Indian Hotels Q2 FY26: Seasonal Softness Weighs on Profitability Despite Robust Revenue Growth

The quarter's performance underscores the pronounced seasonality inherent in India's hospitality sector, with the April-June period traditionally representing the lean season due to summer heat and monsoon onset. Whilst revenue growth remained encouraging at 31.66% year-on-year, reaching ₹2,041.08 crores, the sequential 15.84% revenue decline and corresponding margin compression highlight the operational challenges during off-peak months.

The company's half-yearly performance for H1 FY26 presents a more balanced picture, with net sales of ₹4,081.97 crores representing 20.90% growth over the corresponding period last year. However, the quarterly volatility raises questions about the sustainability of the premium valuations currently commanded by the stock, which trades at a price-to-earnings ratio of 62.12 times trailing twelve-month earnings.

Financial Performance: Margin Compression Overshadows Top-Line Gains

Indian Hotels' Q2 FY26 revenue of ₹2,041.08 crores, whilst demonstrating healthy 31.66% year-on-year growth, marked a 15.84% sequential decline from the March quarter's ₹2,425.14 crores. This seasonal pattern is characteristic of the hospitality industry, where the summer months witness reduced travel and occupancy rates. The company's operating profit before depreciation, interest, and tax (excluding other income) stood at ₹576.03 crores, translating to an operating margin of 28.22%, down 707 basis points sequentially but marginally lower by 78 basis points year-on-year.

The profit after tax margin contracted to 15.65% in Q2 FY26 from 22.27% in the preceding quarter, reflecting the operational leverage working in reverse during the lean season. Employee costs remained relatively stable at ₹597.63 crores, representing 29.27% of revenues compared to 24.26% in Q1 FY26, highlighting the fixed-cost nature of hospitality operations. Depreciation charges of ₹142.75 crores and interest expenses of ₹54.55 crores remained broadly consistent with previous quarters, indicating stable capital structure.

The tax expense of ₹120.40 crores represented an effective tax rate of 27.37%, marginally higher than the 24.99% recorded in Q1 FY26. Other income contributed ₹61.09 crores, remaining stable compared to ₹61.64 crores in the previous quarter, indicating consistent treasury management and non-operating income streams.

Operational Challenges: Return Ratios Signal Efficiency Concerns

Whilst Indian Hotels has demonstrated impressive revenue growth momentum, the company's return metrics paint a more sobering picture of operational efficiency. The average return on equity (ROE) of 8.14% over recent periods, though improving to 14.84% in the latest fiscal year, remains modest relative to the premium valuations commanded by the stock. Similarly, the average return on capital employed (ROCE) of 8.21%, despite rising to 20.16% most recently, suggests that the company's capital-intensive business model requires substantial investment to generate returns.

The balance sheet reveals a significantly strengthened financial position, with shareholder funds expanding to ₹11,160.71 crores as of March 2025 from ₹9,456.65 crores a year earlier. Long-term debt has been reduced dramatically to ₹203.15 crores from ₹784.79 crores in March 2023, demonstrating prudent deleveraging. The company's debt-to-EBITDA ratio averaging 2.90 times and minimal net debt-to-equity position underscore improved financial flexibility.

Fixed assets stood at ₹8,371.64 crores as of March 2025, representing 62% of total assets, reflecting the asset-heavy nature of the hotel business. Current assets of ₹4,169.94 crores provided adequate liquidity, though cash balances declined to ₹256 crores in March 2025 from ₹479 crores a year earlier, primarily due to capital expenditure programmes and debt reduction initiatives.

The company's cash flow statement reveals robust operating cash generation of ₹2,194 crores in FY25, up from ₹1,935 crores in FY24, demonstrating the underlying strength of the business model. However, investing cash outflows of ₹1,869 crores reflect ongoing expansion and renovation activities across the portfolio, whilst financing outflows of ₹547 crores were primarily directed towards debt reduction.

