Indian Hotels’ stock appears to be factoring in the positive picture


Shares of The Indian Hotels Co. Ltd (IHCL) are down by nearly 7% after the September quarter (Q2FY23) results were announced. A weaker than expected margin was a sore point. However, investors are already sitting on handsome returns of 75% so far in CY22, beating the mere 4% rise in the Nifty500 index. The strong rebound in demand driven by an increase in travel, business meetings, and corporate events have boosted the stock.

In the half-year ended September (H1FY23), the rise in demand versus 2019 levels was ahead of the growth in supply. The outlook is bright with a seasonally strong Q3. This quarter began on an upbeat note for IHCL. The first six weeks of Q3 saw strong demand, the company said.

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Given this, IHCL expects revenue per available room to grow in double digits from the high levels seen in pre-covid (Q3FY20). Supply constraints amid a solid demand environment would continue to support room rates.

International arrivals are likely to reach pre-covid levels by January. If this plays out, price hikes could be higher.

Besides, IHCL’s domestic business is on a strong footing. Compared to Q2FY20, a pre-pandemic quarter, the average room rate and occupancy levels in domestic hotels on a like-for-like basis was up by 31% and 100 basis points, respectively. One basis point is 0.01%.

The good run is expected to continue. HVS Anarock estimates the Indian hotel sector’s occupancy to be at 70% in Q3 versus 68.8% in Q3FY20. The wedding season should support this. Also, with India taking over the presidency of G20 summit, IHCL said that it is well positioned to capitalize on the opportunity.

However, with such robust demand, comes the need for more staff, which would lead to a spike in operating costs. This could lead to pressure on margins. In H1FY23, earnings before interest, tax, depreciation and amortization (Ebitda) margin was nearly 27%.

“The elevated inflation levels, macro headwinds in the US and Europe, and the ongoing job cuts could restrict the spending capability of consumers. This is a key worry for the hospitality sector,” said an analyst requesting anonymity. The moot question is whether the demand momentum will continue in FY24 as well.

All the positive elements seem to be factored in the current price, according to the analyst. Therefore, in view of the sharp appreciation in recent months, analysts at ICICI Securities have downgraded their rating on the IHCL stock from ‘Buy’ to ‘Add’.

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