Vasantika Hotels has 3,000 rooms at an average rate of Rs 7,800 and 64% occupancy. If occupancy rises to 72% with 70% of the extra revenue reaching EBITDA, how much does EBITDA rise from a Rs 190 crore base, and what does that tell you about pitching the stock?

EBITDA rises about Rs 48 crore, roughly 25%, to about Rs 238 crore, while total revenue grows only 8%. Eight points of occupancy add Rs 68.3 crore of room revenue, and 70% of it reaches profit because the hotel's costs are already paid. The same lever works in reverse, so the pitch rests on whether 72% occupancy is durable.

Count room nights first. Three thousand rooms for 365 nights is 10.95 lakh room nights a year. At 64% occupancy the hotel sells 7.008 lakh of them; at 72% it sells 7.884 lakh. Each extra point of occupancy is about 10.95 thousand room nights, worth Rs 8.54 crore at Rs 7,800 a night. Eight points add Rs 68.3 crore of room revenue, a 12.5% rise. Hotel analysts track the same move as RevPARRevenue per available room: room revenue divided by all rooms available, which is average rate times occupancy., which goes from Rs 4,992 to Rs 5,616.

Think of a cinema showing a film to a half-empty hall. The projector, the staff and the rent cost the same whether 100 or 160 seats are sold, so the extra 60 tickets are almost pure profit. A hotel works the same way: the building, the staff and the maintenance are paid for at 64% occupancy, so the next guest costs only laundry, cleaning, amenities and a booking commission. Management's 70% flow-through means Rs 20.5 crore of cost comes with the extra revenue and Rs 47.8 crore reaches EBITDA.

Measured against total revenue of Rs 850 crore, revenue grows 8.0% and EBITDA 25.2%, a ratio of about 3.1 times. That ratio is operating leverageHow much faster operating profit moves than revenue, because a large share of costs stays fixed as volume changes.. The EBITDA margin climbs from 22.4% to 25.9%. A rough check on paper: about Rs 70 crore of revenue, keep 70%, call it Rs 48 crore on a base of 190, a quarter.

Two things an interviewer wants to hear. First, the quality of the growth: a rise in room rate brings almost no extra cost, so the same revenue from rate would lift EBITDA about 34%. Ask management which lever it is pulling, because rate growth is worth more than occupancy growth rupee for rupee. Second, the lever works in reverse. If a slowdown takes occupancy to 56%, EBITDA falls by about the same Rs 48 crore, a quarter of the profit, on a revenue fall of only 8%.

So the pitch is not that profit will rise 25%; the market may already expect that. The pitch is a view on whether 72% occupancy is the new normal or the top of a cycle, supported by evidence: new room supply in Vasantika's cities, the share of corporate contracts that are signed for the year, and the wedding calendar. A stock with this much operating leverage needs a view on the cycle, not only on the next year.