Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Piem Hotels Ltd (Piem; a part of the Tata group) to ‘CRISIL AA/Stable’ from ‘CRISIL AA-/Stable’ and reaffirmed its ‘CRISIL A1+’ rating on the short-term bank facilities of the company.

 

The upgrade factors in healthy improvement in both operational and financial risk profile basis post pandemic recovery of hotel operations reflected in improved occupancy rate (OR) and average room rent (ARR) to pre pandemic levels. The upgrade also considers the improvement in the operational and financial risk profiles of the parent - The Indian Hotels Company Ltd (IHCL) - with which PIEM has significant operational integration and is of strategic importance.

 

For Piem, OR and ARR have surpassed pre-pandemic levels at 73% and Rs. 7,813 respectively in fiscal 23, as compared to 57% and Rs. 5,972 in fiscal 2019 and 64% and Rs. 5901 in fiscal 2020 respectively. ARR and OR further improved to Rs. 8357 and 73% for the nine month of fiscal 2024. The improvement in OR in the business as well as leisure hotels is due to continued healthy demand in premium segment hotels driven by corporate travel, Meetings, Incentives, Conferences and Exhibitions, staycations and wedding parties.

 

Piem reported revenue of Rs. 241 crore for the half year ended September 30, 2023 as compared to Rs. 219 crore in half year ended September 30, 2022 (fiscal 22: Rs. 266 crore).  Piem has also shown steady improvement in profitability since fourth quarter of fiscal 2022. It recorded earnings before interest, taxes, depreciation, amortisation, and restructuring or rent costs (EBITDAR) of Rs. 102 crore during the first nine months of fiscal 2024, which is an all-time high for the company. The margin also improved to 24%-25%, leading to better financial performance and healthier cash accrual. Liquidity continues to be healthy with cash and cash equivalents of Rs. 198 crore as on September 30, 2023 with zero debt repayments and maintenance capital expenditure (capex) of ~Rs. 40-50 crore. CRISIL Ratings expects the operating performance to sustain over the medium term aided by established market position with Taj brand and strict cost saving measures.

 

The ratings continue to reflect the support that PIEM derives from its parent IHCL, being strategically important and having significant operational integration. IHCL reported operating income of Rs. 5,826 crore in fiscal 2023 as compared to Rs. 3,098 crore in fiscal 2022. It recorded EBITDAR margin of 31.2% in fiscal 2023 against 14.5% in fiscal 2022. The company is net debt negative since fiscal 2022. The turnaround in operating profitability margin was supported by healthy occupancy levels and ARRs of 72% and Rs. 13,736 in fiscal 2023 against 53% and Rs. 9,717 in fiscal 2022 at standalone level. 

 

The ratings continue to reflect the company’s established position in the hospitality industry, geographical diversity in revenue and benefits derived from association with the Taj brand of hotels. The ratings also factor in Piem’s robust financial risk profile because of low debt, adequate liquidity and high financial flexibility arising from a large investment portfolio and its ability to raise funds from its parent, IHCL, and Tata group companies. These strengths are partially offset by the susceptibility of revenue and profitability to cyclicality in the hospitality industry and low return on capital employed (RoCE).

Analytical Approach

CRISIL Ratings has consolidated the business and financial risk profiles of Piem, its wholly owned subsidiary - Piem International HK Ltd (Piem HK) and Piem’s 94% subsidiary - Northern India Hotels Ltd (NIHL). This is because of strong operational linkages, common business and fungibility of funds across the companies. The three companies are collectively referred to as the Piem group.

 

Considering the strategic importance and significant operation integration. CRISIL Ratings has also factored in support from the parent, IHCL. CRISIL Ratings believes Piem will, during any exigency, receive distress support from IHCL for timely servicing of debt, considering its strategic importance to the parent.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established market presence, supported by association with the Taj group and geographical diversity in revenue: The business risk profile is supported by association with the Taj group of hotels, one of India’s strongest brands. Piem owns seven hotels in India with a total of 1,067 rooms. Piem has many popular restaurants in its hotels, which are patronized by the local populace. The company has a healthy revenue mix, split almost equally between room rent and food and beverages (F&B) income. Piem has maintained a healthy market position. Post pandemic, there has been steady improvement in the operating performance. The post-pandemic ORs improved to 73% for the first nine months of fiscal 2024.

