Indian Hotels checks in with strong growth in Q3, stock up 17% since Jan

Company's metrics are strong but investors should track consistency on demand, room rates and occupancy.

Better-than-expected October-December quarter (third quarter, or Q3) results, hopes of strong rebound after disruption due to the Omicron variant of the novel coronavirus, and lower debt levels are expected to support the Indian Hotels Company stock.

India’s largest listed hotel chain posted its first net profit in Q3 after six consecutive quarters of loss. The growth revival and outlook are expected to support the stock, which has gained 17 per cent since the start of the year. Aided by strong performance of the luxury segment and gradual recovery in business travel, the company reported a year-on-year (YoY) doubling of core revenues in the December quarter to Rs 1,111 crore.  While leisure travel is at 120 per cent of pre-Covid levels, business travel has recovered to 80 per cent. Overall revenue recovery is at 85 per cent. The company outperformed peers in the Goa market, with revenues at 126 per cent of pre-Covid levels.

Another leisure destination Rajasthan, too, reported revenues which were slightly higher than those reported two years ago.

While the company did better than peers in business destinations, revenue recovery in markets such as Delhi National Capital Region, Mumbai, and Bengaluru are yet to reach pre-Covid levels and are at the 68-82 per cent band. 

Propped up by higher average room rates and occupancy, the revenue per available room, or RevPAR, was up 1.9x YoY and 62 per cent on a sequential basis.

Mehul Desai of Anand Rathi Research believes that average room rates would be strong due to room-supply constraints for the industry and recovery in international and business travel. What aided the operational performance was the reduction in costs. Corporate overheads are down 23 per cent in the nine months of 2021-22 (FY22), while they were down 17 per cent in Q3FY22, compared with pre-Covid levels (2019-20).

Operating profit margins at 29 per cent have recovered and are at multi-quarter highs. The company highlighted that margin improvement will be driven by recovery in traditional business, cost initiatives, and traction in new business activities.

Given the rise in revenues and operating profit, Motilal Oswal Research has increased its operating profit estimates for FY22 by 20 per cent. It has, however, retained its 2022-23 and 2023-24 (FY24) estimates for now. 

Improving debt situation is another positive, with consolidated net debt falling Rs 1,666 crore on a sequential basis to Rs 1,905 crore at the end of the December quarter. The fall in debt was largely on account of capital raised from a rights issue. The Street believes that the stock offers an opportunity as the threat of the new variant recedes.

Says Sumant Kumar of Motilal Oswal Research, “Although the ongoing third Covid wave poses a threat to near-term earnings of the hospitality sector, higher vaccination and lower hospitalisation rates will lead to a much stronger rebound than the second wave. Thus, we view this weakness as a buying opportunity.”

At the current price, the stock is trading at a price-to-earnings ratio of 43x its FY24 earnings estimates. While operational metrics remain strong, investors should await consistency on this front (demand, room rates, and occupancies) in the coming quarter before considering the stock.