Indian Hotels Company

Institutional Equities
Indian Hotels Company

25 March 2019
Reuters: IHTL.NS; Bloomberg: IH: IN

1.
Restructuring Story Aided By Favourable Industry Environment BUY
We initiate coverage on Indian Hotels Company (IHCL) with a Buy rating and a target price of Rs195
based on 21x FY21E EV/EBITDA. Our optimism on the stock is based on: 1. Cyclical upturn in the Sector: Hotel
hotel sector along with favourable demand-supply dynamics which are expected to drive the
occupancy rate and average room rate (ARR). 2. Aggressive restructuring strategy focused on CMP: Rs148
improving EBITDA margin from 18% in FY16 to 25% by FY23E. The key pillars of the aggressive
strategy ‘Aspirations 2022’ are: 1. Expansion of the number of rooms with the shift to an asset-light Target Price: Rs195
model leading to increase in management contracts. 2. Cost optimisation. 3. Better management of
Upside: 32%
Initiating Coverage
brands. 4. Leveraging on the Tata Group’s strengths. 5. Sale of non-core assets and monetisation of
the balance sheet.
Amit Agarwal
We have valued IHCL at 21x FY21E EV/EBITDA and arrived at a target price of Rs195, which implies
an upside of 32% from the current market price. Research Analyst
Cyclical upturn in the industry led to improvement in the occupancy rate: Industry experts are of the amit.agarwal@nirmalbang.com
opinion that the demand-supply scenario is changing favorably for the hotel industry, with overall supply +91-22-6273 8033
expected to post a CAGR of 4% (FY18-FY22E). Demand is expected to post a CAGR of 6% (FY18-
FY22E). The changing supply-demand mix led to an increase in the overall occupancy rate from 57% in Key Data
FY13 to 68% in FY18 and is expected to rise further.
Pan-India strategy focused across different segments: IHCL is focused across all verticals ranging from Current Shares O/S (man) 1,189.3
5- star to 3-star, implying that it caters to both domestic and foreign customers. The company currently has Mkt Cap (Rsbn/US$bn) 176.2/2.6
hotels spread across four brands which include: 1. Taj 2. Selections. 3. Vivanta. 4. Ginger. As of February
2019, IHCL had 17,741 rooms through 148 hotels spread across India and abroad. Approximately 85% of 52 Wk H / L (Rs) 156/109
the rooms are in India. Further, 27% of total hotel rooms are under management contracts. Changing Daily Vol. (3M NSE Avg.) 1,557,692
attitude and rising penchant to travel amid rising salaries is expected to maintain strong growth in demand.
Strong cost control measures and high operating leverage leads to rising EBITDA margin: Our
analysis on per room basis shows that operating expenses posted a five-year (FY13-18) CAGR of 0.1%. Share holding (%) 1QFY19 2QFY19 3QFY19
Increase in number of rooms together with strong cost control led to five-year EBITDA (FY13-FY18) CAGR Promoters 39.1 39.1 39.1
of 4.5%. EBITDA margin increased from 14% in FY13 to 16% in FY18. We expect the EBITDA margin to
rise to 23% in FY21E and expect EBITDA to post a three-year CAGR (FY18-FY21E) of 23% aided further Institutions 40.5 41.8 42.2
by the rise in Revpar. Non-Institutions 20.4 19.1 18.7
Healthy balance sheet with negative working capital management: IHCL has improved its balance
sheet in the past three years with the decline in its net debt-to-equity ratio from 2x in FY15 to 0.5x in FY18. One Year Indexed Stock Performance
It also has negative working capital. With the planned strategy as given above and improvement in industry
fundamentals, we expect the net debt-to-equity ratio to decline to 0.4x in FY21E. We expect the rising 130
operating income to help maintain a comfortable interest coverage ratio. 120

Strong growth in operating cash flow: We expect operating cash flow to post a three-year CAGR (FY18- 110
FY21E) of 30% because of strong growth in earnings and consistent negative working capital. Historically,
100
we note that operating cash flow has been volatile with a low of (Rs996mn) in FY15 and a high of
Rs12,002mn in FY16. 90
Earnings to post 94% CAGR (FY18-FY21E): We expect a sharp increase in earnings driven primarily by 80
the cyclical upswing in the industry, leading to a rise in RevPar aided by a sharp increase in total room Mar-18 May-18 Jul-18 Sep-18
INDIAN HOTELS CO
Nov-18 Jan-19
Nifty 50
Mar-19
inventory. The combined impact of strong revenue growth and cost control is expected to lead to strong
earnings growth.
We assign Buy rating to IHCL with a target price of Rs195: Our target price of Rs195 is based on 21x Price Performance (%)
FY21E EV/EBITDA, which is supported by EBITDA CAGR of 23% over FY18-FY21E. Our valuation is
driven by the cyclical upswing in the hotel sector with improvement in RevPar, and increase in the number 1M 6M 1 Yr
of rooms driving higher revenues. Higher revenues, together with a relatively muted increase in costs and Indian Hotels 4.2 18.1 16.2
high operational leverage, are expected to lead to strong growth in EBITDA. Our optimism is further
supported by a healthy balance sheet and negative working capital. Nifty Index 4.4 2.7 13.6
Source: Bloomberg
Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E
Revenues 40,103 41,036 43,624 48,325 53,926
YoY (%) (0.3) 2.3 6.3 10.8 11.6
EBITDA 6,096 6,703 7,540 9,417 12,528
EBITDA Margin (%) 15.2 16.3 17.3 19.5 23.2
PAT (832) 632 1,656 2,694 4,736
YoY (%) NA NA 161.9 62.6 75.8
EPS (Rs) (0.84) 0.53 1.39 2.26 3.98
RoE (%) (2.5) 2.4 3.1 4.3 6.5
EV/EBITDA (x) 32.0 27.2 20.0 16.6 13.7
P/E (x) NA 174.5 130.5 90.3 56.5
Source: Company, Nirmal Bang Institutional Equities Research
Investment summary
We initiate coverage on IHCL with a Buy rating. Our optimism on the stock is driven by the following factors:
Cyclical upswing in hotel industry to drive room revenues: The hotel industry is showing clear signs of
revival and we believe the cyclical upswing is based on a favorable demand-supply balance. The weakness
in the sector was caused by demand-supply imbalance in FY07-FY17. During the period, while demand
registered a CAGR of 12.4%, supply witnessed a CAGR of 13%, creating a demand-supply mismatch. The
room occupancy rate declined to 57% in FY13 from 69% in FY07. The imbalance has now started reversing.
The occupancy rate increased to 65% in FY17. If history is an indicator, then in the previous upcycle
(FY03-FY08), ARR posted a CAGR of 20% and the occupancy rate registered a CAGR of 4%.
Company’s strategy as enunciated in ‘Aspirations 2022’ focuses on improving EBITDA margin to 25%
by FY23 from 17% in FY18: The main pillars of the strategy are: 1. Shift to an asset-light model by
increasing room inventory through management contracts. 2. Cost optimisation. 3. Manage brands more
effectively. 4. Leverage of the parent Tata group’s strengths and explore synergies within the group. 5.
Monetisation through sale of lease back of hotels, sale of non-core land and strategic partnership.
Strategy of cost control amid rising revenues to drive EBITDA CAGR of 23% over FY18-FY21E: We
expect IHCL revenues to post a CAGR of 9% over FY18-FY21E. However, with strong cost control, we
expect operating costs to post a relatively lower CAGR of 6.5%. This will help drive EBITDA CAGR of 23%
over the same period. Our per room analysis of the income statement clearly indicates that the company has
strong cost control measures.
Healthy balance sheet supported by comfortable net debt-to-equity ratio, negative working capital:
IHCL has a healthy balance sheet with a net debt-to-equity of ratio of 0.5x in FY18. We expect this ratio to
decline to 0.4x by FY21E. We also note that the rising operating income is expected to improve the interest
coverage ratio from 1.4x in FY18 to 3.8x in FY21E. Further, the company also has negative working capital
which helped reduce the stress on the balance sheet.
Strong operating cash flow to fund capex for expansion: IHCL had a volatile cash flow in the past few
years. In the recent past, in FY15, the company had a negative operating cash flow while the highest cash
flow was in FY16. We expect the earnings growth and negative working capital to help increase operating
cash flow CAGR (FY18-FY21E) to 30%.
Attractive valuation, given the strong anticipated growth: Our target price of Rs195 on IHCL is based on
21x FY21E EV/EBITDA which is supported by EBITDA CAGR of 23% over FY18-FY21E. Our valuation is
driven by the cyclical upswing in the hotel sector with improvement in RevPar, and increase in the number of
rooms driving higher revenues. Higher revenues, together with relatively muted increase in costs and high
operational leverage, are expected to lead to strong growth in EBITDA. Our optimism is supported by a
healthy balance sheet and negative working capital. We further derive comfort from the expected
improvement in balance sheet health and the net debt-to-equity ratio likely to decline from 0.5x in FY18 to
0.4x in FY21E.
2 Indian Hotels Company

