Indian Hotel Industry - a Jab on Recovery
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Indian Hotel Industry - A jab on recovery Company EIH IHCL “Tell me where I’m going to die, that is, so I don’t go there” - Charlie Munger Recommendation BUY BUY Past recessions warranted examining every data point to determine the pace of CMP 97 127 economic recovery. This time the effectiveness of the vaccine roll-out is more Target Price 125 183 important than the data on near term industrial production. A successful rollout will bring the much-affected service sector back in focus. It has still not recovered to Upside 30% 43% anywhere near past levels. Market Cap (Rs bn) 61 152 ROCE 5 9 Hotels have been one of the most severely affected sectors because of the pandemic. Marred by heavy fixed, labour intensive operations, prone to high physical ROE 5 9 interaction and inertia towards bringing the operating cost down has wiped away the EV/ Sales 4 6 free cash flow (FCF) generated in the last few years. We have structured this report around answering scenario on things that could go wrong and see if there is hope. EV/ EBITDA 23 22 THEMATIC REPORT THEMATIC 20 EV/Room (Rs mn) * 23 Scenarios P/E 39 36 1. WHAT IF…The demand dynamics have changed permanently 1 Yr Return 23% 27% a. what was the nature of pre-Covid demand? b. what is the recovery playbook seen in other markets? Promoters 36% 41% c. what is the air-traffic data suggesting? Source: SKP Research *On equity ownership adjusted rooms basis d. can the digital adoption be reversed? 2. WHAT IF…Demand falls below supply growth 3. WHAT IF…Big Average Room Rate (ARR) growth doesn’t materialize at all 4. WHAT IF…Interest rate cycle reverses by the time normalcy return Pain so far Revenue (H1) (in Rs bn) Thus far the recovery playbook is led by domestic leisure and marriages. Drive-to FY21 FY20 % destinations globally have shown marked recovery, at times at higher ARRs (seen in Airbnb’s data on page 5). As per our channel check and commentary from various EIH 1.0 6.8 -85% stakeholders the overall operating performance of hotels can take 18-24 months to IHCL 4.0 20.3 -80% recover to pre-Covid levels. Hence, we are preferring companies with lower financial Chalet 1.1 4.8 -77% leverage and with better access to capital. We are initiating coverage on East India Hotels (EIH) and Indian Hotels Company Ltd (IHCL) with a BUY rating. Key risks to Lemon Tree 0.9 2.9 -70% our assumptions are yet another nationwide lockdown and delay in vaccine roll out. EBITDA (H1) Company wise investment synopsis FY21 FY20 % East India Hotels (EIH): We like EIH for its Mumbai-Delhi exposure, considering it draws over 50% of its revenue from these two markets. We believe Mumbai-Delhi EIH (2.4) 0.5 -562% should be the earliest participant to business travel recovery. Further, high -225% IHCL (4.2) 3.3 employee-per-room ratio and high head office costs make EIH ripe candidate to Chalet (0.1) 1.6 -105% utilize the current opportunity to bring down the operating cost down, given the inertia Lemon Tree 0.1 0.9 -86% shown by the industry in the past. EIH’s history of maintaining low-financial leverage Source: SKP Research and high dividend payout ratio is a rarity in the hotels space, although it has been EBITDA is excluding Other Income rather slow on room inventory expansion, as compared to the peer set (page 18). Indian Hotels Company Ltd (IHCL): We like IHCL for its delivery on measurable goals (especially since 2017). Pre-Covid it was on track to achieve the 800bps margin expansion. Secondly, it has been aggressively expanding on management contract model to regain its numero-uno status in India (conceded to Marriott after Starwood merger). Thirdly, it has been able to resolve a few overhanging issues like acquisition of Sea Rock, regaining lease of Taj Mansingh and restructuring overseas holding. IHCL is also likely to receive a margin boost on the pre-Covid revenue level Research Analyst: Rajiv Bharati from the cut backs effected during the lockdown (page 33). [email protected] January 15, 2021 2021 January 15, SKP Securities Ltd www.skpsecurities.com 1 Indian Hotel Industry WHAT IF…The demand dynamics have changed permanently To understand this, we break this into three parts (a) what was the nature of pre-Covid demand (b) what is the recovery playbook seen in other markets? (c) what is the air- traffic data suggesting? (d) can the digital adoption be reversed? 