Royal Orchid rides high on India's rising affordability

An assetlight business model, low debt, diversified presence across various segments of accommodation, and lower taxes after GST have burnished the allure of Royal Orchid Hotels, a Bangalore-based mid-sized hospitality company.

Shares of the hotelier gained 62 per cent in the past one year, while the ET Hospitality Index-it captures price movements of key hotel stocks-yielded 7 per cent returns in the same period.

In the past one year, investors bought more into mid-sized hotels than stocks in their large-sized peers. Midsized hotels have given returns in the range of 15-97 per cent, while large-sized peers have returned 2-18 per cent.



The mix of travellers looking for accommodation has changed in the past few years. Although foreign tourist arrivals have been rising by more than 10 per cent in the past two to three years, the revenue growth at luxury hotels that largely hosted overseas tourists has not kept pace with the rate of increase in inbound traffic.More overseas travellers are now coming to India for leisure instead of business, and are comfortable stay ing at mid-sized hotels. Besides, rising local incomes have spawned a new class of domestic tourists who are buying accommodation at midsized hotels and luxury properties.

The share of revenue from domestic travellers at luxury hotels now exceeds 50 per cent. However, analysts say that mid-sized hotels, which have leaner balance sheets and no presence internationally, are expected to benefit more from the rising affordability quotient at home.

Royal Orchid has reduced its debt to equity ratio to 0.5 in FY17 from 1.2 in FY13. Also, more than 60 per cent of its rooms are on management contract, which means the company largely follows an asset-light business model. After the implementation of GST, the company will be paying 18 per cent tax compared with 21 per cent in the pre-GST regime as most of its rooms are priced below Rs 7,500 a night.

Considering FY19 estimated operating profit before depreciation (EBITDA), the hotels's enterprise value (EV) is 8.1 times EBITDA. This is quite attractive considering its past threeyear average EVEBITDA of 10.3.