We previously pointed out that the industry has seen releases, mostly in the unbranded category, with only a few in the branded space. (Representative image)
By HSBC Global Research
Buy. Oversold on worries; plausible growth strategy. Rising Covid-19 cases could prolong weak demand, but strategic growth should strengthen the fairness scenario. Continued cost reduction and new revenue initiatives should improve the profit margin. Purchase note, Rs 160 TP, and forecasts unchanged; the stock appears oversold and tailwinds appear to have been ignored.
Increase in Covid-19 cases could impact demand; The IHCL should benefit from a strong brand: Due to an increase in the number of Covid-19 cases, the government has imposed travel restrictions in many states in India, which could have an impact on Requirement.
Some states require a negative RT-PCR report for entry by any mode of transport. Still, part of the leisure traffic and the lower part of the business traffic continue. However, most guests now prefer hygiene over price, which should benefit Indian hotels.
Strategic growth intended to strengthen the stock story: We have previously pointed out that the sector has seen exits, mainly in the unbranded category, with only a few in the brand space. The likely prolonged weakness in demand could also lead to some additional consolidations (or exits) in the brand space in the coming quarters. Real estate prices remain depressed and Indian Hotels took this opportunity to expand by acquiring assets at depressed prices. While this reflects management confidence, it also reflects a good strategy of maintaining a thin asset model. The company acquired seven new properties in FY21, but all were under management contracts.
Cost restructuring should improve profit margins: Indian Hotels has restructured its costs significantly. It reduced operating costs by almost 30-40% in the first nine months of fiscal 21. The company also redeployed some of its workforce from existing hotels to new hotels, reducing its staff / room ratio from 1.53 in April to 1.14 in December. Some of these costs will come back to the business as demand returns and businesses reopen. However, some costs are expected to be permanently unavailable, improving profitability after the Covid-19 pandemic.
New revenue initiatives to create value: Indian Hotels launched new revenue initiatives earlier last year, including food delivery, stay packages and room membership.
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