IHCL: This Tata Group stock delivered 700% gain in 4 years; should investors buy?

Tata Group stocks have been on a roll over the past few years by setting new record highs, crossing significant milestones, and achieving notable market capitalisations. The majority of the group’s stocks have delivered stellar performances, with Indian Hotels Company (IHCL) being one of the standout performers.

The company, which is a part of the Tata Group, has seen its shares grow steadily over the last four years, delivering a return of 700%.

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Post COVID-19 pandemic, the Indian hospitality industry has witnessed a significant uptick in performance over the past year. This improvement is driven by the recovery of domestic and international tourism, the resumption of international flights, the revival of business travel, and the resurgence of leisure and wedding demand.

Industry tailwinds

Global brokerage firm Phillip Capital, in its recent note, highlighted that the hotel industry is currently in the middle of an up-cycle, with occupancy rates and average room rates (ARR) surpassing pre-COVID highs and resembling the up-cycle of FY04–08, which it believes will drive IHCL’s occupancy rate and ARR.

The brokerage identified several key factors behind this robust performance: demand for hotel rooms is outpacing supply, there is a notable shift towards domestic travel, particularly leisure, the younger working population is growing rapidly, disposable incomes are rising, and government initiatives are strongly pushing for domestic tourism.

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Phillip Capital highlights the company's strategic call to expand its inventory mainly through management contracts compared to the capital-intensive owned/leased model; 79% of room additions over FY25–27 will be through management contracts, which have substantially higher flow-through vs. the owned/leased model.

By FY27, its room inventory mix should increase to 53% management contracts from 43% in FY24; this transition will result in a balanced portfolio that will allow IHCL to increase scale while keeping the balance sheet lean, leading to a higher RoCE on an incremental basis, said the brokerage.

To diversify its revenue stream, IHCL has built growth plans for its ancillary services such as Amã Stays, Qmin (restaurants/food delivery), The Chambers (exclusive business club), and Taj SATS (catering business).

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The brokerage has identified significant phases that the Indian hospitality industry has experienced over the last 20–25 years, including the boom phase (2003–08), a period of flat growth (2008–15), demand recovery (2015–20), the pandemic slump, and the current robust uptrend. The current phase, beginning in FY22, is marked by a notable imbalance between supply growth (lower) and demand growth (higher).

Strong cash position

Despite anticipating a 13% CAGR in IHCL revenue, the brokerage foresees even stronger growth in consolidated EBITDA and PAT at 16% and 20%, respectively, from FY24 to FY27. This optimistic outlook is underpinned by expectations of improved margins, primarily driven by unlocking higher operating leverage.

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The brokerage anticipates that improved profitability will lead to strong free cash flow (FCF) generation, enabling IHCL to potentially eliminate its debt by FY25 or earlier. The company intends to sustain healthy dividend payouts, ranging between 20% and 40%.

Given these growth prospects, the brokerage has initiated coverage on the stock with a 'buy' rating and set a target price of ₹704 per share.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.