Recovery play? Brokerages see up to 40% upside in this Jhunjhunwala stock

Shares of Indian Hotels Company have rallied 105 per cent from its 52-week low levels hit in May last year

Signs of demand revival in the leisure travel segment coupled with expectations of a sharp recovery in FY22 earnings have analysts gung-ho on Indian Hotels Company (IHC), whose shares have rallied a whopping 105 per cent from the 52-week low levels hit in May last year.

However, on a year-to-date (YTD) basis, the shares have underperformed Sensex and peers, and even since September last year. IHC stock has added 3 per cent YTD as against a nearly 7 per cent rise in Sensex. While since the end of September, it has gained 31 per cent vs a 34 per cent jump in the benchmark, Ace Equity data shows.

Yet, brokerages hold bullish views, and see 40 per cent upside from current levels, on the stock which forms part of ace investor Rakesh Jhunjhunwala and his wife Rekha Jhunjhuwala's portfolios. The duo increased the stake in this Tata Group firm to 2.01 per cent in the December quarter from 1.05 per cent in the September quarter.

What makes analysts bullish?

Pick up in occupancy rate

IHC has reported strong occupancy levels of more than 85 per cent at some of its locations even as traditional business centres like NCR, Mumbai and Bengaluru continue to suffer.

Amit Agarwal, research analyst at Nirmal Bang Equities attributes this pickup in the occupancy of leisure destinations to pent-up demand, inability to holiday at international destinations, continued work from home, and demand due to the wedding.

Motilal Oswal Financial Services, meanwhile, believes revival in corporate demand holds the key for the hospitality industry as it would drive up occupancy, with ARR (average room rate) growth following suit. During the company’s Q3FY21 analyst meet, the management indicated that corporate customers are renewing their contracts at FY20 rates.

Given this, Agarwal of Nirmal Bang expects overall occupancy to be around 55 per cent for Q4FY21 as against 46 per cent in Q3FY21.

"We expect the company to maintain a valuation premium to peers due to its strong brand, which helps pricing and occupancy levels. In addition, the company will get preference over peers in getting hotels on management contracts which will help improve margins further," said Antique Broking in a note dated February 27. The brokerage has a target price of Rs 175 on the stock.

F&B: A revenue driver

The F&B (food & beverage) activity for Indian hotels has picked up with most of the preferred restaurants seeing healthy demand in Mumbai and Delhi. Now, with further easing of restrictions on restaurants amid the receding impact of Covid 19, the F&B segment would continue to show strong growth, believes Agarwal.

Besides, the company has launched Qmin, a home delivery service of restaurant food, which has been doing well, as per analysts at Antique Broking. 

Moreover, IHC has revamped the 'Chambers' club and plans to introduce it at other locations.  "The entire membership fee, including joining fee of Rs 20 lakh and an annual fee of Rs 3 lakh, has very little cost associated with it and flows directly to the bottom line," says Agarwal whose brokerage Nirmal Bang has a BUY rating on the stock with a target price of Rs 164.

The percentage of F&B to room revenue stood at 92 per cent in Q3FY21 and 69 per cent in Q2FY21.

Industry outlook

While FY21 earnings are estimated to remain weak, MOFSL expects a sharp recovery in FY22 on a low base, improvement in ARR as normalcy returns, improved occupancy, positivity in cost rationalization efforts in FY21, and an increase in F&B income as banqueting/conferences resume.

"We assign a Buy rating to Indian Hotels, with an FY23-based target price of Rs 143 (one-year forward EV/EBITDA multiple of 18x)," it said.