Hotel industry at the beginning of a revival phase
The hotel industry has transitioned from an upcycle since mid-2002 to mid-2008 followed by a
downcycle which bottomed out in 2015. During this period, overall room supply posted a 10% CAGR
over FY02-FY17, where the highest room addition was in the mid-scale economy segment with a
CAGR of 19.8% and luxury upper upscale witnessing the lowest room addition, posting a 7.9% CAGR
over FY02-FY17.
Going forward, industry experts expect room addition to register a 7.9% CAGR over FY17-FY21E. However,
industry experts forecast demand CAGR of 12.4% over FY17-FY21E. Demand growth in the upper scale
segment is expected to post a 15.6% CAGR over FY17-FY21E whereas the mid-scale and economy
segments are expected to register an 18.6% CAGR over the same period.
We believe the demand growth will be driven by:
1) Rising contribution of tourism and travel to India’s GDP.
2) Increase in working age population to boost the value of discretionary spending.
3) With a rise in annual gross income per capita income, discretionary spending per capita will also
increase.
4) Stable unemployment rate to support the rising working age population.
5) Transition of population from rural areas to Tier 3 & Tier 4 cities to create demand for expected room
addition in the middle-income segment.
6) Rise in nuclear family structure to increase per capita spending.
7) Increase in foreign tourist arrival (FTA) supported by e-visa facility to boost the room occupancy rate.
8) M-visa to lead to a rise in FTA, thereby creating demand for existing and expected room addition.
9) India ranks sixth based on the number of heritage sites and it has 36 heritage sites which draw
domestic and foreign travelers.
10) UDAN (Ude Desh Ka Aam Nagrik) scheme to boost domestic travel.
11) Improved connectivity and infrastructure to create demand for upcoming hotels in
underserved/unserved regions.
1) Rising contribution of tourism and travel sector to India’s GDP

The travel and tourism sector’s contribution to India’s GDP, at US$234 bn in 2017, represents
around 9% of total GDP. India had 1,652mn domestic traveler visits in 2017, posting a 12.6%
CAGR over 2000-17.
Exhibit 1: Travel and tourism sector’s contribution to India’s GDP
(US$bn)
600
CAGR 7.11%
492
500
400
300 252
223 234
187 204
200 164 174
100
-
2012 2013 2014 2015 2016 2017 2018E 2028F
E-Estimated, F-Forecast
Source: Nirmal Bang Institutional Equities Research, www.ibef.org, World Travel & Tourism Council's (WTTC's) Economic Impact
2018

Exhibit 2: Domestic travelers
(mn)
1,800 25%
1,600
1,400 20%
1,200
15%
1,000
800
10%
600
400 5%
200
- 0%
2017*
2000
2002
2004
2006
2007
2008
2009
2010
2011
2013
2015
2001
2003
2005
2012
2014
2016
Domestic Tourist Visits (DTV) Annual Growth %
* Provisional figures for 2017
Source: Nirmal Bang Institutional Equities Research, India Tourism Statistics At a Glance 2018
2) Increase in working age population to boost the value of discretionary spending

The median age of the working population in 2001, 2011, 2021 and 2031 is estimated at 22, 24, 28
and 31 years, respectively. The rise in median age of the working population indicates that per
capita income will also increase supported by better appraisals, incentives and bonus. Rise in per
capita income and students passing out of college and joining the work force are the driving forces
behind the rise in spending and acting as a tailwind to the travel and tour business. As per Exhibit
3, the work force in the age group of 15-34 years was 35% in 2011 and is expected to remain
almost the same at 34% in 2021. However, the working class population in the age group of 35-64
years is expected to increase from 29% in 2011 to 33% in 2021, indicating higher per capita
spending driven by relatively higher salaries.
Exhibit 3: Rise in working age population

40%
36%
35%
35%
34%
34%
33%
32%
35%
31%
29%
27%
30%
26%
24%
25%
20%
15%
9%
10%
7%
6%
5%
5%
0%
2001 2011 2021 2031
0-14 Years 15-34 35-64 64+
Source: Nirmal Bang Institutional Equities Research, MOSPI

3) With a rise in annual per capita gross income, discretionary per capita spending to also
increase
The income level of the five categories are as follows: Elite – annual gross income greater than
US$30,800, Affluent – annual gross income greater than US$15,400 but less than US$30,800,
Aspirer - annual gross income greater than US$7,700 but less than US$15,400, Next Billion –
annual income greater than US$2,300 but less than US$7,700, and Strugglers – annual gross
income less than US$2,300.
In 2016, Next Billion accounted for 45% of the total population which is expected to remain the
same going into 2025, at 46%. But looking at the bottom category, Strugglers segment which
accounted for 31% of the total population in 2016, is expected to decline to 18% by 2025. However,
we see growth in Elite, Affluent and Aspirer categories - which represented 2%, 6% and 15% share
, respectively, of the total population in 2016 - to increase to 5%, 11% and 20%, respectively, by
2025. The rise in the percentage of Elite, Affluent and Aspirer categories among the total population
will lead to a rise in overall income level, thereby translating into higher value of discretionary
spending over the next few years.
Exhibit 4: Increase in annual gross income

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2005 2016 2025
Strugglers Next Billion Aspirers Affluent Elite
Source: Nirmal Bang Institutional Equities Research, BCG
4) Stable unemployment rate to aid rising working age population

Unemployment rate in India is expected to remain stable at 3.5% in 2019, similar to the 2017 level.
Stable unemployment rate asserts the fact that the increase in working age population translates
into actual employment, which leads to a rise in the value of discretionary spending.
5) Population shift from rural areas to Tier 3 & Tier 4 cities to create demand for expected room
addition in the middle-income segment
In Exhibit 5, we see that the total population living in rural areas is expected to decline from 51% in
2016 to 42% by 2018-end. We can see the rise in population in Tier 1, 3 and 4 cities. Tier 1, 3 and
4 cities represent 10%, 10% and 13%, respectively, of the total population in 2016, which is
expected to rise to 13%, 12% and 17%, respectively, by 2018-end. Hotel addition over the next few
years will be focused on the middle-income segment. This addition will not only be in the
metropolitan region, but also in various tiers. Despite supply addition in various tiers, the expected
rise in population in Tier 1, 3 and 4 cities is likely to support the room occupancy rate and ARR in
respective regions.

Exhibit 5: Transition of population from rural areas to Tier 3 & Tier 4 cities
60%
51%
50%
42%
40%
30%
17%
20%
13%
13%
12%
12%
12%
10%
10%
10%
5%
4%
0%
Metropolitan Tier 1 Tier 2 Tier 3 Tier 4 Rural
2016 2018
6) Rise in nuclear family structure to increase per capita spending

Nuclear families represented 68% of the total families in 2016. However, in 2025 we expect nuclear
families to rise and represent 74% of total families. Nuclear families, on an average, spend 20%-
30% more per capita than joint families which support the fact that discretionary spending will
increase in the near future.
Exhibit 6: Nuclear families versus other family structures

80% 74%
68%
70%
60%
50%
40%
32%
30% 26%
20%
10%
0%
Nuclear Family Other Family Structures
2016 2025
7) Increase in foreign tourist arrival (FTA) supported by e-visa facility to boost room
occupancy rate
Foreign tourist arrivals in India registered a 7.9% CAGR over 2000-18 and stood at 10.55mn in
2018. With the introduction of e-visa facility on 27 November 2014, FTA through e-visa facility
registered a CAGR of 179% over 2014-18 and stood at ~2.4mn in 2018. The e-visa facility is
available in three sub-categories - e-tourist visa, e-business visa and e-medical visa - and is
extended to nationals of 163 countries. The duration of e-visa has also been increased from 30
days to 60 days. Under the e-visa, a foreign national has to submit an application for a visit in India,
after which the applicant gets an authorisation via e-mail. The foreign national has to just show the
authorisation printout to the immigration authorities in India on arrival. The ease with which a
foreign national can get entry into India via the e-visa route is expected to boost FTA. Foreign
tourist spending in 2018 stood at Rs19,48,920mn and posted a 15% CAGR over 2000-17. We
believe the value of foreign tourist spending will increase with the rise in FTA.

