Indian Hotels trades lower; Nuvama cuts rating but other brokerages confident. Here’s why

Despite an upbeat outlook from Indian Hotels, Nuvama Institutional Equities says the recent run-up leaves limited upside potential. It has downgraded the stock to ‘hold’ from ‘buy’ but others have a different view

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Indian Hotels slumped over 3 percent in the morning trade on May 12, as investors booked profits. The scrip has generated returns of more than 60 percent in the past year and 450 percent over three years.

Considering the upmove, Nuvama Institutional Equities has downgraded the hotel company stock to “hold” from “buy”.

At 10.03 am, Indian Hotels Company was quoting at Rs 357.50, down Rs 8.05, or 2.20 percent.

Upbeat on Q1FY24

On May 11, the company organised a Capital Market Day. During a presentation, the management highlighted that the first quarter of FY24 would be better than the year-ago quarter. FY23 was strong and the company moved closer to its targets during the year.

Indian Hotels raised its guidance for metrics such as the number of hotel openings to over 325 from 300 and revenue from managing hotels to Rs 5.5 billion from Rs 4 billion.

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Indian Hotels is focused on diversification and growth of top line rather than scaling up margins, it said. The company is clear that mergers and acquisitions cannot be at the expense of balance sheet health. It believes it is in a position to add another brand at present, the presentation said.

Taj hotels will remain the largest revenue contributor (around 73 percent) with constant improvement in offerings while Seleqtion, Vivanta and Ginger hotels would increase their reach across diverse locations, it said.

Brokerages’ view

Despite the upbeat outlook, Nuvama Institutional Equities said, “That said, the recent run-up in the stock leaves limited upside potential,” and hence the downgrade.

On the other hand, Jefferies said the management is confident of a cyclical recovery in the hotel sector. Another key point was that FY24 could see double-digit revenue per available room (RevPAR) growth yet again, it said, citing the May 11 presentation.

The company’s RevPAR premium as compared to the industry was around 40 percent in FY19, which moved up to about 70 percent led by premiumisation of the portfolio, strong brand equity, quality market share gains and smart renovations, it said.

In the short and medium terms, the company believes demand will outpace supply leading to better occupancy and higher ability to charge, resulting in better RevPAR.

Jefferies has a “buy” call on the stock with a higher target price of Rs 425.

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Morgan Stanley, too, said that the management reiterated its FY26 guidance and raised guidance on management contracts. The management also remains bullish on industry dynamics.

The foreign brokerage firm has an “overweight” rating on the stock with a target price of Rs 412.

Motilal Oswal Financial Services also has a “buy” recommendation with a target price of Rs 420. It believes multiple revenue growth drivers are in place for the luxury and leisure hotel operator such as strong domestic consumption story, favourable demand-supply dynamics and rapid increase in hotels through asset-light model.

“Margins are likely to sustain at current levels (33%) due to higher contributions from margin-accretive businesses, improved productivity and operating leverage in existing hotels,” the domestic brokerage firm said.

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