Indian Hotels margins have room for expansion with better cost optimisation

Led by an improvement in key parametres, Indian Hotels registered a better-than-estimated performance in the September quarter. 

Receipts were led by higher revenue per available room or RevPar (combination of occupancy and room rates) which rose 4 per cent.

Occupancies jumped 4 percentage points over the year-ago quarter to 68 per cent. Its performance in key markets of Mumbai, New Delhi, Chennai, and Hyderabad, among others, helped it outperform the sector and gain market share. 

The company indicated that RevPar trends over the past month have been positive, led by growth in occupancies. 

The management believes the cut in goods and services tax (GST) from 28 per cent to 18 per cent is expected to help the sector, with the second half of the financial year being better than the first half. 

Indian Hotels has been a key beneficiary, given that most of its portfolio attracted GST of 28 per cent. The reduction in corporation tax rates, too, is expected to help improve occupancy levels of corporate customers. 

Among other areas, the firm reported improvement in operating profit. Adjusted for IndAS changes, operating profit was up 16 per cent over the year-ago period. 

The company reported its highest Q2 operating profit margin at 15.9 per cent, led by a 125-basis-point drop in corporate overheads (as % of revenue) and a 130-bp fall in raw material costs, as a share of food and beverage revenues.

Analysts expect margins to improve further, given its focus on cost optimisation. 

ICICI Securities expects Ebitda margins to expand to 26 per cent, driven by cost optimisation, improving RevPar, and reclassification of lease expenses by FY21.

Of this, 250-300 bp expansion is on account of lease expenditure being reclassified. Further, in line with its goal of being asset-light, the company aims to take its share of rooms under management contracts to 50 per cent, from the current 28 per cent . 

The disappointment in the quarter, however, was the weak performance of the corporate and international segment. Impacted by the tourism slowdown in Sri Lanka, International RevPar declined by 1 per cent. 

Most brokerages are positive on the company’s prospects, given multiple triggers on both the demand and supply fronts. 

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