Investors in IHCL seem to be betting on its asset-light strategy.
Investors in IHCL seem to be betting on its asset-light strategy.

Investors give thumbs-up to Indian Hotels’ asset-light strategy

  • IHCL had steered towards revenue accretion through management contracts instead of the traditional strategy of building assets or acquiring them
  • Hotel stocks such as IHCL and EIH Ltd have outperformed the Nifty midcap index on a one-year horizon

Apart from decent June quarter results by Indian Hotels Company Ltd. (IHCL), its prospects seem bright. Shares of the hospitality company, with leading brands ‘Taj’ and ‘Vivanta’ to its credit, reacted positively on Tuesday as its asset-light strategy for higher returns on investment is beginning to yield fruit.

Besides a 4% year-on-year (yoy) revenue growth in April-June of current fiscal, IHCL scored on profitability. Ebitda (earnings before interest, tax, depreciation and amortization) rose around 16% after the implementation of Indian Accounting Standards -116 norms. Higher operating performance implied costs are being reined in.

IHCL had steered towards revenue accretion through management contracts instead of the traditional strategy of building assets or acquiring them. According to Edelweiss Securities Ltd, “Traction in new signings continued with addition of 1,257 rooms in Q1FY20 (April-June) across seven cities, which took the pipeline to 4,500-plus rooms (FY19: 4,000 rooms)." The company added seven new contracts in Q1, an indication that the plan of adding 15 management contracts every year was on track.

To be sure, the mood has been upbeat in the industry in the recent past. After a prolonged slowdown spread over eight years, occupancy rates in the industry moved up by three percentage points to 69% year-on-year in FY2019, according to data from ICRA Ltd. The rating agency added that average room rates expanded 3-4% last fiscal, with the majority of it coming through in the second half of the year.

Hotel stocks such as IHCL and EIH Ltd have outperformed the Nifty midcap index on a one-year horizon.

However, there is reason for fresh concern in both international and domestic markets. The outlook for hospitality business in the UK and the US, where the IHCL operates, remains clouded. Back home, foreign tourist arrivals grew just about 2% between January and May, a far cry from double-digit growth seen in 2018. This is one of key factors determining the fortunes of the hotel industry.

Despite this, investors in IHCL seem to be betting on its asset-light strategy. “Margin expansion and lower capex intensity are likely to boost earnings per share by 35% average compounded rate and return on capital employed from 8% to 14% over FY19–22E," forecasts Edelweiss.

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