 

• Robust financial risk profile and high financial flexibility: The financial risk profile is supported by zero debt, strong net worth and high financial flexibility arising from a large investment portfolio and ability to raise funds from the Tata group. Networth remained strong in fiscal 2023. The investment portfolio comprises investment in quoted equity, with current market value (around Rs 126 crore) higher than the historical book value. Piem also has significant investments in other Taj group companies. These investments are part of its long-term strategy and returns have been moderate in the recent past.

 

Over the years, Piem has funded capex through internal cash accrual and by liquidating investments, without relying on external debt. In fiscal 2021, because of the pandemic, Piem undertook minimal, external debt-funded capex. However, Piem prepaid the debt in fiscal 2022 and had no external debt as on March 31, 2023

 

Weaknesses:

• Exposure to cyclicality in the hospitality industry: The global hotel industry is inherently cyclical with growth dependent on the macroeconomic scenario and supply of rooms. The industry has been under severe stress since fiscal 2012, on account of the slowdown in demand coinciding with huge supply addition. Post fiscal 2016, after plummeting to a decadal low, occupancy and ARR improved with moderation in supply growth and pick-up in demand. As the hotel business usually has high operating leverage, with large share of fixed cost, companies witness sharper decline in operating margin during slowdown. Additionally, the stabilization phase of new hotels or any renovation increases the fixed cost and affects profitability. Moreover, the Covid-19 pandemic led disruptions impacted performance in fiscal 2021 and the first half of fiscal 2022. During a downturn, premium hotels are affected more as their revenue per available room declines more sharply than that for mid-sized or economy hotels, while operating cost remains high. Thus, cash flow from premium properties is more susceptible to downturns. Furthermore, the Indian hotel industry is witnessing intense competition due to the increasing presence of foreign players and expansion by domestic players.

 

• Low RoCE: Piem undertook capex in the past in terms of addition of new property to its portfolio and for few major renovations at existing properties. However, this has not improved in its RoCE. RoCE may improve in the coming years with improving ARR, OR and profitability. However, RoCE also remains low on account of sizeable investments on its books in other IHCL or Tata group companies.

Liquidity: Strong

Piem has adequate liquidity of around Rs 198 crore, which includes cash and equivalent (including investments in Tata group companies) and sizable unutilised bank lines.  Also, Piem’s strong operational and financial linkages with its parent and funding support from IHCL and Tata group companies strengthen its financial flexibility.

Outlook: Stable

Piem will continue to benefit from its established market position, association with the Taj group and robust financial risk profile with high financial flexibility.

Rating Sensitivity factors

Upward factors:

• Operating margin sustaining in the range of 28-32%
• Continued healthy operating performance driven by ARR and resulting in higher operating revenues.
• Improvement in business and financial risk profiles of the parent.

 

Downward factors:

• Sustained, lower-than-expected revenue or profitability leading to low cash accrual
• Weak demand, leading to occupancy below 55% over the medium term
• Higher-than-expected, debt-funded capex leading to deterioration in Piem’s liquidity profile
• Deterioration in the financial profile of the parent or lower strategic importance of Piem to parent.

About the Company

Incorporated in 1968, Piem is promoted by the Tata group and the Nagpal family based in Mumbai. In May 2011, IHCL of the Tata group became the majority shareholder of Piem. The group has seven hotels in India. As a part of the rebranding strategy of its parent, three hotels, at Mumbai, Pune, and Agra, operate under the IHCL-SeleQtions brand, and four hotels at Bengaluru, Lucknow, Nashik and Amritsar, operate under the Taj brand.

 

NIHL owns a hotel at Agra and receives fixed lease rental and reimbursement for operational expenses from Piem. Piem HK holds 35.38% equity in St James Court Hotels Ltd, UK, and receives a share of the operating fee of the hotel assigned to it. Piem HK has a wholly owned subsidiary, BAHC5 Pte Ltd (BAHC5, incorporated in Singapore), which was acquired as a pass-through investment. It is for sale and may be delinked from the group.

About the Group

Incorporated in 1903, IHCL is promoted by Tata Sons Pvt Limited. It has operations spanning over 120 years and operates the largest chain of hotels in South Asia. IHCL has 198 operational hotels with a room inventory of 23,168 rooms as on December 31, 2023.

 

IHCL has presence across luxury, upscale, premium and mid-scale segments through its various brands, i.e., Taj Hotels Resorts and Palaces, Vivanta, SeleQtions and Ginger, respectively. The group also has presence in air catering, spas, wildlife lodges and service apartments.

Any other information: Not Applicable