INDIAN HOTEL COMPANIES LIMITED: INITIATING COVERAGE REPORT!

Disclaimer: This blog is not intended to provide any form of investment advise and is strictly for personal and academic goals of reinforcing learning.

My intention is to summarize my readings for the day, and some of the facts I found most interesting. You can understand more about this concept in this video.

You can find the links to all articles cited hyperlinked within the article!

IHCL'S INITIATING COVERAGE REPORT 2022 BY AXIS SECURITIES!

This article intends to answer 3 basic questions:

1) What about IHCLs operations (or predicted operations) makes it the biggest hotel chain in the country?

2) How do I compare IHCL's operations with Lemon Tree's?

3) What are some leading current affairs that will affect their business in a big way?

WHAT IS IHCL AND WHAT MAKES IT SO BIG?

The Indian Hotel Companies Limited (IHCL) hotel chain is the largest hotel chain in the country. It operates in the luxury, upscale and lean luxe segment. The lean luxe segment was coined by the company itself, and it refers to a chic, modern style hotel that caters to the working class, without charging an extremely hefty fee!

In my opinion, the biggest MOAT of IHCL is its unique business model that protects it from the pressures of seasonality that is often seen in this industry:

• Hotel and F&B revenues: Its hotel and F&B business (from where majority of its revenues were derived in 2022) generates about 25% EBIDTA margin in a good season. The company operates this business across a range of models.

1. Owned hotels: Some of their hotels are owned and operated end to end by the company which helps to stabilize their fixed costs and expand their operating leverage. IHCL's operating leverage is the highest among its peers.
2. Leases: Some of their hotels are leased, which means they get to enjoy the entirety of their revenues and profits, while some amount of rent is expensed out.
3. Management contracts: Most interestingly, some of their inventories are management contracts with real estate developers, who 'hire' the company to manage and operate a successful hotel business on their properties. In return they are given management fees while majority of the capital infusions in these hotels are incurred by the property developers themselves. These revenue sources generate the company about 70-80% in EBIDTA margins.
4. Franchising agreements: The company can also find franchisees who can operate a hotel on their behalf by using its branding strategies, while in turn offering them handsomely rewarding franchising fees.

• Other revenue streams: 

1. The company also has other revenue streams like QMIN for instance, that delivers food from their 5 star banquets directly to customer's homes, and Ama, where villas owned by the hotel chain are made available to customers for homestays. 
2. They also have a member exclusive club called 'The Chambers' that is a perfect place for elite businesses to network for clients. Overall, the company has a brilliant cushion against the seasonality of the room letting business.

• Strong corporate governance: 

1. The company's management is very strong. Going by the report itself, majority of the BOD have been promoted from extremely junior roles all the way to the top, showcasing their nuanced specialization of the hotel industry. 
2.  The management has shown a solid track record in retaining their promises. At the time of this report in 2022, the company had only announced its AHVAAN 2025 strategy to convert its net losses to profitability. This strategy discussed expansion of rooms, a target EBIDTA and net zero debt all of which were achieved ahead of schedule, in 2024! :)
3. They also play strategically with their assets of lesser utility. The report discussed 2 such assets. The first asset, The Searock Properties, was heavily damaged in the 1993 serial blasts in India. The company recently decided to demolish the entire property and has announced injection of 2600 cr rupees in order to construct an equivalent hotel in the space. This appears to be indicative of the management's ability to revitalize their brand value regardless of the circumstances.
4. Lastly the company's shareholding pattern indicates that the promoter's holdings has been stagnant at around 38%. The majority of the ownership lies with Mutual Fund investors and FII's, which can help to ensure a more shareholder centric mindset.

HOW I COMPARE IHCL'S OPERATIONS WITH LEMON TREE'S?

For the last fortnight, the focus of this blog was on Lemon Tree. I draw quite a few parallels between the 2 companies:

• Business models: 

1. Both the companies have unique business models. IHCL is more focused on the luxury segment, and in this arena, they seem to experience little to no competition. On the flipside, Lemon Tree is focussed on the 2.5 star to 4.5 star segment and the dynamics of these 2 are very different. 
2. In the ICR, I noticed a few charts indicating that rate realization of IHCL far outpaces the rest of the industry, and while that is true, each company operates in a different domain and the rates they seem to realize within this domain is quite appreciated by analysts.

• Board of Directors:

1. IHCL's BOD has very nuanced skill in managing the hotel industry, and even specifically their brands. However their CFO does not seem to have very elaborate exposure in the hospitality industry and rather brings a plethora of diversity in manging financial operations.
2. Lemon Tree is currently demerging into a Propco-Opco structure and executive directors of these 2 companies do not just privy to the hospitality sector, but have worked in a diverse range of businesses. 
3. One could argue that both these hiring decisions have their own pros and cons but one conclusion that can be yielded here is that since Lemon tree too is planning to develop a comprehensive L&D program that can train juniors to become directors, most successful hospitality companies prefer an inward sucession in their companies, as that's what helps to retain the standards of their brand images.

WHAT ARE SOME CURRENT AFFAIRS THAT ARE AFFECTING THESE BUSINESSES IN A BIG WAY?

• The Lag between demand and supply

1. As per the ICR, the CAGR of supply in the hospitality sector stands at 5.1% while the CAGR of demand stands at 6.5%. The obvious implication here is the opportunity for business to explore their pricing powers, espcially during peak seasons. 
2. One advantage that I believe IHCL has here is that they have an added luxury value, which means they have greater power in convincing existing hotel chains to undergo a franchising agreement with them, or even acquire them, and obtain maximum market share even without directly controlling the operations.

• The AI city of Bidadi

1. The Karnataka government has recently launched the initiative of an AI city in the Bidadi city, which is a greenfield township that will be run and managed by various AI interfaces that are meant to attract tech startups and also divert traffic away from the capital city.
2. Although the exact potential of success in this project is still getting debated, there is no doubt that this will atleast increase the daytime population in this city which the entire hotel industry can most certainly benefit from, if strategized properly.

Overall, the IHCL has delivered very strong momentum post the pandemic, and I would love to explore where this trajectory is headed. 

Thanks for reaching till here..see you in our next feature! :)