Asset light model has made analysts upbeat on this hotel stock

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To beat the impact of Covid 19 businesses across sectors are trying new and innovative ideas to stay profitable. One such example is of Indian Hotels Company – the owner of iconic hospitality brand Taj Hotels. The company has adopted an asset-light model which basically means that the company will own relatively fewer capital assets compared to the value of its operations. From Indian Hotels point of view, this is done by adding capacity through the management contract route while being selective in owned-room additions.

In a recently hosted analysts meeting, the management said that in FY18, management contract hotels formed around 33% of its overall portfolio, which has now increased to 46%. That’s not all the management gave guidance that it targets to take this to 50%. About 78% of the hotels in its current pipeline are under management contract and only 6% are owned. Currently, management contracts generate a revenue of Rs 220 crore, which the company targets to take up to Rs 350 crore. At the same time, it also aims to reduce debt to pre-pandemic levels by hiving off non-core assets and generate a better return on capital in the medium to long term.

All this has made analysts gung-ho on the hotelier, here is what they have to say.

Sharekhan | Rating: Buy | Price target: Rs 182 | Upside: 21%

A strong focus on building an asset-light model and recovery in the business environment will help IHCL recover to 80% of pre-Covid levels in FY2023 and clock strong profitability. In FY2022, the company is focusing on keeping its balance sheet lean with no major capital investments. Stock is currently trading at 25x its FY2023E EV/EBIDTA (Enterprise Value to Earnings before interest depreciation tax and amortization). Any sustained improvement in the business fundamentals and reduction in debt as planned would further re-rate the stock.

Among hotels, it is one of the better plays in the unlock theme due to a relatively stable balance sheet, strong room inventory and brand recognition.

Anand Rathi | Rating: Buy | Price target: Rs 175 | Upside: 17%

The company reckons that demand will completely revive in FY23 subject to the speed of vaccination. It wants to focus on and expand its new brands and business started in the last 1-2 years and aims at a further 10% revenue (~50-80% EBITDA flow-through) from these businesses in the next 2-3 years. It reiterated its focus on driving asset-light profitable revenue growth, which would expand RoCEs (Return on Capital Employed). On the subsidence of the Covid-19 pandemic, Anand Rathi expects it to outclass others, driven by its dominance in the Indian hotel’s sector, superlative brand equity and well-diversified portfolio across business segments and price-points.

(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)