Rationale

The upgrade in long-term rating factors the improvement in the capitalisation metrics and cash flow position of The Indian Hotels Company Limited (IHCL/the company), following the fund raising in FY2022, and significant improvement in operating metrics in Q1 FY2023. IHCL raised equity of Rs. 3,982.0 crore in FY2022 via rights issue and qualified institutional placement (QIP), the proceeds of which were primarily utilised for debt reduction. This has resulted in net cash1 of Rs. 105.5 crore and Rs. 259.7 crore as on March 31, 2022 and June 30, 2022 respectively at a consolidated level, as against Rs. 3,089.5 crore of net debt (excluding lease liabilities) as on March 31, 2021. The reduction in debt has translated into comfortable capital structure and coverage metrics. The company's standalone occupancy improved to 70.4% in Q1 FY2023 (compared to 63.4% in Q1 FY2020), while its ARR stood at Rs. 11,397 (compared to Rs. 9,141 in Q1 FY2020) supported by sustenance of domestic leisure demand, improvement in business travel, weddings/social MICE and corporate events, amidst others. This, in turn, translated into an operating income of Rs. 1,266.1 crore in Q1 FY2023, higher by 24.1% compared to pre-Covid levels (Q1 FY2020). IHCL also reported its highest ever Q1 operating profit margin in the last 10 years at 29.8% in Q1 FY2023, aided by sustenance of cost saving initiatives undertaken in the last two years and benefits accruing from demand pickup and consequent operating leverage. The revenues and operating profits are likely to witness healthy improvement on full-year basis in FY2023. Over the medium term, healthy pickup in demand and expansion of IHCL's hotel portfolio are likely to aid revenue growth. Further, the expansion is likely to be asset-light with majority of the incremental properties being through the management contract route. The company is expected to incur 5% of revenues for normal capex and 10% of revenues as capex for expansion projects, on an annual basis, over the medium term. ICRA expects IHCL to be able to meet its medium-term commitments and yet be left with healthy cash/liquid investments surplus. In the absence of incremental borrowings, the company's capital structure and coverage metrics are likely to remain comfortable going forward. The ratings remain supported by IHCL's parentage (Tata Sons Private Limited (Tata Sons), rated [ICRA]AAA (Stable)/[ICRA]A1+, holds 35.74% stake), its strong financial flexibility and lender/investor comfort by virtue of the Tata Group lineage. There have been equity infusions by the parent in the past, and ICRA expects this to continue going forward as well, should there be a need. The ratings also favourably factor in IHCL's dominant position in the Indian hotel industry and its strong brand equity, with RevPARs consistently higher than the industry average during the last several years. IHCL, at a consolidated level, operates 178 hotels (20,826 keys) across 4 continents, 12 countries and over 100 cities. Its geographic and segment diversification with the portfolio consisting of well-recognised brands across luxury (Taj), upscale/upper upscale (Vivanta/Seleqtions) and midscale/lean luxury (Ginger) segments mitigate the revenue concentration risk to a large extent. IHCL's consolidated margins and profitability have been historically weaker than the standalone margins and return on capital employed (RoCE) because of subdued performance of some of its key overseas properties and the sizeable periodic investments in ELEL Hotels and Investment Limited (ELEL), which holds the Sea Rock property. Significant improvement in operating performance of subsidiaries and adequate sweating of the Sea Rock asset would be critical for consolidated profitability improvement going forward. Akin to other hotel players, the operating performance of IHCL's properties remains vulnerable to industry cyclicality/seasonality, macro-economic cycles and exogenous factors (geo-political crisis, terrorist attacks, disease outbreaks, etc). Nonetheless, the risk to revenues is partially mitigated by IHCL's geographically and segment diversified portfolio, which allow it to withstand any demand vulnerability related to a micro-market/particular segment. The [ICRA]AA+ (Stable) rating on the company's Rs. 300.00-crore non-convertible debenture programme has been withdrawn based on confirmation from IHCL that there is no amount outstanding against the rated instrument and is in accordance with ICRA's policy on withdrawal and suspension. This has been done at the request of the company.