Rakesh Jhunjhunwala portfolio stock up 30% so far in 2022, may rally 18% more; should you buy?
Rakesh Jhunjhunwala portfolio stock Indian Hotels Company Ltd (IHCL) hit a fresh 52-week high of Rs 245.45 on Wednesday. Despite the market correction so far this year, IHCL share price has rallied over 30 per cent in 2022. The stock is expected to rally further as “strong recovery in domestic leisure travel would help IHCL post better performance in the medium term,” said Sharekhan in its report. Rakesh Jhunjhunwala held 1.42 crore shares of the company till quarter ended December 2021 and his wife Rekha held 1.42 crore shares. The couple collectively holds 2.16 per cent stake in IHCL, per the shareholding data.
IHCL to clock robust numbers in FY2023, revenues to cross pre-pandemic levels
The Indian hotel and hospitality industry was hit by the COVID-19 pandemic over the last two financial years, as various mobility restrictions hit foreign tourist arrivals, inter-state travel and occupancy rates for the hotel industry. As the pandemic-led restrictions were eased gradually, with a reduction in COVID-19 cases, IHCL saw strong revival in room demand that helped room occupancies improve sequentially. Analysts at Sharekhan believe that with a reduction in cases globally, a strong vaccination drive and most countries including India removing travel restrictions, the revival in global tourism will be stronger in FY2023. “We expect IHCL to clock robust numbers in FY2023 with revenues crossing pre-pandemic levels on the back of high domestic demand and an expected recovery in foreign tourist arrivals,” they said.
Strong room demand for next 100 days
The company posted strong revival in room demand in Q3FY2022 with domestic occupancy ratio improving close to 70% in December last year. Q4 started with a pause in the month of January 2022, led by the emergence of the third COVID-19 wave. However, this wave was short-lived and room demand recovered strongly from February 2022. The management has indicated that demand outlook for March-May 2022 is strong with revenues expected to stay ahead of pre-pandemic levels. “If there is no further covid wave over the next 4-5 months and as global uncertainties ease, we expect a strong revival in IHCL’s business in H2FY2023 led by comeback in foreign tourist arrivals,” said analysts.
Focus on strengthening balance sheet
The company is also focusing on strengthening the balance sheet by reducing debt on books through equity issuance. It raised Rs 1,981 crore in Q3FY2022 through equity infusion from rights issue. In line with its plan, the company reduced the gross debt by Rs 1,350 crore sequentially to Rs 2,730 crore. It will now be raising another Rs 2,000 crore with QIP placement at Rs 202 per share (issuing 9.9 crore shares). The funds raised will be further utilised to reduce debt on the books in the coming months. Thus the company expects to cut down a significant portion of debt by the end of next financial year.
Margins to improve
In the quarter ended 31 December, IHCL clocked one of the highest margins with EBITDA margins reaching at 29.0% on back of strong cost saving initiatives and overall recovery in the business fundamentals. The company is expected to end FY2022 with EBITDA margins of around 13%. With a strong improvement in occupancies and ARRs and scale-up of new businesses, the EBITDA margins are expected to consistently improve in the coming years. “A strong improvement in the profitability and reduction in the interest cost due to reduction in debt will drive up PAT strongly over the next two years. Raising of funds through equity will unlikely to lead to any earnings dilution and would strengthen the balance sheet,” the report said.
Should you buy?
Sharekhan maintains a ‘Buy’ call on the stock with an unchanged price target of Rs 286, implying over 18% upside. A strong recovery in domestic leisure travel is likely to help IHCL post better performance in the medium term. Strong focus on building an asset-light model, market share gains in key markets and recovery in the business environment will help the company to recover 100% of pre-COVID levels in FY2023 with strong growth in profitability. However, any emergence of a fourth COVID-19 wave in the next four to five months or slow recovery in inbound and outbound tourism industry would act as a key risk to earnings estimates.
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