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Earlier this month, we initiated coverage on Indian Hotels. In this update, we summarise top investor feedback and our views on a few concerns raised about the sustainability of occupancy, as well as cyclical recovery, growing asset-light mix, Ginger Hotels, and valuations. We continue to believe that against a favourable industry backdrop, IHCL, with its leadership position, improving asset mix, margin profile, and healthy BS, is a strong investment story. Buy.
1: What if occupancy slips when pent-up demand fizzles or Indian tourists start going abroad? This is a key question. Of course, we do believe some domestic tourists will go abroad once visa bottlenecks ease, but strength in leisure travel should stay, especially against a backdrop of greater affordability, improvements in connectivity in recent years, the post-Covid trend of self-drive vacations, and the return of foreign tourists. Furthermore, strengthening of corporate travel/government delegate-led demand should keep the recovery buoyant in metros. Foreign tourist arrivals into India typically pick up in Oct-Dec, which will be the time to monitor any trend reversal in International Travel recovery.
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2: Where are we in the Industry cycle? Industry data suggests that the pace of supply addition for quality/branded hotels should remain constrained, and with demand remaining steady (subject to no global crisis), the likelihood of rates, occupancy, and RevPAR trending upwards is high in the near to medium term.
3: Profitability impact of increasing Ginger Hotel mix: Ginger is a mid-scale or budget hotel chain operated by IHCL’s 100%-owned subsidiary. The Ginger segment is margin-accretive for the business. IHCL is targeting to increase the count of Ginger properties from 57 in FY22 to 125 hotels by 2025. This could be a meaningful growth engine in the next 2-4 years.
4: Will asset-light strategy affect quality? With the expanding scale, the company is focusing on the asset-light strategy via management contracts (50:50% mix). For IHCL, management contracts are taken based on meeting the standards; operations are targeted to be alike in hotels under management contracts as in the case of Owned/leased Hotels.
5: Does strong run-up in stock leave space in valuations? With the strong run-up in IHCL in the past 6-months/1-year, the debate is whether it fully prices in the recovery. We believe IHCL can continue to trade at a premium given it is a strong proxy play to travel recovery, as well as its brand equity, leadership position and the strong promoter group. Its strong hotel pipeline should help it capture an outsized portion of industry growth. New initiatives, a strong focus on building an “asset-right” model and the strengthened BS augur well for the long term.
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