Royal Orchid Hotels: Up only 2.5% in a year but Nuvama sees 63% upside going ahead – key reasons

On the back of in-line September quarter results, strong growth outlook, robust room additions, and high EBITDA, brokerage house Nuvama has retained its ‘buy’ call on hotel stock Royal Orchid Hotels (ROHL) with a target price of ₹498, indicating an upside of 63 percent.

"We remain positive on the industry given the favourable demand-supply dynamics in the near-to-medium term. We expect growth for ROHL to outpace peers, given its lower base, extensive room addition pipeline, and improving brand recognition, which will help to narrow the valuation gap with its peers," it said.

However, the stock has just gained 2.5 percent in the last 1 year. Meanwhile, it has advanced 21.5 percent in 2023 YTD. It has risen 5 percent in November, snapping 3 straight months of losses.

The stock is still over 20 percent away from its record high of ₹384.75, hit on May 25, 2023. Meanwhile, it has advanced 48 percent from its 52-week low of ₹206.35, hit on December 23, 2022.

In the September quarter, the company's net profit fell 16.6 percent to ₹4.94 crore from ₹5.92 crore in the year-ago period. Meanwhile, its net sales rose 18.5 percent to ₹44.51 crore in the September 2023 quarter from ₹37.56 crore in the September 2022 quarter. Its EBITDA came in at ₹14.02 crore in the quarter under review, up 5.41 percent from ₹13.30 crore in the same period last year.

Investment Rationale

Revenue in line on strong room additions: Revenue grew on strong room additions and growth in income from F&B and other services. Occupancy stood at 73 percent (Q2FY23/Q1FY24: 75 percent/78 percent). While EBITDA grew on higher revenue, EBITDA margin contracted by 318bp YoY on i) higher staff cost owing to the hike in the minimum wage rate and hiring for new hotels (employee cost rose 34 percent), ii) elevated spending on renovation and maintenance of rooms ( ₹2 crore), iii) increased fixed operating cost such as power and fuel (up 21 percent) and other overheads (other expenses up 15 percent) on major room additions, said the brokerage.

Strong room addition: As of September, ROHL operated 5,633 rooms (own/JV/leased/managed: 398/193/647/4,395 rooms) across 95 hotels, catering to leisure, business, and the wedding segment. In H1, it added 692 rooms and intends to add another 900 rooms by FY24-end. The brokerage conservatively estimates a total of 6,841 rooms by FY25-end against the management’s guidance of 8,000 rooms. Nearly 80 percent/20 percent of expected additions will be under management contracts/revenue-sharing leases, noted Nuvama.

Estimates: Nuvama expects 29 percent revenue CAGR over FY23-25 on i) a 14 percent ARR CAGR, with strong occupancy levels, leading to 10 percent RevPAR CAGR, driven by favourable demand-supply dynamics and strong demand from local tourists; ii) its elaborate expansion plan of adding over 2,300 rooms in two years; iii) strong growth in F&B income, with a revival in large-scale weddings after the lifting of COVID-related restrictions and the expansion of the restaurant and banquet portfolio; and iv) its focus on boosting in-resort spends by offering value-add services.

Meanwhile, the EBITDA margin is expected to settle at a sustainable 26 percent in FY25 as i) the strong room additions will entail higher fixed costs (employee, power and fuel, and maintenance), which will impact unit profitability as new properties will take three-to-four quarters to ramp up, and ii) share of the revenue from leased hotels, which earn a lower margin, is expected to increase. It expects a 27 percent PAT CAGR over FY23–25, aided by lower interest costs.

Higher EBITDA to drive cash flows: With the working capital cycle stable for 23 days, Nuvama expects a major portion of EBIT to flow down to OCF (10 percent CAGR over FY23–25). “We expect a cumulative OCF of ₹171 crore in FY24 and FY25, of which ₹83 crore will be used for room additions and maintenance capex. The balance will aid deleveraging. We expect the net D/E ratio to improve to -0.11x in FY25 from 0.02x in FY23,” it said. With a large part of room additions under the asset-light model, it expects RoCE to improve to 29.6 percent in FY25 from 25.6 percent in FY23.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.