Industry Context: Premium Positioning in Recovering Hospitality Sector

Indian Hotels operates in India's organised hospitality sector, which has witnessed remarkable recovery following the pandemic-induced disruption. The company's portfolio of 235 hotels with 28,107 rooms, including 85 Ginger brand properties with 3,763 rooms, positions it as the largest player in the domestic hotels and resorts segment. The Taj brand commands premium positioning in the luxury segment, whilst Ginger caters to the budget-conscious business traveller segment.

The company's five-year sales growth of 19.73% and EBIT growth of 80.12% reflect the sector's recovery trajectory and Indian Hotels' ability to capitalise on improving demand dynamics. The average EBIT-to-interest coverage of 5.12 times indicates comfortable debt servicing capability, though this metric has improved significantly in recent periods as profitability has expanded.

The company's institutional holdings of 45.69%, including 26.14% foreign institutional investor (FII) ownership and 12.51% mutual fund holdings, reflect sustained confidence from sophisticated investors. However, the sequential decline in mutual fund holdings from 14.04% in March 2025 to 12.51% in September 2025 suggests some profit-booking at elevated valuations.

Peer Comparison: Premium Valuation Relative to Competitors

Indian Hotels' valuation metrics reveal a significant premium relative to peer group companies in the hotels and resorts sector. With a price-to-earnings ratio of 62.12 times trailing earnings, the stock trades below the peer average of approximately 123 times, though this comparison is skewed by loss-making peers with negative or extremely high P/E ratios. More meaningfully, the company's price-to-book value of 9.49 times substantially exceeds the peer average of roughly 3.3 times, reflecting market expectations of superior future returns.

Indian Hotels' ROE of 8.14% positions it favourably within the peer group, exceeding most competitors except EIH's 8.77%. The company's debt-free status (debt-to-equity of 0.00) provides a significant competitive advantage, offering financial flexibility for growth initiatives without the burden of interest obligations that constrain some peers. However, the elevated P/BV multiple of 9.49 times suggests that much of the company's future growth potential is already reflected in the current valuation.

The company's market capitalisation of ₹106,131 crores establishes it as the largest player in the organised hospitality sector, providing scale advantages in brand recognition, procurement, and operational efficiency. This market leadership position supports the valuation premium, though investors must assess whether the current multiples adequately compensate for execution risks and cyclical volatility.

Valuation Analysis: Premium Multiples Reflect Growth Expectations

Indian Hotels' current valuation metrics position the stock at the expensive end of the spectrum across multiple parameters. The trailing P/E ratio of 62.12 times represents a substantial premium to historical averages and reflects market expectations of sustained earnings growth. The enterprise value-to-EBITDA multiple of 36.56 times and EV-to-EBIT of 45.01 times similarly indicate elevated valuations relative to both historical norms and peer group averages.

The price-to-book value of 9.49 times suggests that investors are valuing the company at nearly ten times its net asset value, implying confidence in the management's ability to generate superior returns on the existing asset base. However, this premium valuation leaves limited margin for disappointment, with the stock having declined 16.82% from its 52-week high of ₹894.15, though remaining 14.19% above the 52-week low of ₹651.35.

The PEG ratio of 1.90 suggests that the stock is trading at nearly twice its earnings growth rate, traditionally considered expensive territory. The absence of dividend yield, with the latest dividend of ₹1.75 per share representing a modest 19.78% payout ratio, indicates that the company is prioritising capital allocation towards growth investments rather than shareholder distributions.

The valuation assessment of "Very Expensive" reflects the substantial premium embedded in the current market price. Whilst the company's quality metrics and market leadership position justify some premium, the current multiples appear to discount significant future growth, leaving limited room for valuation expansion. Fair value estimates would need to factor in sustained margin improvement and consistent execution to justify current levels.

Shareholding Pattern: Institutional Confidence with Recent Trimming

The shareholding pattern of Indian Hotels reveals a stable promoter base with the Tata Group entities collectively holding 38.12% through various investment vehicles, unchanged over the past five quarters. This unwavering promoter commitment provides governance comfort and strategic stability, crucial for a capital-intensive business requiring long-term investment horizons.

