Investors of Indian Hotels to get a warm stay

The Indian Hotels shares touched a 52-week high on Wednesday on NSE  (Photo: HT)

The hospitality sector, which was badly bruised during the pandemic, is poised for a strong recovery, with covid cases receding and following the lifting of mobility restrictions. The restart of scheduled commercial international flights and an expected boost to business travel as companies increasingly hold offline meetings and conferences are factors that help demand.

This optimism reflects in hotels stocks. A case in point is The Indian Hotels Co. Ltd, shares of which touched a 52-week high on Wednesday on NSE.

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Staying light

There is also a pent-up leisure and wedding demand as the Omicron coronavirus variant led to postponement of many such plans. “According to the India Hospitality Industry Overview 2021 by HVS Anarock, industry level occupancies are expected to touch pre-covid levels of 66% in CY22E/FY23E and reach 70% in CY24E,” said analysts at ICICI Securities in a report on 6 April. The lack of significant supply addition in the last two years, coinciding with robust demand, means higher pricing power. Accordingly, the average room rate is anticipated to reach pre-covid levels in FY23E.

For Indian Hotels particularly, it also helps that the company has raised funds of 2,000 crore through a qualified institutional placement issue that closed on 25 March. This indicates a net-debt free balance sheet. The restrictions imposed to contain the spread of coronavirus over the past two years had an adverse impact on the cash flows of Indian Hotels, leading to a rise in the consolidated net debt to equity ratios to 0.9x in H1FY22 from 0.4x in FY20. As such, free cash flow generated hereon could be used to tackle disruptions from potential covid waves or to enhance operations.

ICICI Securities expects Ebitda margins to rise to 29% in FY23E from 22% in FY20 on the back of bids to cut fixed costs and staff-to-room ratio. Even so, there are some margin pressures. “Sharp rise in margin is likely to be curbed by wage inflation. Many employees were let go in the past two years as covid impacted operations of the sector. As demand recoups, the workforce has to be increased which means there will be additional costs involved in bringing back the employees and training them,” said Vikas Ahuja, analyst at Antique Stock Broking. A resurgence in covid cases and the possibility of demand not returning to expected levels could dampen sentiments. Given that the Indian Hotels’ stock is near highs, sharp near-term upsides may be capped.

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