Analysts see demand revival, earnings comfort in Indian Hotels stock

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 (IHCL), whose shares are now seen consolidating over the past two months after surging a whopping 105 per cent from the 52-week low hit in May last year. But will the spike in Covid cases spoil the party?
 
Most brokerages hold bullish views and see up to 40 per cent upside from current levels for the stock which also forms part of Rakesh Jhunjhuwala's and his wife Rekha’s portfolios. The duo increased the stake in this Tata Group firm to 2.01 per cent in Q3FY21, from 1.05 per cent in the September 2020 quarter.
 
What makes analysts bullish
 
IHCL has reported strong occupancy levels of more than 85 per cent at some leisure travel locations, even as traditional business centres like the National Capital Region (NCR), Mumbai and Bengaluru continue to suffer.
 
Amit Agarwal, research analyst at Nirmal Bang Equities attributes this pick-up to pent-up demand, inability to holiday at international destinations, continued work from home, and destination weddings. He pegs overall occupancy to be around 55 per cent for the ongoing quarter, as against 46 per cent in Q3.
 
Motilal Oswal Financial Services, meanwhile, believes a revival in corporate demand holds the key for the hospitality industry. It sees a sharp recovery in FY22 earnings for hotel stocks on the back of a low base, improvement in average room rates, improved occupancy, positivity in cost rationalisation efforts, and an increase in F&B (food & beverage) income.
 
Analysts also expect IHCL to maintain a valuation premium to peers due to its strong brand, which would aid pricing and occupancy levels. Besides, Antique Broking believes IHCL will get preference over peers in getting hotels on management contracts, thus helping improve margins further. Its target price for IHCL stock is Rs 175.

 
The F&B activity for Indian hotels has also picked up with most of the preferred restaurants seeing healthy demand in Mumbai and Delhi. The F&B segment would continue to show strong growth, believes Agarwal, whose brokerage has a target price of Rs 164 on the stock.
 
The percentage of F&B-to-room revenue for IHCL stood at 92 per cent in Q3, up from 69 per cent in Q2FY21.
 
Near-term bumps
 
On the flip side, G Chokkalingham, founder and MD at Equinomics Research, is negative on hotel stocks and says it is too early to buy any given the flare-up in Covid cases and sporadic lockdowns. "Even before Covid, not many hotel companies were making big money. And now, with three-four quarters of losses in a row, their balance sheets are under heavy stress, and with the virus spiking, they are likely to bleed for another 3-6 months," he said.
 
With already a phenomenal recovery in stock prices, Chokkalingham suggests waiting for a 10-20 per cent correction before entering the stocks.