Indian Hotels Stock Soars 4% on Strong Q2 Earnings, but Brokerages Remain Cautious

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Indian Hotels Company Limited, one of the Tata group companies, reported quarterly numbers with impressive revenue growth in earnings, and the stock jumped over 4%. Consolidated net profit for the quarter ended September 30, 2024 stood at Rs 554.6 crore, up 232 per cent year-on-year. Positive revenue growth, successful consolidation moves, and growing occupancy-everyone of these aspects drove growth and garnered investors' attention. However, brokerages are cautious as they would point out the recent run-up of the stock along with near-term headwinds.

Q2 Financial Highlights

Indian Hotels saw a very strong Q2 in FY25 while coming back from a slightly more subdued Q1. For Q2, it has reported Rs 1826 crore of the consolidated revenue from operations, with a year-over-year growth of 27%. The reasons behind the growth include higher ARR and occupancy at 78% which is 150 bps higher year over year. The quarter's standout, however, was the year-over-year growth of 10.4% in ARR, which made up a large portion of revenue growth. In addition, strategic consolidation-albeit muted by the integration of Taj SATS-much continued to energize revenue and underscored IHCL's commitment to enriching its service portfolio and operating footprint.

Margin and Profit Growth

IHCL's profitability also improved handsomely during the quarter with operating margins improving to 27.5%, which reflects an increase of 270 basis points year over year. Since IHCL had already indicated in its H1 FY25 performance that it would post 11 per cent revenue growth year over year, management seems pretty much more than confident of eventually achieving double-digit growth for the entire fiscal year. The company posted spectacular growth in its consolidated PAT, which would most likely be continued at a compound annual growth rate of 24% from FY24 through FY27.

Broker Views and Target Price

Brokers are being cautious despite this great set of numbers, primarily for the fact that IHCL has witnessed its recent stock rally and was trading at high valuations. The 'Hold' rating on Indian Hotels has been retained by Investec, however, the target price has increased from Rs 630 to Rs 742. Indeed, certain long-term trends, strategic expansion plans and strong ARR growth do paint a picture of IHCL in rather very positive colours, according to the brokerage. It believes IHCL's margin is going to stabilize at around 32-32.5% for FY26 and FY27. Emkay shares a similar sentiment with HCL and Co., noting strength in the hotel segment of IHCL, which will start seeing some traction from the upcoming wedding season. Emkay has even highlighted IHCL's well-diversified revenues, strong operating efficiency, and a healthy balance sheet as positives. Hence, Emkay maintained an 'Add' rating on the stock with a target of Rs 700. However, the overall estimate sounded rather conservative, as Nuvama believes that the company's like-for-like (LFL) growth will top in the early teens for FY25 and would be slightly below the earlier estimates. With this basis, Nuvama revised its revenue and EBITDA projections for FY25-27 and downgraded the rating from 'Hold' to 'Reduce' while revising the target price to Rs 574.

Industry Outlook and Demand Supply Dynamics

Indian hotel industry is witnessing increasingly positive trends, particularly led by domestic travel, business events, as well as the reviving of international tourism. For IHCL, positive demand-supply dynamics are a tailwind. The festive and wedding season should get occupancy going in the upcoming season and add extra momentum to growth for IHCL. With the travel and hospitality sectors on the road to recovery from a pandemic-driven slump, strong brands such as Taj under IHCL are gaining market share. According to Emkay, diversified revenue streams and operational efficiency will be the keys for IHCL in sustaining growth, which is also supported by the firm's strategic location at key cities and high-end locations in India, bolstered by a good balance sheet.

Strategic Outreach and Consolidation

IHCL has aggressively expanded its footprint through several new projects and property acquisitions. The Taj SATS acquisition is a strategic move that not only strengthens IHCL's presence but also presents an opportunity for cross-selling. Taj SATS is the leading in-flight catering service provider, thereby adding value to IHCL by enhancing potential revenue streams through synergies established within its hotel and hospitality businesses. In addition, the company's efforts to increase its ARR across the properties would ensure a constant flow of revenue. Moreover, with experiences being at a high premium and of the best quality, IHCL's emphasis on quality service and experience goes well with consumer expectations in such scenarios.

Challenges and Risks

While optimism surrounds the IHCL story, analysts have certain red flags related to the risks that come with it. The sharp stock rally and current high valuations have exercised caution among many brokerages, including Nuvama. While the firm's like-for-like growth might be capped in the medium term, a significant portion of near-term growth has already been accrued, so further upside may be modest. Except for this, any slowdown in the world economy could impact travel and tourism, which could also mean softer occupancy and ARR. Squeezing of margins can also be seen due to enhanced competition from hotel chains in the domestic as well as international markets, mainly due to discounts to attract customers. IHCL is a premium play and, hence, needs to invest continuously in service quality that may compress the margins if not handled properly.

Long-term Prospects and Investment Potential

IHCL offers a long-term opportunity in the company, with its sound financials, strategic expansions and being compatible with industry trends of encouraging dynamics. For a strong brand with a wide outreach in the market, this Indian hotel chain exposes it to structural growth within the tourism and hospitality space of India. Brokerages like UBS and Investec consider IHCL as one of the resilient players that can sustain growth in the years ahead. The company plans to sustain double-digit growth, a high EBITDA margin, and an increase in ARR, making it more poised to continue scaling new heights.

Share Market Performance and Recent Spike

On 29 October, shares of IHCL closed at Rs 712.40 on the National Stock Exchange, when the same saw more than 4% spiking. The stock has risen around 63% year to date and has comfortably outperformed the Nifty, with the latter having gained only about 10%. IHCL's stock has risen by 75% in the last 12 months. In comparison with Nifty, which has risen around 23% in the last 12 months, this is a very good gain indeed which speaks well of IHCL's growth prospects, but at the same time also speaks of very high valuations. Indian Hotels reported impressive Q2 results, reflecting robust growth and resilience in a hospitality sector that appears to be recovering. While brokerages continue to remain optimistic about the company's fundamentals, the recent run-up in the stock of IHCL has more or less ensured a cautious take moving forward. Investors need to keep a close eye on the valuation of the stock while the company continues to benefit from favourable demand trends and strategic expansions. IHCL has set up itself for long-term success through a strong background of revenue growth, strategic consolidation, and a diversified revenue base. This company is focused on consigner-value properties, increased occupancy, and average room rates, all of which will propel the chain toward sustained growth in the future. But from the investor's point of view, the challenge lies in growing with the high valuations undertaken now by the company as it moves on with its dynamic and competitive trends in the industry.