The hospitality industry has witnessed a significant uptick in performance over the past one year, buoyed by the recovery of domestic and international tourism, the resumption of international flights, the recovery in business travel, and the resurgence of leisure and wedding demand.
As a result, companies have delivered robust financial numbers for the last few quarters, marked by rising average room rentals and strong occupancy rates. Against this backdrop, the majority of stocks in this space have generated double-digit returns, and some have even doubled investors' wealth in a year.
Royal Orchid Hotels was one such stock that delivered astounding returns to its shareholders. The company's shares, which were trading at ₹123.55 apiece a year ago, have risen by 120.67% to trade at ₹272.65 apiece today.
Between June and November of last year, the stock experienced a one-way spike, rallying 171.53% to hit an all-time high of ₹317.70.
Further, the stock's value has surged by an impressive 827% in the last 10-year period, moving from Rs. 29.40 to Rs. 272.65 apiece.
The company is one of the leading branded hotel chains in India, with a presence across 49 locations in South, West, and North India. It operates 75 hotels, catering to the business, leisure, and wedding segments.
Royal Orchid portfolio of 4,805 rooms is well diversified across different categories, such as five- and four-star hotels, budget hotels, and service apartments.
Nuvama Research, a domestic brokerage firm, has recently initiated coverage on the stock with a positive outlook based on several factors. The firm believes that favorable industry dynamics, capacity expansion, strong growth in profitability, improving balance sheet strength, and expanding return ratios all point to a promising future.
The lifting of COVID-related restrictions has led to strong growth in ARR and occupancy across the industry, creating a robust demand for rooms. Nuvama expects RevPAR to stay robust on strong demand and anticipates the upcycle to continue over FY22–25.
Nuvama believes the company's strong room addition pipeline will help capture growth. With strong RevPAR and growth in inventory, the brokerage expects a 45.9% revenue CAGR for ROHL over FY22–25.
It estimates a 75.3% EBITDA CAGR over FY22–25 on strong growth in realization, an increase in occupancy, and operational efficiency. Additionally, it projects the company's EBITDA margin to expand to 28.8% in FY25E from 16.6% in FY22.
With a large part of the future expansion being asset-light and a negative working capital cycle, the brokerage expects the company to deliver healthy free cash flows over the next three years.
The brokerage also expects the net D/E ratio to decline to 0.35 (x) in FY25 from 0.27 (x) in FY22, which will help amplify net profit given the significant fall in net interest costs. Overall, it expects a 132.7% CAGR in APAT over FY22–25.
On the return ratios front, the brokerage estimates an improvement in RoE and RoCE to 29.7% and 32.3% in FY25 from 5.5%/1.7% in FY22 on higher asset turns and strong earnings growth.
Nuvama believes that the stock is trading at a significant discount to its peers, despite comparable margin and return profiles. The firm expects the company to close the valuation gap, which it deems as unwarranted.
Therefore, the brokerage has assigned a 'buy' rating to the stock with a target price of ₹433 apiece, representing a significant upside of 59% from the stock's current trading price, as of March 28.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
