, its consolidated revenues stood at INR162 Crores, apart from this, its revenues from managed properties stood at INR128 Crore. This is expected to go up significantly in the near future as all the 12 properties which it plans to add this fiscal would be under manage-ment contracts.

– Improving Occupancy: Currently, ROHL is sitting at an occupancy of 69% across all of its hotels. However, some of its hotels such as Royal Orchid Central Pune and Royal Orchid Central Grazia, Navi Mumbai, the occupancy is close to 85%. Some of the new properties which have been added during the past two years haven’t achieved high occupan-cy which is averaging out the total group occupancies. This is poised to turnaround in the coming year when the occupancy goes up and reaches an optimum level. The company is planning to develop its land in Powai (Mumbai) under a joint development model (no upfront capex). Looking at the current occupancy rate of its property in Mum-bai, this seems to be a prudent decision, especially considering the fact that the hospitality industry is going through an up cycle.

– Lower Finance Costs: The management’s efforts to reorganize the Company’s debt are paying off. ROHL’s debt have gone from a five-year to 10-year repayment period. The interest rates have also come down from about 16% to 13.50%, as a result the interest expense has come down from INR14.92 Crore in 2015 to INR12.15 Crore in 2016