Nomura initiates Buy on Indian Hotels; cites ADR growth, asset-light model

Nomura has set a target price of ₹830 for the Indian Hotels stock, based on a valuation of 26 times its estimated FY28 EV/Ebitda

Global brokerage Nomura has initiated coverage on Indian Hotels, Tata Group’s hospitality arm, with a ‘Buy’ rating, citing high visibility on average daily rate (ADR) growth amid constrained hotel supply, strong demand and a low ADR base in dollar terms, along with improving quality of earnings driven by a capital-light expansion strategy. 

 

The brokerage also said the company is well-positioned to meet or exceed its 2030 targets for revenue, return on capital employed and portfolio expansion. It expects revenue and Ebitda to grow at compound annual rates of 15 per cent and 16 per cent, respectively, over FY25–FY28.

 

Nomura has set a target price of ₹830 for the stock, based on a valuation of 26 times its estimated FY28 EV/Ebitda. The brokerage noted that IHCL’s valuation multiples have cooled over the past year, falling from a peak of 42 times FY26 Ebitda to about 27 times FY27 Ebitda, as earnings growth moves from a high-growth phase to a more stable trajectory. It expects growth in FY27 and FY28 to remain steady, which should help valuations stabilise. The target price implies an upside potential of around 23 per cent from the previous session's close of ₹678.15 on the NSE. 

 

Here's why Nomura is bullish on Indian Hotels:

ARR growth outlook remains strong

Nomura expects the company's average room rate (ARR) growth to remain resilient over FY25–FY28. The brokerage said room supply in key business cities where IHCL operates is likely to grow at a moderate pace of about 5–7 per cent CAGR between FY25 and FY30, even if all announced projects come on stream.

 

On the demand side, analysts at Nomura expect continued strength from domestic tourism, which is at record levels, a recovery in foreign tourist arrivals that are still below pre-pandemic levels, and sustained momentum in meetings, incentives, conventions and exhibitions (MICE) activity. They added that while ARRs are at record highs in absolute terms, they remain below 2008 levels in dollar terms, which should support further ARR growth.

IHCL on track to surpass 2030 hotel portfolio target

According to Nomura, IHCL is well-positioned to exceed its FY30 target of 700 portfolio hotels while continuing to follow a capital-light expansion strategy. The brokerage noted that management had earlier guided for doubling operational hotels from 250 to 500 and portfolio hotels from 380 to 700 by FY30. With the consolidation of the Clarke’s portfolio, IHCL’s hotel portfolio has already crossed 550 properties.

 

Additionally, the company has stepped up the pace of hotel signings to about 50–70 properties a year, with annual openings of 25–35 hotels. Most of the expansion is expected to remain asset-light, with nearly 80 per cent of new rooms added under management fee arrangements. In the mid-scale Ginger brand, about 95 per cent of the expansion is expected to be through management contracts or revenue-sharing lease models.

Revenue, Ebitda seen growing at healthy pace

Analysts at Nomura project IHCL’s revenue and Ebitda to post CAGRs of 15 per cent and 16 per cent, respectively, between FY25 and FY28, supported by improving returns on invested capital and strong cash generation. The brokerage estimates revenue per available room (RevPAR) to grow at about 8 per cent CAGR over the period, while management fees and earnings from the Ginger portfolio are expected to increase at around 20 per cent annually.

 

Additionally, selective greenfield projects and acquisitions should drive strong top-line growth. On profitability, it expects Ebitda margins to expand by around 50 basis points each year, aided by high flow-through from management fees and operating leverage. The company's operating cash flow is likely to cover annual capital expenditure of ₹10–12 billion, while still generating surplus cash of about ₹8–10 billion per year, which could be used for inorganic growth.  Disclaimer: View and outlook shared belong to the respective brokerages/analysts and are not endorsed by Business Standard. Readers discretion is advised.