Exhibit 7: Foreign tourist arrival
(mn)
12 30%
25%
10
20%
8
15%
6 10%
5%
4
0%
2
-5%
- -10%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
2012
2014
2016
2018
2009
2011
2013
2015
2017
Foreign Tourist Arrival in India Annual Growth %
Source: Nirmal Bang Institutional Equities Research, www.ibef.org, Ministry of Tourism
Exhibit 8: E-visa related arrival

(mn)
2.50 2.37
2.00
1.70
1.50
1.08
1.00
0.45
0.50
0.04
-
2014 2015 2016 2017 2018
E-Visa Arrivals
Source: Nirmal Bang Institutional Equities Research, www.ibef.org, Ministry of Tourism
Exhibit 9: Foreign tourist spending

(Rsbn)
2,500
2,000
1,500
1,000
500
-
2000
2001
2003
2004
2005
2007
2008
2010
2011
2013
2014
2016
2017
2002
2006
2009
2012
2015
2018
Foreign Tourist Spending

Source: Nirmal Bang Institutional Equities Research, Industry

8) M-visa to lead to a rise in FTA, thereby creating demand for existing and expected room
addition
M-visa FTA in 2016 stood at 4,27,014 and posted a 20% CAGR over 2009-17. Most medical tourists
arrive from Bangladesh, Afghanistan, Maldives, Nigeria, Kenya etc. Medical tourists generally go for
joint replacement, cardiac surgery, dental surgery and cosmetic surgery. Medical tourism is mostly
driven by the private sector and the Ministry of Tourism acts as a facilitator in marketing and
spreading awareness. Medical tourism in India has been promoted on various international platforms
like World Travel Mart, London, Berlin and Arabian Travel Mart. Within medical visas, there is a
category called e-medical visa which is introduced to boost medical tourism. Medical tourism has
gained popularity over the past few years and we believe the trend will continue because of the
availability of relatively low-cost medical treatment in India and lack of qualified doctors and
equipment in some countries.
Exhibit 10: M-visa FTA

(Lac)
6.0
5.0
5.0
4.3
4.0
3.0
2.4 2.3
1.7 1.8
2.0 1.6 1.4
1.1
1.0
-
2009 2010 2011 2012 2013 2014 2015 2016 2017
M - Visa FTA
Source: Nirmal Bang Institutional Equities Research, Press Information Bureau
9) India ranks sixth based on the number of heritage sites and it has 36 heritage sites which
draw domestic and foreign travelers
Italy has 53 heritage sites, as per UNESCO, taking the number one position. India, with 36 heritage
sites, takes the number 6 position, just after Germany. In 2016, the archaeological site at Nalanda,
Bihar, archaeological work of Le Corburier, Chandigarh, and Khangchendzonga National Park,
Sikkim, were added. In 2017, UNESCO added the historic city of Ahmedabad as a heritage site. The
number of visitors to centrally-protected and ticketed monuments stood at 43mn, posting a CAGR of
22% over 2002-17. We have seen a few years of decline in visitors, especially foreign visitors, over
the past few years but domestic visitor growth remains strong and registered a decline only in 2007,
2013 and 2016. The Adopt a Heritage Scheme of the Ministry of Tourism was launched on 27
September 2017 by the President of India. The ministry has invited private sector companies, public
sector companies, and corporate individuals to help in conservation and development of heritage
sites. Seven short-listed companies have been given Letter of Intent for 14 monuments. We believe
that India has a lot of heritage value and we expect the steps taken by the Ministry of Tourism to
conserve and develop heritage sites to fuel domestic and foreign visitor growth over the next few
years.

Exhibit 11: Countries with the highest number of heritage sites as per UNESCO
United States
Russia
United Kingdom
Mexico
India
Germany
France
Spain
China
Italy
0 10 20 30 40 50 60
Mixed World Heritage Sites Natural World Heritage Sites Cultural World Heritage Sites
Source: Nirmal Bang Institutional Equities Research, UNESCO
Exhibit 12: Visitors to centrally-protected and ticketed monuments

(mn)
60
50
40
30
20
10
-
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Domestic Visitors Foreign Visitors

Source: Nirmal Bang Institutional Equities Research, Ministry of Tourism
10) UDAN (Ude Desh Ka Aam Nagrik) scheme to boost domestic travel
In 2012, low-cost carriers (LCCs) accounted for 50.6% seats in domestic market while full-service
airlines accounted for 49.4%. However, in 2017, LCCs accounted for 67.2% of total seats in the
domestic market. UDAN scheme was launched on 27 April 2017 with the objective of improving
connectivity with the operation and revival of airports in underserved and unserved areas and
introducing viability gap funding for RCS (Regional Connectivity Scheme) flights to fill the gap
between the cost of airline operations and expected revenues on unserved/underserved routes.
UDAN scheme provides a dual benefit for the hotel industry by improving connectivity to bottom-tier
cities from where expansion of middle-income hotels is expected and increasing the affordability for
domestic travelers to visit bottom-tier cities. The rise in LCCs and implementation of the UDAN
scheme will provide significant support to domestic travel growth, thereby creating demand for
middle-income hotels.

11) Improved connectivity and infrastructure to create demand for upcoming hotels in
underserved/unserved regions
Upto 2013, AAI (Airports Authority of India) was the major player in developing and upgrading the
airports in India, but now private players have also started participating. 1) GMR is undertaking
development of Hyderabad airport and mordenisation of Delhi international airport. 2) GVK will
undertake modernisation of Mumbai airport. 3) Siemens, Larsen & Toubro and UNIQUE will
develop Bengaluru international airport. 4) Maytas Infra to develop Shimoga and Gulbarga airports
in Karnataka.
Budget allocation for the infrastructure segment in 2018-19 has been increased to .Rs597mn crore
from .Rs494 mn crore in 2017-18. The government is going to use this budget for improving road,
rail, air and waterways infrastructure and connectivity. Budget allocation for the Ministry of Road
Transport and Railways has been increased from Rs649bn in 2017-18 to Rs710bn in 2018-19.
National highways exceeding 9,000km are expected to be completed under the Bharatmala
scheme in 2018-19 out of the total 35,000km. Indian Railways has also been allocated with .Rs148
mn crore for 2018-19. With development and upgradation of airports and increased government
spending on improving the infrastructure and connectivity, one of the biggest drawbacks for the
domestic hotel industry will get converted into a tailwind.

Hotel industry trends
RevPar, occupancy rate and ARR
After a downcycle that ended in 2002-03, there was a beginning of an upcycle which lasted till the middle of
2008. The upcycle was driven by multiple factors like: 1) Travel to South-East Asia getting impacted
because of SARS (Severe Acute Respiratory Syndrome). 2) India’s GDP growing more than 8%. 3)
Domestic travelers’ contribution started picking up. 4) The US declared a war on Iraq (impacting the tourism
in the Middle-East). 5) The number of branded hotels increased from 27,000 to 47,000, representing a
supply CAGR of 12% per annum. However, the demand during the period posted a 16% CAGR. This led the
occupancy rate and ARR to post a CAGR of 4% and 20%, respectively. Post 2008, horrific events like 26/11
in the US impacted the demand side, but demand growth remained relatively stable. The downcycle mainly
began on account of excess supply coming in from under-construction branded hotels in 2005-06 becoming
operational in 2008, and international hotel players entering the Indian market using an asset-light model
(management contract). Going forward, with the demand factors mentioned earlier and relatively less supply
addition over the next two to three years, we believe the hotel industry is in a bull cycle.
Overall RevPar was the highest in 2007-08 at Rs5,496. RevPar of five star deluxe and four star rooms also
peaked at Rs8,030 and Rs3,942, respectively, in 2007-08. The upcycle that began in 2002-03 ended in
2007-08. The downcycle bottomed out in 2013-14 where overall RevPar touched Rs3,275, whereas five-star
deluxe and four-star rooms registered RevPar of Rs5,231 and Rs2,643, respectively. The increase and then
the decline of RevPar is a result of both occupancy rate and ARR increasing and then declining.
Exhibit 13: RevPar trend
(Rs)
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15
2015/16
2016/17
2017/18
Five Star Deluxe Five Star Four Star
Source: Nirmal Bang Institutional Equities Research, Hotelivate

The overall occupancy rate was 52% in 2001-02, which peaked at 72% in 2005-06 (during the 2002-03 to
2007-08 upcycle). The five-star deluxe and four-star room’s hotel occupancy rate at 74% and 73%,
respectively, touched their peak in 2005-06. Post 2007-08, during the downcycle, the occupancy rate
bottomed out at 58% in 2012-13, whereas during the same year five-star deluxe and four- star hotels
reported occupancy rate of 60% and 58%, respectively.
Exhibit 14: Room occupancy rate trend

