Royal Orchid Ltd Sector: Hospitality Q4 & FY18 - Results Update 30th May 2018

Company Overview CMP (INR) (As on 28th May 2018) 207.65 Previous Target (INR) 275.00 Royal Orchid Limited (ROHL) is the flagship company of the Royal Orchid Current Target (INR) 275.00 Group of Hotels. The hotel chain has been in the business since the past 30 Upside(%) 32.4% years, it comprises 5 and 4 star properties for business and leisure travelers. Recommendation Strong BUY The company operates through mix of owned & leased properties, management contracts and JVs with recently focus more shifting towards asset light management contract model. It is present across all the major BSE Code 532699 business destinations in the country and has strategy to explore tier IIand pilgrimage destinations. It operates under two brands: Royal Orchid and NSE Code ROHLTD Regenta. The Company has 47 operational properties with a collective Reuters Ticker ROHL.BO inventory of 3,294 rooms spread over 34 cities. Bloomberg Ticker ROHL.IN Key Highlights Stock Scan Key Business for FY18 (Standalone)  Revenue from operations INR103.59 crore in v/s. INR92.73 crore Market cap (INR Cr.) 566.91  EBIDTA of INR25.11 crore v/s. INR20.27 crore Outstanding Shares (Cr.) 2.73  EBIDTA Margin of 23 % in FY18 v/s. 20 % in FY17  PAT of INR10.98 crore v/s. INR5.63 crore Face Value (INR) 10.00  EPS of INR4.03 v/s. EPS of INR2.07 Dividend Yield(%) 0.72 Key Business for FY18 (Consolidated)  Revenue from operations of INR190.90 crore in FY18 v/s INR174.87 TTM P/E (x) 44.67 crore in FY17 Industry P/E (x) 87.93  EBIDTA of INR39.74 crore v/s. INR31.70 crore  EBIDTA Margin of 20 % in FY18 v/s. 17 % in FY17 Debt/Equity 0.56  Net Profit of INR2.46 crore in FY18 v/s INR(4.54) crore in FY17 Beta vs. Nifty50 1.79  EPS of INR0.90 v/s. EPS of INR(1.67)

52 Week High/ Low (INR) 238.90/97.15 Highlights of Q4 FY18 v/s Q4 FY17 Avg. Daily Vol. (NSE)/1 yr. 121834  Revenue from operations of INR27.72 crore v/s. INR24.36 crore  EBIDTA of INR6.46 crore v/s. INR6.11 crore Shareholding Pattern (%)  PAT of INR2.46 crore v/s. INR0.03 crore

Mar-2018 Dec-2017 Sep-2017  EPS of INR0.90 v/s. EPS of INR0.01 Promoters 69.53 69.61 70.53 Exhibit 1: Financial Performance at a glance (Consolidated) Institutions 6.96 5.70 5.15 Particulars (INR Cr) FY 2016 FY 2017 FY 2018 FY 2019E FY 2020E Non-institutions 23.51 24.69 24.33 Revenue from operations 158.53 174.87 190.90 222.40 261.32 Stock vs. Nifty (Relative Returns) Growth (%) 7.3% 10.3% 9.2% 16.5% 17.5% 250 EBITDA (Excl. O.I) 24.70 31.70 39.73 45.92 61.63 200 EBITDA Margins (%) 15.6% 18.1% 20.8% 20.6% 23.6% 150 Net Profit -1.29 -3.44 3.39 8.55 19.76 100 Net Profit Margins (%) -0.8% -2.0% 1.8% 3.8% 7.6% 50

0 EPS -1.33 -1.68 0.89 2.80 6.92 BVPS 58.76 60.14 60.64 62.04 67.37

ROHLTD Nifty 50 P/E (x) N/A N/A 234.36 74.16 30.00 P/BV (x) 3.53 3.45 3.42 3.35 3.08 Source: NSE Research Analyst EV/EBITDA (x) 29.57 33.57 21.02 16.19 10.98 Sarthak Mukherjee ROE (%) -2.3% -2.8% 1.5% 4.5% 10.3% Email: [email protected] Source: Company Data, SMIFS Research 1 Ltd

Con-Call Highlights

 Occupancy for Royal Orchid for the whole year and Q4FY18 was at 78% and 81% respectively. Average Room Rates (ARR) for the company went up by 10%.

 Central Bangalore asset is reporting losses, primarily because of high depreciation and maintenance as it is a old property. In FY18 renovations were done, a new and new machineries were installed. The management is hopeful that the property will come into profits by FY19.

 The company on a standalone basis has earned around 63% of its revenue from room rents, 31% from food & beverages and banquets and 7% from other operating sources. Similarly on a consolidated basis the company has earned around 60% of its revenue from room rents, 31% from food and beverages while 9% from other operating sources.

