Investors in Indian Hotels Co. Ltd’s shares have just a paltry 7.4% gain to show for returns this past year. The stock, though, compares well with the 2.5% drop in the Nifty 500 index. However, will it see better days on the company’s plans to pare its debt in the coming years?

The management, which owns the Taj, SeleQtions, Vivanta and Ginger brands, has stated its intention to sell about three-four properties every year, to deleverage its balance sheet.

Indian Hotels' cost-optimization strategy has paid off as margins have expanded.
Indian Hotels' cost-optimization strategy has paid off as margins have expanded.

Last quarter, Indian Hotels sold its Gateway Hotel in Visakhapatnam to Varun Group for 120 crore. It will, however, continue to manage the property. The company is looking at similar deals for some of its properties. Over the coming 18 months, it seeks to bring down net debt-to-Ebitda (Earnings before interest, tax, depreciation and amortization) to below two times. In September 2018, its total debt was 2,082 crore, or 2.56 times trailing 12-months Ebitda.

As part of its deleveraging plans, Indian Hotels is taking up more management contracts. This would enable its revenue to increase without incurring additional debt. The company is likely to add more than 4,500 rooms in the next two years, most through management contracts. Further, in FY19, it signed on 20 properties, which would add about 2,750 rooms across all its brands.

Indian Hotels has also unveiled plans to increase Ebitda margins to 25% by FY23 by focusing on revenue growth and cost optimization. It seems to be on course to achieving this. For the first nine months, Ebitda margin has come in at 16.7%, a year-on-year increase of 231 basis points. While the company has already achieved a margin of 25% in Q3, note that this is in a seasonally strong period.

One hundred basis points equal one percentage point.

The sector is also trying hard to come out of a slowdown. Occupancy rates have improved and room rents are marginally turning up. In the December quarter, Indian Hotels reported a 2.8% rise in average room rents. The company is also focusing on improving revenue growth. Analysts point out that as the company is focusing more on an asset-light expansion, it will generate more cash.

That has gradually tilted investor sentiment. Indian Hotels shares have more than doubled in the past five years, beating the 75% return of the Nifty 500 index. However, for the outperformance to persist, investors will be watching the progress report on deleveraging quite closely.

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