80%
70%
60%
50%
40%
30%
20%
10%
0%
2002/03
2003/04
2004/05
2006/07
2007/08
2008/09
2010/11
2011/12
2012/13
2014/15
2015/16
2016/17
2001/02
2005/06
2009/10
2013/14
2017/18
During the 2002-03 and 2007-08 peaks, overall ARR peaked in 2007-08 at Rs7,989, and ARR for five-star
deluxe and four-star hotels peaked at Rs11,200 and Rs5,722, respectively, in 2007-08. However, post 2007-
08, during the downcycle, ARR bottomed out at Rs5,527 in 2013-14 and at Rs8,727 and Rs4,474 in case of
five-star deluxe and four-star hotels, respectively, in 2014-15.
Exhibit 15: ARR trend

(Rs)
12,000
10,000
8,000
6,000
4,000
2,000
-
2006/07
2007/08
2014/15
2015/16
2001/02
2002/03
2003/04
2004/05
2005/06
2008/09
2009/10
2010/11
2011/12
2012/13
2013/14
2016/17
2017/18


Room supply trend and supply addition expected over 2021-22
Since 2007/08, room supply has posted a CAGR of 10.5% and the number of branded rooms increased
from 47,612 in 2007-08 to 128,163 in 2017-18. However, going forward, we can expect the number of
branded rooms to increase to 166,286 by 2021-22, representing a CAGR of 9%. We believe that demand
growth will outperform supply growth, leading to an upward movement in ARR and occupancy rate.
Exhibit 16: Total room addition expected
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
-
2021E/22E
2008/09
2007/08
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15
2015/16
2016/17
2017/18
Total Room Additions

Valuation
We have valued IHCL based on 21x FY21E EV/EBITDA to arrive at a target price of Rs195
The historical one-year forward EV/EBDITA has been in the range of 12x to 25x. The multiple has, of late,
shown a sideways trend and continues to be range bound between 18x to 25x. Currently, the stock was trading
at a one-year forward EV/EBDITA of 20x. We expect the stock to get re-rated and is expected to trade at a one-
year forward EV/EBDITA of 21x (refer Exhibit 18). Our optimism on the stock is driven by the cyclical upturn in
the sector driven by favorable demand-supply scenario and supported by improving fundamentals for IHCL
because of the restructuring of the company.
Exhibit 17: Valuation summary
Value (Rsmn)
EV based on 21x EV/EBITDA on FY21E earnings Rs263,079
Less: Net debt as of FY21E Rs17,808
Less: Minority interest as of FY21E Rs13,104
Total Rs 232,167
Number of shares O/S (mn) Rs1,189
Target price Rs195
Source: Nirmal Bang Institutional Equities Research
Exhibit 18: One-year forward EV/EBITDA

(x)
30
25
20
15
10
-
Mar-12
Mar-13
Mar-14
Mar-15
Mar-17
Mar-18
Mar-19
Mar-11
Mar-16
1 year Forward EV/EBDITA 9 Year Mean EV/EBDITA SD SD+1 SD-1
Source: Nirmal Bang Institutional Equities, Bloomberg
Other factors justifying the valuation

1) Revenues are expected to post a 9.4% CAGR over FY18-FY21E supported by increase in Revpar and
room addition.
2) Hotel industry is going through an upcycle, providing support by way of ARR increase in existing as well as
new hotels, thereby helping in achieving a higher occupancy rate in newly added and upcoming hotels.
The demand-supply scenario is now favorable for the industry.
3) IHCL is on a cost optimisation path, with the company successfully being able to reduce its operating
expenses per room including ‘employee benefits expenses’, ‘food and beverages expenses’ and ‘fuel,
power and light expenses’ by 8% YoY in FY16 and 2% YoY in FY17 and FY18 .
4) The company intends to continue maintaining a low-cost structure to help achieve EBITDA margin of 23%
in FY21E (an increase from 16% in FY18). We expect EBITDA CAGR of 23% over FY18-FY21E, delivering
a strong and steady growth as compared to its competitors (refer Exhibit 19).
5) Earnings expected to post a 94% CAGR over FY18-FY21E.
6) Further, IHCL has also successfully reduced its balance sheet stress with net debt-to-equity ratio having
been reduced to 0.5x in FY18.

Peer comparison
Peer comparison for the company indicates that IHCL stock trades at a discount to average EV/room of
Rs14.5mn. The discount is primarily driven by the weak historically financial performance of IHCL because of
the combined impact of balance sheet stress and losses following ill-timed expansion just before a cyclical
downturn in the sector.
In our view, the steps taken by the company in the recent past are slowly allaying the concerns on the financial
health. The net debt-to-equity ratio is comfortable, the cash flows have improved and the EBITDA margin also
has started showing signs of improvement. We expect the combined effect of the all these factors to lead to a
re-rating of the stock and we expect that at our target price of Rs195, the stock will trade at EV/room of 14x.
We expect the EBITDA margin to expand from 16% in FY18 to 23% in FY21E because of: 1. Improvement in
occupancy rate and ARR, thus increasing the RevPar. 2. Cost reduction. 3. Debt reduction which led to a fall in
interest expenses.
Exhibit 19: EBITDA margin – Peers vs. IHCL
40%
35%
30%
25%
20%
15%
10%
5%
0%
FY14 FY15 FY16 FY17 FY18 FY19E
Indian Hotels Lemon Tree EIH
Source: Nirmal Bang Institutional Equities, Bloomberg
The chart below shows that the occupancy rate of IHCL is below some of its listed peers. With cyclical
upturn in the hotel sector, we expect IHCL to improve the occupancy rate.
Exhibit 20: Occupancy rate – Peers vs. Indian Hotels
FY15 FY16 FY17 FY18
Indian Hotels (%) (standalone) 64 65 66 67
Lemon Tree Hotels (%) 68 75 76 75
Chalet Hotels (%) NA 58 66 72
Source: Nirmal Bang Institutional Equities Research, respective companies
Exhibit 21: One-year forward EV/EBITDA – Peer companies vs. IHCL

EV/EBITDA (x) FY15 FY16 FY17 FY18 FY19E
Indian Hotels 22.9 20.9 21.1 21.9 19.5
Lemon Tree Hotels 72 63 55 35 29
Source: Nirmal Bang Institutional Equities Research
Exhibit 22: Peer comparison based on EV/room

Companies EV/room (Rsmn)
Lemon Tree Hotels 11.8
EIH 25.97
Indian Hotels 11.00
Hotel Leela 17.12
Taj GVK 14.36
Advani Hotels 15.98
Sinclair Hotels 5.74
Average 14.53
Source: Nirmal Bang Institutional Equities Research, respective companies

Key assumptions
If history is an indicator:
We note that while we have assumed RevPar increase ranging from 5%-10% annually, in the previous upcycle
the RevPar posted a five-year CAGR (FY03-FY08) of 24%. The average ARR (overall) increased from
Rs1,870 in FY03 to Rs5,496 in FY08.
Exhibit 23: Historical RevPar
RevPar (Rs) 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
Overall average 1,789 1,870 2,313 2,966 3,892 5,049 5,496
Growth (%) - 5 24 28 31 30 9
Five-Star Deluxe 2,437 2,571 3,046 4,003 5,290 7,138 8,030
Growth (%) - 5 18 31 32 35 12
Five-Star 1,684 1,775 2,252 2,771 3,509 4,567 5,142
Growth (%) - 5 27 23 27 30 13
Four-Star 1,248 1,267 1,772 2,217 2,797 3,665 3,942
Growth (%) - 2 40 25 26 31 8
Three-Star 843 895 995 1,038 1,458 2,075 2,257
Growth (%) - 6 11 4 40 42 9
Exhibit 24: Revenue assumptions

Revenue FY15 FY16 FY17 FY18 FY19E FY20E FY21E
RevPar 4,256 4,009 3,950 3,918 4,113 4,442 4,887
Growth (%) 1 (6) (1) (1) 5 8 10
Total owned number of rooms 12,749 12,969 13,000 13,326 13,369 13,686 13,796
Growth (%) 2 2 - 3 - 2 1
Rental revenues* 19,803 18,979 18,742 19,055 20,071 22,192 24,608
Growth (%) 2 (4) (1) 2 5 11 11
Total managed number of rooms 3,504 4,109 4,321 4,467 4,824 5,307 5,997
Growth (%) 1 17 5 3 8 10 13
Management and operating fees 1,364 1,606 1,774 2,043 2,555 3,102 3,987
Growth (%) 11 18 10 15 25 21 29
Food, restaurant and banquet hall * 17,360 16,695 16,487 16,762 17,663 19,529 21,655
Growth (%) 5 (4) (1) 2 5 11 11
As a % of room revenues 88 88 88 88 88 88 88
Shop rentals 409 447 398 409 430 451 474
Growth (%) 10 9 (11) 3 5 5 5
Membership fees 600 710 952 858 901 946 993
Growth (%) 9 18 34 (10) 5 5 5
Other operating income 2,351 1,792 1,750 1,909 2,004 2,104 2,210
Growth (%) (7) (24) (2) 9 5 5 5
*Note: It is assumed that ‘Room Rentals’ and revenues from ‘Food, Restaurants and Banquet Halls’ is in the proportion of 53: 47.
Source: Nirmal Bang Institutional Equities Research, Company

