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The Indian Hotels Company Limited: Rating Reaffirmed

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The Indian Hotels Company Limited: Rating Reaffirmed November 25, 2019 The Indian Hotels Company Limited: Rating reaffirmed Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Non-convertible Debenture 800.0 800.0 [ICRA]AA(Stable); Reaffirmed Programme Non-convertible Debenture (NCD) 800.0 - [ICRA]AA(Stable); Withdrawn Programme Total 1600.0 800.0 *Instrument details are provided in Annexure-1 Rationale The reaffirmation of the rating factors in the dominant position of The Indian Hotels Company Limited (IHCL) in the Indian hotel industry and the established ‘Taj’ brand. IHCL has a well-diversified hospitality portfolio across India and overseas, across business segments and price points. The rating also favourably factors in the improvement in Average Room Rates (ARRs) and occupancy of most of IHCL’s domestic and international hotel properties in the last one year. Consolidated debt levels declined to Rs. 2,355.0 crore as on September 30, 2019 and Rs. 2,326.0 crore as on March 31, 2019 from Rs. 4,538.9 crore as on March 31, 2016 with repayments using proceeds of divestments and the Rs. 1,500 crore equity rights issue of FY2018. Reduction in debt levels has been in line with ICRA’s expectations and the company’s stated intention to reduce its leverage levels. Along with improvement in profitability, this has resulted in improved Total Debt/OPBDITA of 2.8x (PY: 3.6x) in FY2019. While the hotel industry upcycle is likely to be delayed by the current subdued demand environment, the strong demand expected over the medium term is likely to facilitate improvement in ARR and occupancy. IHCL, as a Tata Group company, enjoys considerable financial flexibility to raise funds to meet its investment and capital expenditure (capex) requirements. ICRA also expects IHCL’s parent, Tata Sons Private Limited (Tata Sons, rated [ICRA]AAA(Stable)/[ICRA]A1+), to be willing to extend financial support to IHCL, should there be a need. There also exists a track record of Tata Sons having extended timely financial support to IHCL in the past, whenever a need has arisen. The rating, however, is constrained by the modest consolidated operating performance and the high revenue and profit concentration of the standalone operations on luxury properties in Mumbai and New Delhi. Further, IHCL’s consolidated performance has historically been dragged down by the subdued performance of some of its key overseas properties, Taj Campton Place (San Francisco) and The Pierre (New York). The operating metrics of these key international properties have improved in the last one year. While Taj Campton Place and St. James Court (London) reported improvement in profitability, The Pierre, New York, continues to make losses, moderating IHCL’s consolidated financial indicators. The improvement in the performance metrics of its international properties would remain a key rating sensitivity, going forward. The rating also factors in the anticipated equity investments towards acquisition of fully operational hotels through strategic partnership with Government of Singapore Investment Corporation (GIC), which could lead to increase in debt levels. However, the GIC framework also benefits IHCL as it can add hotels to its portfolio with limited investments. The rating continues to take into consideration the increase in license cost for Taj Mahal Hotel, New Delhi (also known as Taj Mansingh), effective April 2019, which will impact property profitability in the near term. However, ICRA expects other 1 IHCL properties to post better performances and adequately compensate for the increased license expense for Taj Mansingh. While ICRA notes that the management has continued with its stated policy of future growth largely through the asset light strategy (management contracts and GIC platform), limiting capex requirements, it also notes that the development of the Sea Rock asset could entail significant capital outlays, although the timelines and funding mix for the same is yet to be finalised. ICRA would review the impact of GIC and Sea Rock investments, as and when there is progress on the same. The Stable outlook on the long-term rating reflects ICRA’s opinion that IHCL will continue to benefit from its strong brand presence and established market position as a leading hospitality player in the country, and the anticipated improvement in the hotel industry operating parameters over the medium term. Key rating drivers Credit strengths One of the largest hotel chains in India backed by a balanced property portfolio, strong brands and corporate customer relationships – IHCL and its subsidiaries own/operate 18,020 rooms across 152 hotels as of November 2019 with presence across four continents, 12 countries and over 80 locations. The hotel portfolio is diversified across categories, with presence in luxury (‘Taj’ brand), select hotels (‘Seleqtions’ brand), upscale (‘Vivanta’ brand) and lean luxury (‘Ginger’ brand) segments, as well as price points. These brands have an established presence in the market, attracting business from corporate and leisure customers