PL Sector Report: Travel & Tourism - Jul-Sep’23 Earnings Preview – Seasonally weak quarter; all eyes on 2H

Travel & Tourism - Jinesh Joshi - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Jul-Sep’23 Earnings Preview – Seasonally weak quarter; all eyes on 2H

Luggage: The overall demand environment was tepid given negligible auspicious wedding days as per Hindu calendar during the quarter. In addition, as 2QFY24 is a seasonally weak quarter from travel standpoint we expect VIP/Safari to report modest topline growth of 7%/20% respectively led by e-com channel given the ongoing festive sale (results in pre-stocking by channel partners).

Hotels: In a seasonally weak period, we expect 2QFY24 performance for our coverage universe to be a replica of previous quarter. We expect Chalet/Lemon Tree to report ARR of Rs10,150/Rs5,310 respectively with an occupancy of 71%. We expect EBITDA margin of 37.2%/47.4% for Chalet/Lemon Tree respectively.

Aviation: We expect Indigo to report load factor of 84% and yield of Rs4.4 (down 13.3% YoY) due to seasonality impact. Consequent to a 6.8% sequential rise in ATF prices to Rs102 per litre (average of 3 months) we expect gross spread of Rs2.5 (RASK less fuel CASK). Decline in yield and rise in crude prices is expected to impact Indigo’s performance in 2QFY24 and we expect revenues of Rs146bn (up 16.6% YoY) with EBITDAR margin of 15.8% (adjusted for forex impact).

Top picks: Safari and Chalet have remained our top picks in travel & tourism space for quite some time. While we continue to like both these names given 104%/68% appreciation in stock price of Safari/Chalet in last 6 months, we believe Lemon Tree offers a good entry point at current levels given its crown jewel asset Aurika, Mumbai has just started operations. We expect sales/EBITDA CAGR of 19%/20% over FY23-FY26E and retain BUY on Lemon Tree with a SOTP based TP of Rs140.

Luggage: For our luggage universe, we foresee a modest growth in 2QFY24. We expect VIP/Safari to report revenues of Rs5.5bn (up 7.0% YoY) and Rs3.8bn (up 20% YoY) respectively. Further, we expect GM of 49.0%/43.0% for VIP/Safari, as RM prices have been on an increasing trend during the quarter amid rising crude.

Given yet another quarter of sub-par performance on growth front, we cut our EPS estimates for VIP by 8%/9% for FY24E/FY25E and revise our TP to Rs721 (earlier Rs707) as we roll-forward to Sep-25 EPS. Retain ACCUMULATE on the stock.

In case of Safari, we maintain our positive bias with a TP of Rs4,559 (earlier Rs3,728) as we raise our target multiple to 45x (earlier 41x) and roll forward to Sep-25E EPS. Retain BUY on the stock. Our target multiple is at a premium of ~18% over VIP. We believe the premium is justified as Safari has been able to outpace the market leader by registering a top-line CAGR of 24% over FY18-FY23 versus a CAGR of just 8% for VIP over the same period. In addition, Safari has also been able to bridge the EBITDA margin differential and has surpassed VIP (average EBITDA margin of 18.6% over the last 3 quarters for Safari versus 13.6% for VIP) as operating leverage benefits have started accruing.

Hotels: For Chalet, we expect ARR’s to increase 28.0% YoY to Rs10,150 with an occupancy of 71%. Overall, we expect Chalet to report 29.7% YoY growth in revenue with EBITDA margin of 37.2%. Current quarter performance will get an additional boost from operationalization of West-In 2 in Hyderabad and commercial tower in Bangalore. We maintain our positive bias on Chalet and retain BUY with an SOTP based TP of Rs656 (earlier Rs562) as we increase our target multiple for hotel business to 20x (earlier 17x). While we have increased our target multiple for hotel business by 18%, it is still at a discount of 10% to Lemon Tree. Further, Chalet is also trading at a discount of 32% to Indian Hotels and re-rating was on the cards as asset sweating has begun which should result in sales/EBITDA CAGR of 25%/31% respectively over FY23-FY25E.

For Lemon Tree, we expect ARR’s to increase 8.0% YoY to Rs5,310 with an occupancy of 71%. Overall, we expect Lemon Tree to report 17.3% YoY growth in revenue with EBITDA margin of 47.4%. Maintain BUY on the stock with an SOTP based TP of Rs140.

Aviation: We expect Indigo to report revenues of Rs146bn with a load factor of 84% and yield of Rs4.4. We expect ASKM/RPKM to improve 5.9%0.3% on QoQ basis. We expect RASK of Rs4.2 and gross spread (RASK less fuel CASK) of Rs2.5 with EBITDAR margin of 15.8% (excluding forex adjustments). Given pressure on yields and rising ATF prices, we cut our EBITDAR estimates by 7%/8% for FY24E/FY25E and cut our TP to Rs2,701 (earlier Rs2,855) as we roll-forward to FY25E. Maintain BUY.

IRCTC: Excluding last 10-days of Sep, the cumulative non-suburban PRS traffic figure stood at 183.2mn in 2QFY24. Assuming in the last 10 days of September, passenger traffic settles down at 21.3mn (similar to bucket-2), cumulative number for the quarter would stand at 204.6mn. Approximately, ~1.7-1.8x passengers travel per e-ticket which implies that roughly ~114mn tickets may have been booked online in 2QFY24. Overall, we expect IRCTC’s revenues to increase 31.7% YoY to Rs10.6bn with an EBITDA margin of 34.0%. We retain ‘HOLD’ on IRCTC with a TP of Rs700 (45x FY25E EPS).