Increase in the average rates not significant, says Indian Hotels CEO Puneet Chhatwal

Update on the Indian Equity Market:

On Wednesday, NIFTY50 closed 0.5% higher at 12,225. NIFTY50 gainers includes M&M (+3.6%), Sun Pharma (+2.5%), and JSW Steel (+2.1%). NIFTY50 losers includes Tata motors (-2.9%), GAIL (-2.1%) and Grasim (-1.9%). Pharma (+1.2), and Media (+0.8%) were the top sectoral gainers. PSU Banks (-1.9) and Media (-0.4%) were the only losing sectors.

Excerpts from an interview with Mr Chhatwal, CEO, Indian Hotels. The interview was published in Livemint dated 18^th December 2019

• IH has a lot of last-minute pick-ups and till now the demand has been holding quite well. The volumes are okay. What has not done so well this year is the increase in the average rates.
• IH has come from such a low base and there has been the GST reduction since 1^st October, but the rate increases are not as evident as all of them would like to see.
• Weddings are recession proof so weddings happen and they happen this time of the year, so they do fill-up the hotels.
• Similar is the case in all those religious circuits that they are strong in. They just opened hotel in Tirupati, so if people have to go to Tirupati they will go to IH. According to him, the unrest in the North-East or in Delhi won’t have an impact on this kind of business.
• Their backbone is really the Taj brand and on the luxury segment, whether it is chauffeur driven cars or it is hotels, disruption has not really played a significant role. They announced the opening of the 50th Ginger and they have repositioned the Ginger brand.
• This year started with the terror attack in Sri Lanka. They have three properties there so they went down. Colombo has bounced back quite well, Bentota has not. It is hopefully coming because now it is the season time. The year before that there was the political unrest in Maldives.
• London has been very strong, New York and  San Francisco has been strong. Cape Town has problems or challenges both politically as well as with water availability. If you have a larger portfolio, large footprint, it balances out.
• Opening hotels is definitely on their agenda. They have guided that IH will open a hotel a month, they are ahead on that too. They will open 12 hotels this year and this number may even increase to more than a hotel a month across all IH brands.
• Their own capex has been limited to either renovating their most iconic asset in Delhi, the Mansingh, or bringing to life in 3-4 months the Connaught and that is where IH is putting in capex. Otherwise, it is normal capex, which is 4-5% of total revenue.
• When IH builds new destinations like they built Goa as a destination 40-50 years ago, it took 3-4 years but then now everybody breaks even in Goa very fast. Now they are doing the same with Andaman with Havelock.
• They are actually at 19% EBITDA margins for this year, year-to-date and the second half is more important. One is that 60% of revenues come from there and the margins are much higher in the second half.
• IH is definitely looking at a further improvement and improvement has been almost 600 basis points in the first half so that is very positive news. 

Consensus Estimate (Source: market screener website)

• The closing price of Indian hotels was ₹ 146/- as of 18-December-19. It traded at 42x/34x/29x the consensus EPS estimate for FY20E/ FY21E/ FY22E of ₹ 3.5/4.3 /5.1 respectively.
• Consensus target price of ₹ 187/- implies a PE multiple of 37x on FY22E EPS of ₹ 5.1/-