By HSBC Global Research
Quality of customer mix has started to improve, giving a push to RevPAR; new revenue initiatives are value accretive. We edge up our ARR assumption slightly, which pushes up our FY22-23e profit forecasts by 22% and 3%, respectively. Increase TP to Rs 121.50 (from Rs 111.50); leaner cost structure and easing competition should improve profit quality.
Quality of customer mix improving, occupancy during the last quarter was primarily driven by lower-paying Covid-19-related customers (quarantined patients, medical staff), so RevPAR was also significantly down. However, the situation has changed. While the Covid-19-related business has started to disappear, there has been some pick-up in normal business and leisure demand, which means that Average Room Rate (ARR) has started to increase significantly since June, according to the company.
What’s next? The company is set to enter the strongest quarter seasonally (quarter to December). Although this year it may not be the same as the pandemic will continue to impact demand. However, we expect there will still be some pick-up in demand. We note that demand for staycation seems to be rising strongly.
People have already started booking their holidays and since hygiene remains a key criteria, Indian Hotels is set to benefit from its strong brand.
On the other side, the marriage season (November-December) is set to push demand for the banquet business too and that will also lift room occupancy levels. So its profitability should get strong support from a pick-up in business and the planned cost cuts.
Maintain Buy; increase TP to Rs 121.50 (from Rs 111.50), the increase in our TP reflects the changes in our forecasts. The share price weakened recently as the surge in COVID-19 cases created uncertainty about a recovery in demand. We think the improving quality mix of customers and cost discipline should support profitability. So, in our opinion, the stock reaction was overdone and the tailwinds have not been captured in the price.
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