Tata group’s hospitality arm Indian Hotels Company Ltd (IHCL) posted a record profit of Rs 1,230 crore in Q2FY23, which was was 3% higher than I-sec estimate led by stronger than expected ARRs (annual recurring revenues). However, Q2FY23 Ebitda of Rs 290 crore was 13% lower than I-sec estimate of Rs 340 crore owing to higher employee/other expenses. With the company indicating that demand momentum is sustaining in Q3FY23 as well till date, we raise our FY23-25 estimates consolidated revenue estimates by 2-3% factoring in higher standalone FY23 estimates revenue per available room (RevPAR) of Rs 8,563 vs. Rs 8,104 earlier and similar increase in domestic subsidiaries (Ginger/PIEM/ Benares/United hotels).

However, considering wage inflation and higher operating expenses to cater to increased demand, we have cut our FY23-24 estimates Ebitda by 5% each but increased FY25 estimates Ebitda estimate by 2% as operating leverage plays out. We revise our SoTP-based TP on IHCL to Rs 351/share as we roll forward to Sep’24 EV/Ebitda and increase our EV/Ebitda multiple to 23x from 22x earlier considering strong ARR trajectory. However, post the 14% appreciation in stock price over the last three months, we downgrade our rating to ADD from BUY. Key risks to our rating are fresh Covid waves and rise in costs denting margins.

The company reported Q2FY23 consolidated revenue of Rs 1,230 crore which was 3% higher than I-Sec estimate of Rs 1200 crore. However, consolidated Ebitda of Rs 290 crore bn was 13% lower than I-sec estimate of Rs 340 crore owing to higher employee costs and other expenses. Q2FY23 standalone RevPAR stood at Rs 7,681 which is 29% higher than Q2FY20 (pre-Covid levels) with Q2FY23 occupancy at 70% while Q2FY23 ARR of Rs 11,003 was 27% higher than Q2FY20 levels. This is in line with the observed industry trend of higher focus on ARRs since April’22. As per management, increments and bonuses are implemented in the Jul-Sep period every year and some spill over from delayed increments owing to Covid led to higher employee expenses which should stabilise in H2FY23.

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Demand trends remain intact in Q3FY23 till date

As per company management, the occupancy and room rates seen in the first half of Q3FY23 (Oct’22-mid Nov’22) indicate that RevPAR is growing at double digits vs. the similar period seen in Q3FY20 which was the strongest pre-Covid quarter for the company and industry. The revenue continues to be driven largely by higher ARRs as seen in H1FY23 and a demand-supply gap and management’s strategy will continue to be focused on higher room rates vs. occupancy in India.