Exhibit 25: Expenses assumptions
Expenses FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Food and beverage expenses 4,431 3,669 3,640 3,764 3,886 4,296 4,764
Growth (%) 4 (17) (1) 3 3 11 11
As a % of food and beverages revenues 26 22 22 22 22 22 22
Fuel, power and light 3,204 2,754 2,586 2,591 2,729 2,934 3,105
Growth (%) 3 (14) (6) - 5 7 6
As a % of revenues* 8 7 7 7 7 6 6
Employee expenses 14,625 14,233 13,647 13,466 14,185 15,248 16,139
Growth (%) 7 (3) (4) (1) 5 7 6
As a % of revenues* 36 37 36 35 35 34 32
Other expenses 14,741 14,052 14,134 14,510 15,285 16,430 17,390
Growth (%) 6 (5) 1 3 5 7 6
Other expenses per room 1 1 1 1 1 1 1
Growth (%) 4 (9) (1) - 3 3 2
As a % of total revenues 36 36 37 37 37 36 35
* Excluding revenues generated from management contracts

Strategy
IHCL has clearly enunciated its strategy in a document titled “Aspirations 2022.” The key highlights
of the strategy are:
Goal: EBITDA margin expected to increase from 17% in FY18 to 25% in FY23E.
The main drivers of the strategy as mentioned in the document are:
1. Increase in room inventory with a rising emphasis on an asset-light model, implying that a large
number of rooms to be added to the inventory will be on management contract.
2. Cost optimisation to help in reducing costs- e.g. in procurement, utilities, payroll.
3. Capitalising on the strengths of the parent Tata group- exploring synergies across different Tata
group- owned companies.
4. Monetisation- implying sale and leaseback, sale of non-core assets, light land etc, strategic
partnerships.
5. Better manage brands with a multi-segment brand strategy- brand strategy not only limited to
selling rooms across brands but also restaurant, spas, khazana and salons.

Financials
Profit & Loss account
In the recent past, we note that with improvement in ReV PAR and cost optimisation, the earnings have
been steadily improving. The company incurred a loss of Rs3,907mn in FY13, which turned into a profit of
Rs632mn in FY18. The strong growth in earnings has been a result of:
1. Robust growth in revenues - The growth in revenues was driven by increase in room rate, consistent
occupancy rate, increase in the number of rooms under operation that are fully owned or leased, and
lastly the increase in rooms under management contracts.
2. Cost control led to a decline in operating costs over FY13-FY18. Despite a constant increase in the
number of rooms, operating costs increased marginally from Rs32,057mn in 2013 to Rs34,332mn in
2018. The cost control was led by decrease in employee expenses and also fuel, power and light
expenses over the years.
We expect IHCL’s revenues to post a three-year CAGR of 9% until FY21E. We expect the revenue growth to
be driven by: 1. Strong growth in Revpar. 2. Steady increase in the number of rooms.
The strong growth in earnings (three-year CAGR over FY18-FY21E) of 94% will be driven by: 1. Revenue
growth posting a three-year CAGR of 9%. 2. Strong EBITDA growth (three-year CAGR of 23%) because of
cost reduction. 3. Reduction in interest expenses because of a decline in debt.
Exhibit 26: Net profit of IHCL

(Rsmn)
6,000
4,000
2,000
-
FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
(2,000)
(4,000)
(6,000)
Net Profit of Indian Hotels
Exhibit 27: Revenues of IHCL Exhibit 28: Total operating costs

(Rsmn) (Rsmn)
60,000 42,500
53,926
48,325
50,000 40,500
43,624
40,662 41,886 40,230 40,103 41,036
40,000 37,434 38,500
30,000 36,500
20,000 34,500
10,000 32,500
- 30,500
FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Revenues of Indian Hotels Operating Costs of Indian Hotels
Source: Nirmal Bang Institutional Equities Research, Company Source: Nirmal Bang Institutional Equities Research, Company

Strong growth in revenues
Favorable shift in the demand-supply scenario, focused strategy of IHCL on the burgeoning upper - middle
class and luxury segments - implying attractive room rates and increasing foreign and domestic tourism led to
a five-year revenue CAGR (FY13-FY18) of 18%. The revenue growth is primarily driven by the growth in
room revenues and management contracts with a steady contribution from food and beverage segment.
We expect the revenue growth to continue over FY18-21E at a three-year CAGR of 9%, primarily driven by
continued growth in room revenues and increased focus on management contracts. We have given below
the details of the historical reasons behind revenue growth and the reasons for revenue growth over FY18-
FY21E.
Key revenue drivers
1. RevPar- driven by the occupancy rate, rising ADR.
2. Increase in the number of rooms.
Increase in Revpar
Change in Revpar is driven by the change in average daily rate (ADR) and the increase in occupancy rate.
With a steady standalone occupancy rate over the years at around 65%, we expect one of the key revenue
drivers to be the rise in occupancies and ADR. We expect the rise in ADR to be driven by change in the client
mix and overall rise in ADR with a changing demand-supply scenario.
We have shown below the rise in RevPar of IHCL.
Exhibit 29: RevPar
(Rs)
6,000
4,887
5,000 4,442
4,234 4,256 4,113
4,012 4,009 3,950 3,918
4,000
3,000
2,000
1,000
-
RevPar
Occupancy rate
We note that in the past three years the occupancy rate of IHCL (standalone) rose steadily from 64% in FY15
to 67% in FY18. Any addition of new rooms in the wake of addition of new hotels takes about two to three
years to stabilize and has a lower occupancy rate compared to other hotels that have been running. IHCL
has positively shown rising occupancy rate, despite the constant increase in the number of rooms. The
overall addition of rooms is given in the chart below.
In our model, we have assumed that occupancy rate for the consolidated IHCL is the same as that of the
standalone entity.

Exhibit 30: Standalone occupancy rate Exhibit 31: Room addition - Overall
74% 73% 20,500
72%
70% 19,500 19,793
70%
68% 18,500 18,993
68% 67%
66% 18,193
66% 65% 17,500 17,793
64% 64%
64% 63% 17,321
16,500 17,078
62%
16,253
15,500 16,004
60%
14,831
58% 14,500
FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Standalone Occupancy Rates Total Room Additions
Source: Nirmal Bang Institutional Equities Research, Company Source: Nirmal Bang Institutional Equities Research, Company
Rising ARR
Average room rate or ARR has been rising steadily as the chart below indicates. The primary reasons for the
growth in ARR have been stated earlier. They include rising domestic tourism, changing demand -supply
balance in favor of hotels and a changing client mix.
ARR rose from Rs9,562/room in FY15 to Rs10,722/room in FY18. We expect continued growth in ARR
during FY19E-FY21E, given the premium category brand image of IHCL, increase in foreign and domestic
tourism and the rise in per capita income.
Exhibit 32: Standalone ARR
(Rs/night)
15,000 16%
14%
14,000
12%
10%
13,000
8%
12,000 6%
4%
11,000
2%
0%
10,000
-2%
9,000 -4%
Standalone ARR % change
Increase in the number of rooms

Overall, the number of rooms owned by IHCL increased from 12,367 in FY13 to 13,326 rooms in FY18. The
number of owned rooms is expected to increase to 13,796 in FY21E. The rate of increase in owned rooms
has declined because of the shift in the company’s focus to managed rooms in the coming years.

Exhibit 33: Owned rooms
(No. of Rooms)
14,000
13,796
13,500 13,686
13,326 13,369
13,000
12,969 13,000
12,749
12,500
12,541
12,367
12,000
Number of Owned Rooms
Management contracts
Currently, management contracts account for 25% of the total rooms whereas owned and leased rooms
represent the balance 75%. Going forward, the management aims at focusing its expansion plan through an
asset-light model. The management plans to add 2,000 rooms in the next three years and increase the
number of rooms by 11%. Out of the total expected room addition, 76% rooms shall be added through
management contracts, taking the management contracts proportion to 34% of total rooms and the balance
shall be owned rooms. The management’s strategy is to successfully increase IHCL’s presence and take
advantage of the upcycle without taking excess leverage.
Exhibit 34: Rooms under management contract

(No. of Rooms)
6,500
5,997
6,000
5,500 5,307
5,000 4,824
4,467
4,500 4,321
4,109
4,000
3,463 3,504
3,500
3,000
2,464
2,500
2,000
Number of Managed Rooms
Revenues from management contracts posted a 14% CAGR over FY13-FY18. With the company’s focus on
following an asset-light model, it will boost revenues from management contracts at a 25% CAGR over
FY18-FY21E. Revenues from management contracts accounted for 5% of total revenues in FY18 and are
expected to increase to 7% by FY21E.