1(a) what was the nature of pre-Covid demand? If we dissect the current inventory of hotels in India, gateway city hotels make for ~60% of the branded rooms inventory (Exhibit 1). The top 10 cities have at least 3,000 chain- affiliated hotel rooms. These hotels are based in metro cities and its adjacent regions (Delhi National Capital Region (NCR), Bengaluru, Mumbai, Chennai, Kolkata, Hyderabad and Pune). Delhi NCR historically has had the highest number of rooms supported by diplomatic travel, 1982 Asian Games and 2010 commonwealth games. Although the upcoming supply is disproportionately skewed towards smaller cities in 2:1 proportion (i.e., two rooms are added in non-metros for every new addition in metro cities). In terms of market share four cities namely Pune, Ahmedabad, Jaipur and Goa have grown the fastest taking away market share from top three regions Delhi NCR, Mumbai Metropolitan Region (MMR) and Bengaluru. Exhibit 1: Region-wise breakup - Branded rooms Exhibit 2: Most key markets were clocking fairly healthy occupancies Hyderabad, 100% Mumbai, Chennai, 6,965 , 5% 9,863 , 7% 77% 77% 13,687 , 10% Goa, 6,828 , 80% 73% 72% 70% 71% 67% 66% 65% 69% 68% 5% 64% 60% Bengaluru, 60% 14,287 , 11% Pune, 6,460 , 5% 40% Gurugram, 5,866 , 5% 20% New Delhi, Jaipur, 5,613 , 0% 14,730 , 11% 4% Kolkata, 3,742 , 3% Goa Agra Pune Noida Others, Ahmedabad, 3,000 , Jaipur Kolkata Mumbai 38,815 , 29% 2% Chennai Gurugram Bengaluru Delhi New Hyderabad Noida, Ahmedabad Agra, 2,125 , 2% 1,378 , 1% Branded room occupancy (FY19) Source: Hotelivate, SKP Research Further the country wide inventory growth over the last decade is led by chains like Intercontinental Hotels Group, Accor and Lemon Tree replacing Leela, Bharat Hotels and Royal Orchid on the top 10 list. Presently, international hotel companies have ~50% of the total chain-affiliated supply in India. In term of supply, on average most markets have had ~5% supply growth, but occupancies across the board pre-Covid was at a healthy level. Case in point in Chalet Hotels, which operated five hotels and one executive apartments in MMR, Bengaluru and Hyderabad. It had an average occupancy/ARR of 76%/Rs 8,300 respectively in December 2018-October 2019 period. The standard deviation of 5%/Rs 605 in occupancy/ARR implied a reasonably stable year-round demand across the three major business districts. Further if segregate the hotel occupants as per star-rating of the hotels, business travellers (domestic + foreign) make for 40-50% of the hotels demand (Exhibit 3). Foreign travellers (business + tourist) make for 25% of the traffic, at least in 4/5-star category hotels. Comparatively, Marriott in North America has 95% domestic guests and leisure make for about a third of the room demand. SKP Securities Ltd www.skpsecurities.com 2 Indian Hotel Industry Exhibit 3: Guest composition (All India): Business + Foreign guests contribute over 50% of the demand 100% 80% 4% 5% 5% 9% 4% 16% 60% 7% 27% 8% 16% 20% 29% 26% 17% 17% 40% 12% 9% 8% 27% 6% 8% 17% 13% 20% 39% 11% 36% 37% 35% 31% 18% 22% 14% 0% 5-Star Deluxe 5-Star 4-Star 3-Star 2-Star 1-Star Heritage Others Airline Crew Business Traveller - Domestic Business Traveller - Foreign Complimentary Rooms Domestic - Tourist/Leisure FIT Foreign - Tourist/Leisure FIT Meeting Participants ( < 100 Attendees) Meeting Participants ( > 100 Attendees) Tour Groups - Domestic Tour Groups - Foreign Others Source: FHRAI, SKP Research Guest composition in the top seven cities is very heavily skewed towards business travellers especially in Mumbai, Bengaluru, Kolkata and Pune. New Delhi and Chennai are relatively evenly distributed. Under the current pandemic scenario Goa seems to be the most suitably placed where the foreign tourist demand can be easily replaced by the domestic travellers who are unable to travel abroad due to overseas travel restrictions. Exhibit 4: Guest composition (Key cities): Business + Foreign guests contribute over 60% of the demand 100% 80% 3% 6% 16% 8% 7% 6% 26% 17% 5% 18% 60% 10% 18% 20% 13% 12% 16% 6% 40% 14% 33% 17% 13% 42% 47% 20% 40% 6% 26% 28% 31% 14% 0% New Delhi Mumbai Bengaluru Chennai Goa Kolkata Pune Airline Crew Business Traveller - Domestic Business Traveller - Foreign Complimentary Rooms Domestic - Tourist/Leisure FIT Foreign - Tourist/Leisure FIT Meeting Participants ( < 100 Attendees) Meeting Participants ( > 100 Attendees) Tour Groups - Domestic Tour Groups - Foreign Others Source: FHRAI, SKP Research Business travel segment has been the linchpin of the hotels industry in India, making for 40-60% of the overall demand. On the group business side, MICE (Meetings, Incentives, Conferences and Exhibition) has been a huge demand generator for full- service hotels. MICE visitation is mainly corporate driven and happens during the working week. SKP Securities Ltd www.skpsecurities.com 3 Indian Hotel Industry On the social travel side, global wedding industry is estimated to be upwards of US$300bn and India alone witnesses 10-12mn weddings annually.