Indian Hotels: Wait and Watch for Signs of a Turnaround; CMP Rs.57, TP Rs.57; Equalweight (MS)

[Amit shah]

Indian Hotels: Wait and Watch for Signs of a Turnaround; CMP Rs.57, TP Rs.57; Equalweight (MS)

 

Domestic RevPAR trends remain sluggish, and the

US properties continue to make losses, bringing

down overall margins. Visibility on any turnaround

remains low, thus keeping us EW on the stock.

 

Domestic business to stay sluggish into F14: Given

the strong pipeline of rooms ready for commissioning,

room availability growth should remain strong in F14,

keeping occupancies, and thus rack rates, under

pressure as the weak domestic economy impedes

efforts to increase ARR. For IHCL, we assume RevPAR

grows just 0.5% in F14 and gradually picks up from F15.

 

US operations to continue marring overall

performance: In F13, standalone EBITDA margin stood

at 22%, while consolidated margin was just 14%, largely

due to the negative contribution of the US properties.

While we assume lower losses in the US operations

going ahead, we still expect them to take down IHCL’s

overall performance. Their contribution will be further hit

by the 16% depreciation in INR in the last four months.

 

Maintain EW: The stock has underperformed the

Sensex by 27%YTD and trades at 11.7x 1-yr forward

EV/EBITDA, close to 1SD below the mean. While there

is valuation support, the limited visibility on a turnaround

in US operations keeps us EW with a revised price

target of Rs54 (was Rs74). We shift to a probabilityweighted

target and cut our bear case value more

deeply than our bull and base case values.

 

Where we could be wrong: Better domestic RevPARs

could bump up earnings. Performance of US properties

remains a key trigger for the stock in either direction.