 The management expects ARR to increase by 10% in FY19. They have also mentioned that on the corporate front, they have successfully negotiated with all the corporate clients and got the rates hiked in the contracts.

 The management is focusing on controlling cost. They will certainly focus on the employee cost as it’s the major cost for any player in the sector. The company also follows several employee retention policies.

 The issues related to the Mumbai land parcel is expected to get solved soon. May be in June’18 the final call on the land will be made public.

 In FY18 the Loyalty Member base has went up to 1,74,086 from 1,33,055 in FY17, an increase of around 31%.

Business Model

Particulars MC JV Owned Leased TOTAL 5-Star Royal Orchid - 139 195 - 334 4-Star Central 1,512 130 - 198 1,840 / Heritage 646 73 - 188 907 /MICE - 54 - - 54 Serviced Apartments 159 - - - 159 Total Keys 2,317 396 195 386 3,294

Source: Company Data, SMIFS Research

2 Royal Orchid Hotels Ltd

Exhibit 2: Financial Performance Quarter Ended (Standalone) Consolidated Particulars (in INR Crore) Q4 FY18 Q4 FY17 YoY % Q3 FY18 QoQ % FY18 FY17 YoY Income from Operations 26.27 24.36 7.8% 28.40 -7.5% 190.90 174.87 9.2% Other Income 0.65 2.03 -68.3% 1.23 -47.7% 8.93 12.76 -30.0% Total Income 26.91 26.40 2.0% 29.64 -9.2% 199.83 187.63 6.5% Cost of Material Consumed 2.69 3.03 -11.1% 2.92 -7.9% 20.27 21.48 -5.6% Employee Benefits Expense 5.60 5.24 7.1% 5.16 8.7% 46.68 44.34 5.3% Rent Expense 3.07 2.04 50.0% 3.06 0.1% 13.64 14.98 -8.9% Power & Fuel 2.26 2.44 -7.6% 2.28 -1.1% 16.85 17.19 -2.0% Other Expenses 8.28 7.53 10.0% 8.11 2.2% 62.66 57.94 8.1% Foreign Exchange fluctuations 0.00 0.00 N/A 0.00 N/A 0.00 0.00 N/A Total Expenses 21.90 20.28 8.0% 21.53 1.7% 160.10 155.93 2.7% EBITDA 5.01 6.11 -18.0% 8.10 -38.2% 39.73 31.70 25.3% EBITDA margin (%) 19.1% 25.1% -602bps 28.5% -946bps 20.8% 18.1% 268bps Depriciation & ammortization 1.11 1.05 5.7% 1.09 1.8% 15.82 16.12 -1.9% EBIT 3.90 5.06 -23.0% 7.01 -44.4% 23.91 15.58 53.5% EBIT Margin (%) 14.8% 20.8% -593bps 24.7% -985bps 12.5% 8.9% 362bps Interest cost 1.08 1.58 -31.5% 1.28 -15.4% 14.69 15.47 -5.0% Exceptional Item 1.45 0.00 N/A 0.00 N/A 0.00 0.00 N/A Profit before tax 4.27 3.48 22.5% 5.74 -25.6% 9.22 0.11 8281.8% PBT margin (%) 15.9% 13.2% 266bps 19.4% -349bps 4.6% 0.1% 456bps Tax 1.81 3.33 -45.7% 1.52 19.2% 6.81 4.67 45.8% Profit after tax 2.46 0.15 1531.0% 4.22 -41.7% 2.41 -4.56 -152.9% PAT margin (%) 9.1% 0.6% 856bps 14.2% -509bps 1.2% -2.4% 364bps EPS 0.90 0.01 8900.0% 1.55 -41.9% 0.90 -1.67 -153.9% Source: Company Data & SMIFS Research Outlook Demand-Supply mismatch : Robust growth in the sector is awaiting since there is a demand-supply mismatch in terms of required room inventory. According to Ministry of , India is short of around 2lac tourist hotel rooms and India is projected to be the fastest growing nation in the wellness tourism sector. Tourist arrivals have been seeing a robust growth due to introduction of -e visa. It has already crossed 1 crore in CY2017.The drive to promote India as a tourist destination and increase in global growth has also led to larger to India by global tourists.

Healthy Balance Sheet: The Company owns two land parcels, one in Mumbai (Powai) and the other in Tanzania, which the management is planning to sell. The combined value of the properties is around INR90 crores. The proceeds from the above mentioned sale can be partially used to reduce debt further and the rest can be allocated for expansion plans.