alike. Domestic hotel rooms constitute ~86% of IHCL’s total room inventory, while international hotel rooms constitute ~14% of IHCL’s total room inventory as of November 2019. Presence across price points helps capture down trading volumes during a downturn and provides revenues stability – While the company captures premium segment customers through Taj, Seleqtions and Vivanta brands, it captures lean luxury/economy segment customers through the Ginger brand. This presence across price points helps it capture the business from its customer base through the business cycles. Diversified business model with a mix of ownership and asset light strategy; gradual migration up the value chain (from ownership to management) – IHCL’s hotel portfolio comprises a mix of owned properties, properties in subsidiaries, joint ventures (JVs) and associates, as well as hotels run by IHCL under management contracts. As on November 2019, 24% of the consolidated inventory of 18,020 rooms is owned by IHCL directly, 48% of the consolidated inventory is owned by group companies and the remaining 28% is held through management contract. Further, in line with global trends, new room additions by IHCL has been through the management contract route. IHCL has signed 14 new management contract properties during H1 FY2020, including three Taj properties—one Seleqtions property, five Vivanta properties and five Ginger properties. The Tata Group parentage; financial flexibility stemming from this lineage and demonstrated funding support from the parent from time to time – The Tata Group holds 39.09% stake in IHCL through Tata Sons Private Limited (Tata Sons) and other Group companies. Tata Sons has demonstrated its support to IHCL from time to time by subscribing to various fund-raising activities of the company. The Tata Group lineage also imparts considerable financial flexibility in raising funds from the debt market as well as from banking and financial institutions. Robust medium term outlook for the hotel industry – The Indian hospitality industry, which had experienced a prolonged downturn during FY2009–FY2015 because of excess supply in several key markets in India, posted 2 improvement (as measured by Revenue per Available Room or RevPAR) over FY2016-FY2019. This was driven by improvement in occupancy levels, as pace of supply additions slowed down across markets amid healthy demand growth. Scale up in room occupancy offered some pricing power to the industry, as witnessed by the improvement in ARRs, albeit modest, across cities over FY2018-FY2019. However, ICRA expects FY2020 pan India RevPAR growth to remain muted, impacted by the subdued demand environment. While the upcycle is likely to be delayed, the strong demand expected over the medium term is likely to facilitate future improvement in ARR and occupancy. Credit challenges Revenue and profitability dependence on luxury hotel portfolio remains high; operating performance of some of its key overseas properties continues to moderate the consolidated performance – Though the company has been focusing on hotel additions through management contract route, IHCL’s inventory concentration in the luxury segment is high at ~50% of its standalone inventory. Revenue dependence on the luxury segment remains high at ~75% (FY2019) of IHCL’s standalone revenues, with Mumbai and Delhi properties contributing the maximum. IHCL’s consolidated performance has historically been dragged down by the subdued performance of some of its key overseas properties, Taj Campton Place and The Pierre. The operating metrics of these key international properties have improved in the last one year. While Taj Campton Place and St. James Court reported improvement in profitability, The Pierre, New York, continues to make losses, moderating IHCL’s consolidated financial indicators compared to its standalone financial indicators. IHCL’s profitability (as measured by Return on Capital Employed, or RoCE, of 7.8% in FY2019, on a consolidated basis; PY: 6.4%) has remained subdued constrained partly by the modest performance of its overseas properties. IHCL’s debt coverage indicators, which have improved over the last three years with retirement of sizeable debt through divestments and equity rights issue proceeds, are moderate as of March 31, 2019, as reflected by interest cover of 4.4x (PY: 2.5x), Total Debt/OPBDITA of 2.8x (PY: 3.6x) and Net Cash Accruals/Total Debt of 23% (PY: 11%). The management is focusing on improving profitability of its international portfolio that, when achieved, will improve the credit profile of the company. Investments towards acquisition of fully operational hotels through strategic partnership with Government of Singapore Investment Corporation (GIC) could lead to increase in debt levels – In May 2019, IHCL signed a strategic partnership with GIC for an investment framework of ~Rs. 4,000 crore or $600 million over a period of three years. This capital platform will be used to acquire fully operational hotels mainly in the luxury, upper upscale and upscale segments in India. Equity contribution from IHCL will be 30% and the balance will be contributed by GIC, over a period of three years.
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