CAPEX, WEDDINGS AND STRANGER EVENTS: IHCL'S Q2 CONCALL FOR FY'26!

Disclaimer: This blog is not intended to provide any form of investment advice 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!

FY'26: A STORY OF GREAT INCONSISTENCIES

This quarter IHCL achieved more than 80% occupancy in the city of dreams, Mumbai. Kolkata stood at 83%, and EBIDTA jumped 16%!

Sounds like an absolute dream until one realizes that the RevPAR grew by a sad 2% figure, begging the question of what really happened here. Yet, this question wouldn't be so difficult to answer.

Against the backdrop of a Pahalgam attack, fierce retaliation from the Indian military via Operation Sindoor, a full blown warfare between Iran and Israel, and mysterious flight crashes across multiple airlines - what wizardry does it take for IHCL to still sustain its market positioning, and heck, grow their revenues in the double digits?

THE GOOD STUFF

1. Captivating by Capex

The company treated the first half of the year, almost as their only chance to delve deep into the world of renovations. They spent about 200 CR in renovating all major hotels, and there is something so beautiful about this timing. 

H1 is the trough period for the hospitality industry (much fewer festivals, lesser scope for international arrivals) and planning most of their renovations in this time is definitely strategic. It's expected to bring in 12-15% more ADR's (Average Daily Rates) compared to where we stand now!

There's also the very prominent Clarke and Brij chain acquisiton (which we discussed here) which is expected to make them market leaders in the mid market/lean luxe/business chic (whatever you want to call it) segment, that was of obvious interest, and in the first 6 months of the year alone, they have opened about 26 hotels (that's 1 hotel every week!)

In addition to this, there was about 100 CR of investment into the digital space, integrating applications like Tata Neu very closely into the business, and as IHCL transitions into a player with equal footing in the premium and mid market segments, this provides a much needed boost to customer loyalty.

2. Decisive diversifications

Last quarter, the company emphasized on being on a low carb diet (being asset light, and the importance of management contracts to their business model) and yet this quarter they really put out their capital expenditures.

Initially, this sounded like a red flag, and then it struck me. The company has a very specific approach to the acqusition of assets - To only own the hotel when the lag between demand and supply is sustained.

Think Ekta Nagar. This is where the statue of unity has been set up, and there are lush beautiful spice gardens out here, butterfly gardens and all sorts of beautiful tourist-y things, that the number of people who visit this place will always be so extraordinary. The gap in demand isn't just a gap, it's a void!

Owning a hotel in this space not only helps to gain better control over these rampant operations but because there will be very high operating expenses in owning a hotel, these can easily be covered by the room tarriffs. The room tarriffs will be so high because the pricing power is just so huge!

Now, you may call me out based on what I said at the beggining - Mumbai standing at 84% occupancy, and RevPAR growing at a meagre 2% in Q2. Why is that?

Well in Mumbai happened a very one off event - the wedding of someone very famous, which led to max occupancies being achieved - a rare and exclusive phenomenon and yes, these hotels can charge a hefty premium when it comes to room tarriffs, but that doesn't take away from the impact that renovations had this quarter.

As we just discussed, majority of IHCL's crown jewels were under their renovation period in this quarter, and hence the amount of revenue that was earned on a net basis was obviously much lower. However, this principle in their business strategy seemed extremely exciting to me.

In Ekta Nagar this quarter, IHCL has opened a Ginger hotel and Vivanta hotel, both 100% owned by them, and this is expected to cater to this growing demand.

3. The Ambuja Alliance

A very exciting collab happened this quarter: IHCL and Ambuja Neotia in a partnership that gives IHCL management contracts across 15 different hotels.

For those unclear about how management contracts work, you should definitely read up here! In short, a management contract is where the property is owned by a developer who then gets into a contract with a hotel company to operate a hotel on their premises. The majority of room revenues go to the developer and the hotel is left with a management fee.