Improving Occupancy: Currently, ROHL is sitting at an occupancy of 70% across all of its hotels. However, some of its hotels such as Royal Orchid Central Pune and Royal Orchid Central Grazia, Navi Mumbai, the occupancy is around 80%. Some of the new properties which have been added during the past two years haven't achieved high occupancy which is averaging out the total group occupancies. This is poised to turnaround in the coming year when the occupancy goes up and reaches an optimum level.

Lower Finance Costs: The management’s efforts to reorganize the Company's debt are paying off. ROHL’s debt have gone from a five year to 10-year repayment period. The company has refinanced a loan at a lower interest rate for the Jaipur property which has already indicated the signs of recovery. The management has also renegotiated few other borrowing terms post their up gradation in credit rating to "BBB-" and as a result the interest expense will come down.

3 Royal Orchid Hotels Ltd

Actual v/s Estimate Added Keys SMIFS Consolidated Numbers Actual Figs Variance (%) Particulars FY17 FY18 Estimates Net Revenue (INR Cr.) 199.83 187.63 6.5% Management Contracts 2112 2317 EBITDA (INR Cr.) 39.73 32.47 22.3% Joint Venture 396 396 EBITDA Margin(%) 20.8% 17.3% 350bps Owned (Domestic) 195 195 Net Profit(INR Cr.) 2.41 4.63 -48.0% Leased 456 386 Net Profit Margin (%) 1.2% 2.5% -126bps Total 3159 3294

Source: Company Data, SMIFS Research

Valuation We maintain our previous price target of INR275 and keep a “Strong BUY” rating. Several macro and micro factors compel us to believe a good visibility of growth in the hospitality sector . Asset light business model, rapid expansion of properties, favorable taxation structure under GST, turnaround in business operations combined with lower operational and finance expenses is a boost to the company. Ever increasing foreign tourist arrival and robust air passenger traffic bodes well for the industry. We value the Company using DCF and arrive at a target price of INR275.

Please find below the link of our previous report:

Date : 22.01.2018 CMP : 191.15 Target Price: INR275 https://www.smifs.com/files/reports/636522409103161259_SMIFS%20Research_Re-rating%20Royal%20Orchid.pdf

4 5 Disclaimer

Any document, including this report, which is prepared by the research team of Stewart & Mackertich Wealth Management Ltd. (SMIFS) is circulated for the purpose of information only to the intended recipient and should not be replicated or quoted or circulated to any person/corporate or legal entities in any form. This document/ documents/ reports/ opinion should not be interpreted as an Investment/ taxation/ legal advice. While the information contained in the report has been procured in good faith, from sources considered/ believed to be reliable, all/ part of the statement/ statements/ opinion/ opinions/ view/ views in the report may not be considered to be complete or accurate. Therefore, it should only be relied upon at the recipients own risk.

Research Analysts/ Economists/ Advisors/ Investment Strategists or any other spokes persons of the company (SMIFS) are often sought after for expressing their views on print/ electronic/ web media. The views expressed are purely based on their assumption/ understanding on fundamental approach/ technical and historic facts on the subject. The views expressed should not be construed as an offer to buy/ sell or hold equity/ commodity/ currencies or their derivatives. The views/ opinions expressed is for information purpose only, and may change due to underlying factors, related or unrelated or other market conditions and may or may not be updated.

Stewart & Mackertich Wealth Management Ltd, its subsidiaries, or any of its directors, employees, agents, and representatives shall not be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information/ research reports/ opinions expressed.

Disclosure: Clients/ associates of SMIFS Group may be holding positions in equities or their derivatives on which the research report is made or opinion is formed or views are expressed in print or electronic media. We ensure all compliance is adhered to with this report/ reports/ opinion or views expressed.

Analyst ownership of the stock – NIL Analyst’s dependent relatives’ ownership in the stock – NIL

Analyst Certification: The matter related to the report has been taken from sources believed reliable and the views expressed about the subject or issues in this report accurately reflect the personal views of the analyst/ analysts. Stewart & Mackertich Wealth Management Ltd. does not compensate partly or in full, directly or indirectly, related to specific recommendations or views expressed by the research analysts/ market strategists/ Portfolio Managers.

REGISTRATION as required under SEBI (Research Analyst) Regulation 2014 has been granted by Securities & Exchange Board of India (SEBI), registration number being INH300001474.

Stewart & Mackertich Wealth Management Ltd. Vaibhav, 4 Lee Road, Kolkata 700020, West Bengal, India. Tel.: +91 33 6634 5408 /, Fax: 91 33 22893401

Website: www.smifs.com

For queries related to compliance of the report, please contact: - Sudipto Datta, Compliance Officer Contact No.: +91 33 66345414 / 4011 5414 Email Id.: [email protected] / [email protected]

6