Foreign institutional investors maintained substantial exposure at 26.14% as of September 2025, though this represents a sequential decline of 104 basis points from 27.18% in June 2025. The FII holding has fluctuated within a narrow band between 26% and 28% over the past year, suggesting tactical repositioning rather than fundamental concerns about the investment thesis.

More notably, mutual fund holdings have declined from a peak of 14.04% in March 2025 to 12.51% in September 2025, indicating profit-booking by domestic institutional investors following the stock's strong performance. This 153 basis point reduction over two quarters suggests that some fund managers are reassessing the risk-reward proposition at current valuations. Conversely, insurance companies and other domestic institutional investors have marginally increased their stakes, with insurance holdings rising from 2.91% to 3.39% and other DII holdings expanding from 2.81% to 3.64% between June and September 2025.

The absence of promoter pledging and high institutional participation of 45.69% collectively underscore the quality of the corporate governance framework and investor confidence in the management's capital allocation decisions. However, the recent trimming by mutual funds warrants attention as a potential signal of valuation concerns amongst sophisticated domestic investors.

Stock Performance: Impressive Long-Term Gains Offset by Recent Weakness

Indian Hotels' stock performance presents a tale of two timeframes: exceptional long-term wealth creation tempered by recent underperformance. Over the past five years, the stock has delivered remarkable returns of 670.73%, dramatically outperforming the Sensex's 105.48% gain by a substantial alpha of 565.25 percentage points. This extraordinary performance reflects the sector's recovery from pandemic lows and the company's successful execution of its growth strategy.

However, the near-term picture reveals concerning momentum loss. Year-to-date returns of -15.14% significantly underperform the Sensex's 6.81% gain, resulting in negative alpha of 21.95 percentage points. The six-month return of -7.06% against the Sensex's 3.67% gain similarly indicates deteriorating relative strength. This recent underperformance coincides with the stock's mildly bearish technical trend, which emerged on September 29, 2025.

The stock's one-year return of 11.59% modestly outperforms the Sensex's 5.94%, delivering positive alpha of 5.65 percentage points, though this represents a significant deceleration from the multi-year outperformance trajectory. The risk-adjusted return of 0.38 over one year, compared to the Sensex's 0.48, suggests that the stock's 30.52% volatility has not been adequately compensated by returns in recent periods.

Technical indicators paint a predominantly negative picture, with MACD showing bearish signals on both weekly and monthly timeframes, moving averages indicating bearish trends, and the stock trading below all key moving averages from 5-day through 200-day periods. The immediate support level rests at the 52-week low of ₹651.35, whilst resistance is encountered at the 20-day moving average of ₹737.00, with stronger resistance zones at the 100-day and 200-day moving averages of ₹753.81 and ₹765.31 respectively.

Investment Thesis: Quality Company at Stretched Valuations

Indian Hotels' investment proposition rests on four key pillars: valuation, quality, financial trends, and technical positioning. The company's quality grade of "Good" reflects its market leadership, absence of promoter pledging, healthy institutional participation, and long-term growth trajectory. The five-year sales CAGR of 19.73% and EBIT growth of 80.12% demonstrate the underlying business strength and sector recovery momentum.

However, the valuation assessment of "Very Expensive" significantly constrains the investment case. Trading at 62.12 times trailing earnings, 9.49 times book value, and 36.56 times EBITDA, the stock embeds substantial growth expectations with limited margin of safety. The PEG ratio of 1.90 suggests that investors are paying nearly twice the earnings growth rate, traditionally considered expensive territory.

The financial trend assessment of "Flat" for the most recent quarter reflects the seasonal weakness inherent in Q2 results, with quarterly profit declining 33.1% versus the previous four-quarter average and sales falling 7.5% sequentially. Whilst the half-yearly performance remains robust with 20.90% growth, the quarterly volatility and margin compression raise questions about near-term earnings momentum.

Technical indicators uniformly point to weakness, with the stock in a mildly bearish trend since late September 2025, trading below all key moving averages, and exhibiting bearish signals across MACD, moving averages, and KST indicators. This technical deterioration, combined with elevated valuations and flat near-term financial trends, creates a challenging risk-reward proposition for fresh investors.

Key Strengths & Risk Factors

Outlook: What to Watch