Indian Hotels: Right strategy, awaiting results

Street to await improvement in room rents and occupancy, even as it gives nod to deleverage plans

The Indian Hotels (IHCL) stock was up 1.5 per cent on Tuesday, even as the broader markets were down, after the management indicated its intent of reducing debt, clearing outstanding legal issues and completing unfinished projects. These should help it to turn profits in the next two years.

The key would be operational improvement in its Indian and foreign properties. For India, the December quarter results are positive given a sequential improvement in revenues, which analysts believe will improve further in FY16, on the back of higher revenue per available room.

This is a function of average room rents and occupancy. Analysts expect domestic occupancy to improve from an estimated 65 per cent in FY15 to 68 per cent in FY16 and average room rates to Rs10,000 levels from Rs9,400 in FY15. Foreign tourist arrival growth at 9-10 per cent and facilities such as visa on arrival are positives, and could boost occupancy.

On the international front, properties such as The Pierre New York have been laggards for some time and enhancing its revenue per available room is crucial. What is encouraging is that the sector in the US has been witnessing improving occupancy and average room rent.

IHCL also needs to fix legal problems both on the Sea Rock, Mumbai, property and lease issues for the Taj Mansingh (Delhi) and Taj Mahal Palace (Mumbai). While IHCL is confident about its legal status on the two Taj hotels, it expects to close the Sea Rock property issue in FY16. Earlier this month, IHCL’s Board approved the purchase of 80 per cent stake in Lands End Properties (owner of the Sea Rock land) for about Rs17 crore.

This, however, will increase its debt to peak levels of Rs4,400 crore (net debt-to-equity at 1.2 times), as Lands End has debt of Rs1,300 crore. Analysts at JP Morgan say the timing of the acquisition given management’s guidance of bringing down leverage belies expectation of Capex rolling down. The Street, according to the research firm, would have preferred a deferment of acquisition until completion (four-five years, estimated cost Rs1,000 crore) and better shape of the balance sheet. Debt had come down by 30 per cent to about Rs3,000 crore post the right issue/Sydney hotel sale.

In addition to operational cash flow, funding could come from the sale of its stake in Belmond (Orient Express) given the buyback plans of the Bermuda-based entity. IHCL is also restructuring its international operations and bringing it under one company. This will enable it bring in a minority partner or borrow funds more efficiently.

Operationally, IHCL is looking at an asset-right strategy which involves managing properties on a contract basis and looking at selective expansion. This would ensure better return ratios.

At the current price the stock is trading at 12 times its FY17 EV/Ebidta and investors should await for a steady improvement in operational metrics before considering it for investment.