Guests in the lobby at the Taj Mansingh Hotel in New Delhi. (Photographer: Amit Bhargava/Bloomberg News)

How Indian Hotels Stands To Gain By Retaining Taj Mansingh

The Indian Hotels Company Ltd.’s successful bid to retain the iconic Taj Mansingh Hotel in Delhi for the next three decades is expected to boost the earnings and profitability of one of India’s oldest hotel chains.

Indian Hotel’s 33-year lease for Taj Mansingh—a 292-room luxury property spread over 3.78 acres in the heart of Delhi—expired in 2011. After nine extensions and a legal battle that allowed the New Delhi Municipal Corporation to auction it again, the Tata Group company retained the property for 33 years at a monthly license fee of Rs 7.03 crore, newswire PTI reported quoting a senior Delhi civic official. That’s nearly twice the earlier fee.

Despite the near-term earnings impact, JP Morgan said an improvement in the business cycle and renewed management focus on the property could help bridge the deficit over the medium term.

That comes when occupancy in Delhi’s hotels has risen to an eight-year high of 70 percent, according to Horwath HTL. In the first half of the calendar year, revenue per room grew by eight percent annually following a 4.2 percent growth in 2017.

The four-decade old Taj Mansingh generated Rs 220-230 crore in revenue and earnings before interest, taxes, depreciation and amortisation of Rs 45 crore in the year ended March 2018 for Indian Hotels, according to UBS. Even with higher licence fees, UBS said it can generate an Ebitda of Rs 20-25 crore by the next fiscal.

Indian Hotels reported an Ebitda of Rs 732 crore in the year ended March, while revenue stood at Rs 4,165 crore.

Binay Singh, executive director at Morgan Stanley, listed three reasons why Indian Hotels retaining Taj Mansingh is positive. It maintains continuity of a marquee property with strategic importance; incremental return on capital employed is good for the company; and the long-standing overhang is removed on the stock.

Brokerage View

UBS:

  • Maintains ‘Buy’ rating with a target price of Rs 175, upside potential of 28 percent.
  • Remains positive on the win, despite higher license fee.
  • Strategically an important win considering location and current profitability of this property.
  • Expect capex of Rs 50-70 crore towards renovation of this property, which should help them charge a higher room rate.
  • Increased earnings estimate for FY20/21E to account for this win.

Morgan Stanley:

  • Maintains ‘Overweight’ rating with a target price of Rs 174, upside potential of 27 percent.
  • Views this win positively as it maintains continuity of a marquee property for Indian Hotels.
  • Higher bid to weigh on operating margins by 30 basis points.
  • Renovation capex of around 100-150 crores to be spread through next four years
  • Expect incremental return on capital employed from this property.
  • Plans to increase higher-value rooms and the Taj Chambers at this property likely to improve operating revenues.
  • Expect longstanding bugbear for the stock is removed and with a pickup in average revenue per room and portfolio growth ahead.
  • Stock trades at attractive valuation.

JP Morgan

  • Maintains ‘Overweight’ rating with a target price of Rs 150, upside potential of 10 percent.
  • Doubling of license fees from 17.5 percent to 32.5 percent of revenues is in line with expectations.
  • Expect improving business cycle and renewed management focus on the property to drive strong earnings growth over the medium term.