Exhibit 35: Management contract revenues
(Rsmn)
4,500 40%
4,000 35%
3,500 30%
3,000
25%
2,500
20%
2,000
15%
1,500
1,000 10%
500 5%
- 0%
FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Management Contract Revenues Growth (%)
EBITDA margin expected to improve from 16% in FY18 to 23% in FY21E

We expect revenue per room to post a 5% CAGR over FY18-FY21E driven by the rise in average revenue
per room. Average revenue per room will increase because of the rise in demand for luxury and upper-
middle class hotels and the shift of younger hotels into a mature phase where they can demand higher
average revenue per room.
However, on a conservative basis we forecast a rise in operating costs per room at a 5% CAGR over FY18-
FY21E, even though the historical operating expenses per room declined in FY16-FY18.
We have sub-divided major operating expenses into fuel, power and light, employee benefit, food and
beverage and other expenses.
Employee expenses per room: Historically, employee expenses per room have shown a steady decline
YoY during FY16-18. However, on a conservative basis we have witnessed 5% CAGR in employee
expenses per room over FY18-FY21E.
Food and beverages consumed per room: Historically, food and beverages consumed per room have
shown a declining trend between FY13-FY18. We note that food and beverage expenses as a percentage of
food and beverage income have remained between 22% to 25% over FY13-FY18. Thus, we have assumed
the food and beverages expenses to continue to be at 22% of food and beverage income. Thus, food and
beverage expenses per room are expected to post a 7% CAGR over FY18-FY21E.
Fuel, power and light costs per room: Historically, power and fuel costs per room have declined at a 4%
CAGR over FY13-FY18. However, on a conservative basis, we have increased it to 5% CAGR in respect of
fuel, power and light costs per room over FY18-FY21E
Other expenses per room: Historically, other expenses per room have increased 1% CAGR over FY13-
FY18. We have assumed an increase of 5% CAGR in other expenses per room over FY18-FY21E.
Exhibit 36: Costs per room
Per room cost (Rsmn) FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Salaries, wages and bonus 1,028,342 1,094,163 1,147,117 1,097,432 1,049,731 1,010,521 1,061,047 1,114,099 1,169,804
Growth (%) - 6.4 4.8 (4.3) (4.3) (3.7) 5.0 5.0 5.0
Food and beverage consumed 308,523 340,539 347,549 282,929 279,962 282,485 290,668 313,921 345,313
Growth (%) - 10.4 2.1 (18.6) (1.0) 0.9 2.9 8.0 10.0
Fuel, power and light expenses 233,525 248,106 251,337 212,376 198,931 194,439 204,161 214,369 225,088
Growth (%) - 6.2 1.3 (15.5) (6.3) (2.3) 5.0 5.0 5.0
Other expenses 1,021,768 1,113,316 1,156,232 1,083,538 1,087,254 1,088,871 1,143,315 1,200,481 1,260,505
Growth (%) - 9.0 3.9 (6.3) 0.3 0.1 5.0 5.0 5.0
Source: Nirmal Bang Institutional Equities, Company

With the increase in the number of rooms from 17,793 in FY18 to 19,793 in FY21E, supported by the
company’s ability to keep costs under control, we expect EBITDA margin to expand from 16% in FY18 to
23% in FY21E. IHCL is operating at ~65% occupancy rate level and we expect the occupancy rate to
increase to 73% in FY21E. Also, we forecast a healthy rise in ARR.
Exhibit 37: EBITDA and EBITDA margin

(Rsmn)
14,000 23% 25%
12,000 19%
17% 20%
10,000 16%
15%
14% 14% 14%
8,000 15%
12%
12,528
6,000 10%
9,417
7,540
4,000
6,703
6,096
5,596
5,522
5,376
4,886
5%
2,000
- 0%
EBDITA EBDITA Margins
Net income and margins

Leverage acts as a double-edged sword which worsens the returns in business during economic
downturn/business downcycle and maximizes the earnings potential during economic upturn/business
upcycle. Assuming the hotel industry sustains the upcoming upcycle over the next three to five years for
reasons stated earlier, we expect a sharp rise in the earnings of IHCL. During the downcycle of the hotel
industry, especially caused by excess room addition, a major portion of the costs for a hotel company is
fixed, leading to poor/negative earnings. IHCL has been no exception, incurring losses for the period FY13-
FY17.
Going forward, we expect the earnings of IHCL to post a 94% CAGR over FY18-FY21E driven by: 1)
Demand growth exceeding supply (room addition) growth, leading to higher ARR. 2) Room addition (owned
+management contract) over the next three years. 3) Management maintaining its low operating expense
structure.
Exhibit 38: Net income and margin
(Rsmn)
6,000 10%
4,000
5%
2,000
0%
-
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
-5%
(2,000)
-10%
(4,000)
(6,000) -15%
Net Profit Net Profit Margins
We expect depreciation to increase to Rs 3,944mn in FY21E, posting a 9% CAGR over FY18-FY21E. Rise
in depreciation is because of addition of 2,000 rooms by FY21E. Fixed assets (excluding CWIP) stood at
Rs63,37mn in FY18, which are expected to rise to Rs 78,873mn by FY21E.

Exhibit 39: Depreciation
(Rsmn)
4,100 3,944
3,900
3,649
3,700
3,500 3,354
3,300
3,081
3,100 2,994
2,884 2,913
2,848
2,900 3,012
2,700
2,500
Depreciation
We expect interest costs to decline to Rs2,230mn in FY21E. The decrease in interest costs is because of
the fall in debt from Rs24,274mn in FY18 to Rs 20,274mn in FY21E. The fall in debt is on account of
increasing profitability due to shift in the management’s focus to an asset-light business model, cost control,
increase in RevPar and number of rooms.
Exhibit 40: Interest costs
(Rsmn)
4,000
3,756
3,500
3,000 3,238
2,500
2,690
2,000 2,362 2,428
2,230
1,500 1,707 1,756
1,685
1,000
500
-
Interest Costs

Balance sheet to strengthen further
We believe that with the improvement in the hotel sector dynamics, the balance sheet will continue to
improve. The strength of the balance sheet is aided by: 1. Comfortable net debt-to-equity ratio. 2.
Improvement in interest coverage ratio. 3. Negative working capital.
With the rise in operating income from Rs3,691mn in FY18 to Rs 8,584mn in FY21E and the fall in interest
costs because of the shift in focus towards an asset-light model, we believe the interest coverage ratio to be
at a comfortable level of 3.85x in FY21E.
With the cyclical upturn in the sector, we expect EBIT to post a 32% CAGR over FY18-FY21E, leading to an
increase in the interest coverage ratio from 1.37x in FY18 to 3.85x in FY21E.
Exhibit 41: Interest coverage ratio
(x)
4.50
3.85
4.00
3.50
3.00
2.38
2.50
2.00 1.77
1.46 1.49 1.37
1.50 1.12
0.96
1.00 0.71
0.50
-
Interest Coverage Ratio
The net debt-to-equity ratio is expected to improve from 0.52x in FY18 to 0.37x in FY21E. The fall in this
ratio is because of the decrease in gross debt outstanding from Rs24,274mn in FY18 to Rs20,274mn in
FY21E. The increase in the number of total rooms from 17,793 in FY18 to 19,793 in FY21E, rise in ARR and
improved occupancy rate will support cash generation.
Exhibit 42: Net debt-to-equity ratio
(x)
2.50
2.05
2.00
1.68
1.54
1.50 1.25
1.21
1.00
0.52
0.44 0.43 0.37
0.50
-
Net Debt to Equity

Historically, the working capital of IHCL remained negative primarily driven by higher payable days. Payable
days averaged around 138 over FY13-FY18. Average receivable and inventory days at 26 and 40,
respectively, during FY13-FY18 also supported the negative working capital cycle. We believe the negative
working capital cycle will continue in FY19-FY21E driven by average inventory, receivables and payable
days at 40, 30 and 136, respectively.
Exhibit 43: Working capital management
(Days)
180
160
140
120
100
80
60
40
20
-
Recievables days Inventory days Payables days

