Why Nuvama Analysts See This Micro Cap Stock Surging 77%

Shares of Royal Orchid Hotels have slumped around 18% in the last six months, but analysts at Nuvama see the stock making a strong comeback.

The Royal Orchid Analyst: Amit Agarwal-led analyst team at Nuvama maintained its “buy” rating for the stock slashing the price target to ₹498 from ₹549. The revised target indicates a 77% upside from the stock’s last closing price of ₹281.95.

The Royal Orchid Thesis: The brokerage firm in its latest note, highlighted that the hotel chain’s revenue for the September quarter grew by 15% year-over-year to ₹67 crore. As per the firm, the growth was led by healthy additions in room capacity and increased income from food and beverage (F&B) and other services.

The analyst also pointed out that The average room rate (ARR) grew by 7% year on year but declined by 3% QoQ to ₹5,087 (for JLO rooms) in with an occupancy rate of 73%, compared to 75% in the same quarter last year.

EBITDA increased by 1% year on year to ₹15 crore, but the margin contracted by 318 basis points YoY to 23.2%, primarily due to higher fixed costs associated with rapid room additions, analysts added. Sequentially, there was a decline in revenue by 3%, EBITDA by 15%, and profit after tax by 30%, attributed to a seasonal drop in revenue per available room (RevPAR) and increased staff costs.

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The note further said that the company added 692 keys (72 JLO rooms and 620 managed rooms) between April and September, bringing the total inventory to 5,633 (1,238 JLO rooms and 4,395 managed rooms). The brokerage firm expects the company to add another 408 rooms by March 2024.

The brokerage firm acknowledged that while the company faces near-term margin pressures due to higher fixed costs associated with rapid portfolio expansion, it is well positioned to benefit from the favourable industry dynamics, a surge in domestic demand, limited supply additions in the industry, and key global events in H2FY24. The brokerage also annual recurring revenue to continue upwards.

Analysts expect a revenue/EBITDA/profit after tax compound annual growth rate of 29%/18%/27% over FY23–25. The FY25 EBITDA and estimate have been downgraded by 9% and the price target has also been revised to account for near-term margin pressures.

Price Action: Royal Orchid’s share price was up 2.34% to trade at ₹288.55 on Wednesday afternoon.

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