However IHCL has always tried to negotiate these deals as revenue sharing arrangements as opposed to fee contracts. This would mean that for operating a hotel IHCL would get a share of their room revenues, and not a standard fee. The same agreement has applied to this collaboration too!

The beauty of this, and their alliance with Madisson properties (another real estate group partnering with them for hotel management contracts) is that it makes it easier to secure these agreements for their other hotel chains too.

Take for example their acquisiton of Clarke hotels. Even if 1 Clarke hotel is currently operating in a property owned by Ambuja Neotia, IHCL can negotiate and convert these agreements into revenue sharing arrangements which has historically proven to drastically improve their margins/revenues!

The margins from these contracts is on track to exceed 70%.

4. Ethical ethos

The hospitality world is basically always in war and although this king appears to be ruling now, the scope of overthrowing him is indeed very large in this space.

One analyst pointed out how easy it is to find a property, get it on lease, and then sublease it as a hotel and make a crazy amount of revenue - to the point of issuing an IPO. So how does IHCL protect its throne room from constantly being under attack?

Well, aside from the usual reasons like brandscape, and the Tata legacy, IHCL stands firm on its ethical values. The company is run on 0 debt (something very rare for the hospitality industry) and has good relationships with property developers, often supporting them with their own ambitions and in turn, securing very profitable deals from them.

Given the growing scarcity in land availability that India is experiencing today, the restricted amounts of real estate can only go to those hotel companies that have a reliable track record, and are highly ethical in settling their dues. These are all infinity stones decked on IHCL's boardroom - they funded a whole acquisition in cash and have one of the most experienced management(s) out there!

THE POTENTIAL RISKS

1. The Dangerous Ditch

I recently came across an article that highlights why hotel companies are sprinting towards Tier 2 and Tier 3 cities and it discusses the lack of land availability in Tier 1 cities. Not to mention that the government is also emphasizing on highway constructions and digital infrastructure in the T2 and T3 cities, which means these regions may be future business hubs.

However, when an analyst raised a question about this, the management appeared to believe that the growth in the T2 and T3 arena was only due to a base effect, nothing more.

The management did highlight looking into opportunities for management contract arrangements, but I do believe this would be a very new area for IHCL to work with - since very few people in these regions can afford luxury hotel stays.

2. The Sinister in Spirtuality

There is a sudden trend among hospitality companies to try and capitalize on the growing spiritual awakening among the Indian people. They do this by setting up hotels near relegious sites so pilgrims can stay here during their expeditions.

However, here's the catch - As many analysts point out, why would a pilgrim, inclined spiritually, prefer to stay in a 150 key luxury hotel rather than stay in a dharamshala or mid scale hotel?

IHCL is no different - they have acquired Brij and Brijrama properties, which are set up in spiritual sites thereby addressing the needs of pilgrims when it comes to hotel stays. Although this has already proven quite a bit of success, there is still a very heavy competition coming from the midcsale segments in this arena; and it remains to be seen how this can be tackled.

3. Obstinate October 

This wasn't really a threat, but I did notice that IHCL's renovation season did extend all the way till October - which is considered a big month for festivals, and leisure travels.

Naturally, business travels are much lower during this time due to the holidays, but I do worry that these renovations may have left a lot of leisure demand unfulfilled for this month. 

To be honest, renovations once done serve the company for a really long time, and do give the company the potential to increase their pricing, which means they can go right ahead and earn back all the revenue that they thought they lost. 

However the reason I still include this here is because in Q2 occupancies almost reached 90% in cities like Mumbai and Kolkata which begs the question if the same could have happened in October too.

CONCLUSION

Despite the mild risks, I am really excited to explore how major events will shape IHCL's future. The company for Q3 has elaborated on their inorganic growth strategy, how they plan to strategically penetrate many new markets, and of course - the construction of the 'Taj Bandstand', another potentially iconic IHCL monument in the city of dreams!

Overall, this quarter displayed their strong resilience, incredible brandscape and really laid the foundation to successfully achieve their ambitions for 2030!