Cash flow
IHCL has been generating consistent operating cash flows in FY13-FY18. Operating cash flow is expected
to improve from Rs6,424mn in FY18 to Rs8,903mn in FY21E, driven by the sharp rise in earnings and
negative working capital.
Exhibit 44: Operating cash flow
(Rsmn)
10,000
8,903
9,000 8,245
7,714
8,000
7,000 6,424 6,608
6,000 5,616
5,090
5,000
3,960
4,000 3,388
3,000
2,000
1,000
-
Operating Cash Flow
Note: Operating cash flow does not include changes in current investments in mutual funds
IHCL has been generating negative free cash flow over FY13-FY18. Free cash flow is expected to improve
from (Rs92mn) in FY18 to Rs3,369mn in FY21E, driven by the sharp rise in earnings and negative working
capital. The sharp rise in free cash flow in 2017 is because of proceeds worth Rs8132mn received from the
sale of IHMS (Boston) LLC by United Overseas Holding Inc. (UOH), a wholly-owned subsidiary of IHCL.
We expect a capital expenditure of ~Rs11,000mn over FY19-FY21E, primarily representing expansion in the
number of rooms. The capital expenditure will be funded through internal accruals.
Exhibit 45: Free cash flow
(Rsmn)
18,000
15,000
12,000
9,000
6,000
3,000
-
(3,000) Free Cash Flow

Return ratios
IHCL has delivered a negative to low single-digit RoE and RoCE during FY13-FY18. Poor return ratios
during this period were because of the industry going through a downcycle (excess room supply), leading to
poor earnings performance.
However, we see a significant improvement in RoE and RoCE over FY19-FY21E on account of: 1) Upcycle
in the hotel industry leading to a rise in demand for hotel rooms and thereby higher ARR. 2) Earnings
delivery driven by operating leverage and room addition. 3) Asset-light model (room addition through
management contract) leading to higher return ratios.
Based on our expected earnings growth, we expect RoE and RoCE at 6% and 13.0%, respectively, in
FY23E.
Exhibit 46: RoE and RoCE
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25% ROE ROCE
Source: Nirmal Bang Institutional Equities, Company
When we take a closer look into RoE by conducting a DuPont analysis, we can effectively conclude that the
negative to low single-digit RoE during FY13-FY18 was on account of a negative PAT margin magnified by
higher financial leverage. Historical PAT margin ranged between 2% to (10%) and financial leverage was
between 2.24x to 4.4x. The asset turnover has shown a steady growth from 40% in FY13 to 44% in FY18.
Going forward, we expect the net profit margin to touch 9% by FY21E, driven by the rise in ARR, room
addition and a low-cost structure. The earnings growth will get magnified as the financial leverage ratio
touches 2.17x by FY21E. Asset turnover is expected to increase from 44% in FY18 to 51% by FY21E
because of aggressive room addition through the management contract route.
Exhibit 47: DuPont analysis
60% 5.0
50% 4.5
4.0
40%
3.5
30% 3.0
20% 2.5
10% 2.0
1.5
0%
FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E 1.0
-10% 0.5
-20% Net Profit Margin (%) Asset Turnover (%) Leverage (x) -
Source: Nirmal Bang Institutional Equities Research Company

Management team profile
Mr.Natarajan Chandrasekaran, Chairman and Non-Executive Director
Mr. Natarajan Chandrasekaran is the chairman designate of Tata Sons and the chief executive officer and
managing director of Tata Consultancy Services (TCS), a leading global IT solution and consulting firm, the position
he has held since 2009. He was appointed as a director on the board of Tata Sons on 25 October 2016.
Mr. Chandrasekaran joined TCS in 1987 after completing his master's in computer applications from Regional
Engineering College, Trichy, Tamil Nadu. Under his leadership, TCS has become the largest private sector
employer in India with the highest retention rate in a globally competitive industry. TCS remains the most valuable
company in India and for the year ended 2015-16 it had a market capitalisation of over US$70bn.
Mr.Puneet Chhatwal, Managing Director and Chief Executive Officer
He was previously the chief executive officer of Deutsche Hospitality/ Steigenberger Hotels AG. . He has been in
senior international leadership roles for almost 20 years. He was living in Europe for the past 28 years and was the
first non-European to head a European hospitality organisation with his innovative leadership. Mr. Chhatwal has
launched and re-launched various consumer brands (hospitality) and umbrella brand (B2B). In his association with
Steigenberger Hotels AG, the group witnessed a growth of more than 50% in portfolio along with increased
presence in gateway destinations.
Mr.Deepak Shantilal Parekh, Non-Executive Director and Independent Director
Mr. Parekh is the chairman of Housing Development Finance Corporation, a leading financial institution for
providing affordable home loans and related services. He has immense expertise in the field of finance and
banking, and has led HDFC to be one of the country’s topfinancial institutions.
Mr.Nadir Burjorji Godrej, Non-Executive Director and Independent Director
Mr. Nadir Godrej has a B.S. Degree in Chemical Engineering from the Massachusetts Institute of Technology and a
M.S. in Chemical Engineering from Stanford University, in addition to an MBA from Havard Business School. He is
the Managing Director of Godrej Industries and the chairman of Godrej Agrovet. He has been very active in
research, with several patents in the field of agriculture chemicals and surfactants.
Ms.Ireena Gopal Vittal, Non-Executive Director and Independent Director
Ms. Vittal, a former partner with McKinsey & Co, is a recognised thought partner to consumer-facing companies
looking to build large-scale, profitable businesses in emerging markets. She has also served governments and
public institutions to design and implement solutions core to India’s development, such as inclusive urban
development and sustainable rural growth. Ms. Vittal was a founding member of the economic-development
practice and the global emerging-markets practice at McKinsey. After 23 years in the corporate world, she is
currently working in the urban and agriculture space and is also an independent director on the boards of select
Indian companies.
Ms.Vibha Paul Rishi, Non-Executive Director and Independent Director
Ms. Rishi was associated with Future Group as group strategy and consumer director and was responsible for
marketing, communication and customer strategy of group companies. She had earlier worked with Tata
Administrative Services and PepsiCo.
Mr.Gautam Banerjee, Non-Executive Director and Independent Director
Gautam Banerjee has extensive experience in the realm of finance, accounting and management. Mr. Banerjee is
currently a senior advisor to Blackstone Group and thechairman of Blackstone, Singapore. Mr. Banerjee has held
various positions during his association with Pricewaterhouse Coopers (‘PwC’), from 1982 to 2012. Mr. Banerjee
has been a member of various statutory boards committees of the Government of Singapore and has also been a
member of several industry associations in Singapore. He was a nominated member of Parliament in Singapore
from 2007 to 2009. He is also an independent director of Singapore Airlines, the Government of Singapore
Investment Company and the Straits Trading Company. He is a graduate from the University of Warwick, England,
and is a member of the Institute of Chartered Accountants in England and Wales and also a member of the Institute
of Certified Public Accountants, Singapore.
Mr.Venu Srinivasan, Non-Executive Director
Venu Srinivasan is a director on the board of Tata Sons. Mr Srinivasan is the chairman of Sundaram-Clayton and
TVS Motor Company, one of the largest two-wheeler manufacturers in India. Mr Srinivasan has an Engineering
degree from the College of Engineering, Chennai, and a Master's degree in Management from Purdue University,
USA.

Mr.Mehernosh Sorab Kapadia, Non-Executive Director
Mr. Kapadia joined IHCL in 1977 and has served the Taj Group of hotels in a variety of managerial positions for
over 41 years and also has considerable experience in handling various issues with the central and state
governments and municipal authorities.Mr. Kapadia holds a Diploma in Travel Management and he is also the
chairman of Taj Air and holds directorships in Taj SATS Air Catering, Tata Realty & Infrastructure and Ewart
Investments. Mr. Kapadia has been instrumental in planning and executing the growth strategy for Taj SATS Air
Catering, (a subsidiary of IHCL) a role which helped him develop and hone his leadership and business acumen
skills. Thereafter, he was appointed as the managing director of Taj SATS Air Catering. in October 2001, a role
which he dutifully and meritoriously carried out until 2011. Known for his vast network, Mr. Kapadia was then
appointed as the executive director — corporate Affairs in September 2011. During his time on the board, Mr.
Kapadia provided the organisation with invaluable support and counsel across a wide array of situations.
Exhibit 48: Top shareholders-IHCL
Name Holding (%)
Reliance Capital Trustee Co. 6.68
HDFC Trustee Co. 5.26
Life Insurance Corporation of India 3.66
Government Pension Fund Global 3.57
ICICI Prudential Balanced Advantage Fund 2.42
Franklin Templeton Investment Funds 1.90
DBI Magnum Multicap Fund 1.89
Franklin Templeton Mutual Fund 1.54
ICICI Prudential Life Insurance Co. 1.47
HDFC Standard Life Insurance Co. 1.33
General Insurance Corporation of India 1.04
Source: www.bseindia.com

