Indian Hotels’ asset-light strategy pays off, but corporate demand remains soft2 min read . Updated: 14 Nov 2019, 12:52 AM IST
- Firm also wrote back deferred tax of ₹95 cr, which boosted net profit to ₹71.3 cr in Q2, against a loss a year ago
- Analysts have noted that IHCL’s asset-light model strategy seems to be paying off
MUMBAI : Indian Hotels Co. Ltd’s (IHCL’s) second-quarter revenue growth was marginally higher due to the better-than-industry-growth in revenue per available (RevPAR) room. A focus on costs also meant that margins were better in Q2. That was enough to send the stock up in trade by about 6.4% on Wednesday.
The company’ domestic revenue surged 8.7% year-on-year in Q2. The international segment lagged a bit due to slowing tourism in Sri Lanka, and a one-off impact. Yet, the net effect was an increase of 4.4% in overall revenue to ₹1,007 crore, which was in line with analysts’ estimates.
A sharp reduction in raw material costs and other expenses led to a decline in operating costs. Some of this reduction was also due to the reclassification of lease expenditure due to new accounting standards.
“IHCL reported another decent quarter with consolidated revenue rising 4% YoY (Q1FY20: 4%). Standalone (domestic) revenue grew 5% YoY (Q1FY20: 1%) driven by a better-than-industry RevPar of ~4%. The decline in international network revenue was primarily driven by one-off impact in Sri Lanka. On the margin front, IHCL continued to keep cost under control, which drove Ind AS 116 adjusted EBITDA up 16% YoY (reported EBITDA up 62% YoY)—IHCL reported highest-ever margin in the past decade," analysts at Edelweiss Securities Ltd said in a note to clients.
The company also shifted to the new tax regime, which improved its post-tax earnings. IHCL’s tax savings will be available for additional investments into the business. Besides, it also wrote back deferred tax to the tune of ₹95 crore, which boosted net profit to ₹71.3 crore in Q2, against a loss in the year-ago period.
A positive for the hotels sector has been the lowering of the goods and services tax. Revenue mix has also been stable, led by retail, though corporate demand has been weak. IHCL opened four new hotels this year and added 765 rooms. It has a pipeline of about 5,000 rooms, which is seen as a positive. The management said it was on track to open 12 new hotels this year.
Analysts have noted that IHCL’s strategy to adopt an asset-light model has led to cost optimization and better margins, and seems to be paying off. As a result, the company has been able to improve free cash flow levels with lower capital expenditures. Operating metrics is also expected to improve. “Led by cost optimisation, improving RevPAR in the anvil of industry tailwinds and reclassification of lease expenses, EBITDA margins may expand to 26% by FY21E," said ICICI Securities Ltd in a client note.
The international segment and a pickup in corporate demand, though, will be key developments to watch out for.