Indian Hotels stock: Lower debt, higher room revenues to aid margin

The Indian Hotels stock has gained 20 per cent over the past month on expectations that demand growth, presence in the higher growth premium segment, improving margins and debt reduction will reflect on operational performance. Given the improving industry dynamics and strong outlook, brokerages are positive on the prospects.

The reason for the positive stance is the improving demand-supply situation, reflected in higher occupancy levels. Unlike the 2009-15 period, when supply exceeded demand and average occupancies were muted at 58 per cent, occupancies have increased to around 63 per cent currently. Analysts at Sharekhan expect demand to grow at 12 per cent over the FY17-21 period, with rising room demand from travellers.

What should help Indian Hotels is its presence in the premium segment, with 64 per cent coming from the premium and luxury category represented by the Taj and Vivanta brands. The luxury segment and the cities the company has a presence in are expected to see higher demand and lower supply. Analysts expect the company’s occupancies to increase from 66 per cent in 2016-17 to 69 per cent by 2019-20. Higher occupancies lead to higher room rates, as was the case in the last uptrend during the FY03-08 period. This period saw room rates grow at 15 per cent while occupancies rose to 80 per cent.

Food and beverage revenues, which account for 39 per cent, are expected to see growth of 10 per cent over FY17-20. Analysts expect the company’s operating income, including management contracts, to grow at 15 per cent over this period.

The other trigger for the company is the management strategies, which will help it grow while keeping costs down. The company has been paring down its debt by 36 per cent from sale of its non-core assets and raising funds through the equity route. Its net debt to operating profit now stands at less than 0.5 times as compared to1.2 times in 2015-16. What should keep the debt lower is an asset-light network expansion, improving margins and cash flows on the back of cost optimisation and higher room revenues.

According to analysts at UBS, the company is trading close to its three-year average valuations. Given the company will post better margins and earnings growth compared to the past, the operating profit growth of 17.1 per cent over the FY18-20 period is not priced in, added analysts.