Financial statement
Exhibit 49: Income statement Exhibit 50: Cash flow
Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E
Net sales 40,103 41,036 43,624 48,325 53,926 Profit after tax after minority
(632) 1,009 1,349 1,950 3,113
Growth YoY (%) (0.3) 2.3 6.3 10.8 11.6 interest & share in associates & JV
COGS 3,640 3,764 3,886 4,296 4,764 Depreciation 2,994 3,012 3,354 3,649 3,944
Operating costs 16,233 16,057 16,914 18,182 19,244 Finance costs 3,238 2,690 2,362 2,428 2,230
Other expenses 14,134 14,510 15,285 16,430 17,390 Other income 549 617 648 681 715
EBITDA 6,096 6,703 7,540 9,417 12,528 Working capital changes 638 (2,067) 27 195 148
EBITDA growth (%) 10.4 10.0 12.5 24.9 33.0
Operating cash flow 5,888 4,027 6,443 7,541 8,720
EBITDA margin (%) 15.2 16.3 17.3 19.5 23.2
Capital expenditure 6,961 (6,128) (5,414) (6,078) (5,301)
Depreciation 2,994 3,012 3,354 3,649 3,944
EBIT 3,103 3,691 4,186 5,768 8,584 Net cash after capex 12,848 (2,101) 1,030 1,463 3,420
EBIT (%) 7.7 9.0 9.6 11.9 15.9 Other income/(expense) 2,216 (389) (212) (222) (234)
Interest expense 3,238 2,690 2,362 2,428 2,230 Issue/(buyback of equity) - 14,999 - - -
Other income 549 617 648 681 715 Proceeds/repayment of borrowings (11,431) (9,556) (2,800) 600 (1,800)
Others (108) 225 - - - Finance costs (3,238) (2,690) (2,362) (2,428) (2,230)
Earnings before tax 306 1,843 2,472 4,020 7,068 Others 250 (30) 4,322 449 768
Tax- total 1,137 1,211 816 1,327 2,333
Cash flow from financing (14,420) 2,723 (840) (1,379) (3,262)
Rate of tax (%) 371.9 65.7 33.0 33.0 33.0
Total cash generation 646 233 (23) (139) (76)
Net profit (832) 632 1,656 2,694 4,736
Adjusted PAT (632) 1,009 1,349 1,950 3,113 Opening cash balance 1,826 2,471 2,703 2,680 2,542
% growth N/A N/A 33.7 44.6 59.7 Closing cash & bank balance 2,471 2,703 2,680 2,542 2,466
EPS (FD) (0.53) 0.85 1.13 1.64 2.62 Source: Company, Nirmal Bang Institutional Equities Research
% growth N/A N/A 33.7 44.6 59.7
* Adjusted PAT - After minority interest and Share of associates and JV Exhibit 52: Key ratios
Exhibit 51: Balance sheet
Y/E March FY17 FY18 FY19E FY20E FY21E
Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E
Profitability and return ratios
Share capital 989 1,189 1,189 1,189 1,189
EBITDA margin (%) 15.2 16.3 17.3 19.5 23.2
Reserves and surplus 24,188 40,622 41,971 43,921 47,034
EBIT margin (%) 7.7 9.0 9.6 11.9 15.9
Net worth 25,177 41,812 43,160 45,110 48,223
Net profit margin (%) (1.6) 2.5 3.1 4.0 5.8
Loans 33,830 24,274 21,474 22,074 20,274
RoE (%) (2.5) 2.4 3.1 4.3 6.5
Minority interest 7,378 7,774 11,693 12,236 13,104
RoCE (%) 5.5 5.8 6.8 8.9 13.0
Provisions 756 836 877 921 967
Working capital & liquidity ratios
Deferred tax liability 3,173 3,563 3,741 3,928 4,125
Recievable (days) 25 29 30 30 30
Other non-current liability 3,568 2,536 2,662 2,795 2,935
Inventory (days) 31 33 40 40 40
Total capital employed 73,882 80,794 83,608 87,065 89,628
Payable (days) 113 134 136 136 136
Goodwill on consolidation 5,556 5,655 5,422 5,693 5,978
Current ratio (x) 0.7 0.9 1.0 0.9 0.9
Property, plant and equipment 54,825 57,941 60,001 62,430 63,787
Valuation ratios
Investments 11,529 11,809 12,399 13,019 13,670
EV/sales (x) 5.0 4.6 4.2 3.8 3.4
Loans 151 151 151 151 151
EV/EBITDA (x) 32.0 27.2 20.0 16.6 13.7
Other non-current assets 5,019 5,994 6,293 6,608 6,939
P/E (x) NA 174.5 130.5 90.3 56.5
Total non-current assets 77,079 81,550 84,267 87,902 90,525
P/BV (x) 7.0 4.2 4.1 3.9 3.7
Trade payables 2,931 3,513 3,719 4,011 4,315
Other current liabilities 8,179 8,055 8,458 8,881 9,325
Provisions (current) 1,352 1,384 1,453 1,526 1,602
Total current liabilities 12,462 12,952 13,631 14,418 15,242
Inventories 804 857 1,094 1,180 1,269
Investments 908 3,305 3,471 3,644 3,826
Trade receivables 2,721 3,286 3,586 3,972 4,432
Cash and bank balance 2,471 2,703 2,680 2,542 2,466
Loans and advances 490 91 91 91 91
Other current assets 1,870 1,953 2,050 2,153 2,260
Total current assets 9,264 12,195 12,972 13,582 14,346
Net current assets (3,198) (757) (658) (836) (896)
Total capital employed 73,882 80,794 83,608 87,065 89,628

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Institutional Equities

Reuters: IHTL.NS; Bloomberg: IH: IN

operating income to help maintain a comfortable interest coverage ratio. 120

2 Indian Hotels Company

1) Rising contribution of tourism and travel sector to India’s GDP

3 Indian Hotels Company

2) Increase in working age population to boost the value of discretionary spending

Exhibit 3: Rise in working age population

Source: Nirmal Bang Institutional Equities Research, MOSPI

4 Indian Hotels Company

Exhibit 4: Increase in annual gross income

Source: Nirmal Bang Institutional Equities Research, BCG

4) Stable unemployment rate to aid rising working age population

5 Indian Hotels Company

Source: Nirmal Bang Institutional Equities Research, BCG

6) Rise in nuclear family structure to increase per capita spending

Exhibit 6: Nuclear families versus other family structures

6 Indian Hotels Company

Exhibit 8: E-visa related arrival

Source: Nirmal Bang Institutional Equities Research, www.ibef.org, Ministry of Tourism

Exhibit 9: Foreign tourist spending

Foreign Tourist Spending

7 Indian Hotels Company

Exhibit 10: M-visa FTA

8 Indian Hotels Company

Source: Nirmal Bang Institutional Equities Research, UNESCO

Exhibit 12: Visitors to centrally-protected and ticketed monuments

Domestic Visitors Foreign Visitors

9 Indian Hotels Company

10 Indian Hotels Company

Five Star Deluxe Five Star Four Star

Source: Nirmal Bang Institutional Equities Research, Hotelivate

11 Indian Hotels Company

Exhibit 14: Room occupancy rate trend

Source: Nirmal Bang Institutional Equities Research, Hotelivate

Exhibit 15: ARR trend

Five Star Deluxe Five Star Four Star

12 Indian Hotels Company

Exhibit 16: Total room addition expected

13 Indian Hotels Company

Exhibit 18: One-year forward EV/EBITDA

1 year Forward EV/EBDITA 9 Year Mean EV/EBDITA SD SD+1 SD-1

Source: Nirmal Bang Institutional Equities, Bloomberg

Other factors justifying the valuation

14 Indian Hotels Company

Source: Nirmal Bang Institutional Equities, Bloomberg

Exhibit 21: One-year forward EV/EBITDA – Peer companies vs. IHCL

Exhibit 22: Peer comparison based on EV/room

15 Indian Hotels Company

Exhibit 24: Revenue assumptions

16 Indian Hotels Company

17 Indian Hotels Company

18 Indian Hotels Company

Exhibit 26: Net profit of IHCL

Exhibit 27: Revenues of IHCL Exhibit 28: Total operating costs

19 Indian Hotels Company

20 Indian Hotels Company

Increase in the number of rooms

21 Indian Hotels Company

Exhibit 34: Rooms under management contract

Source: Nirmal Bang Institutional Equities Research, Company

22 Indian Hotels Company