Hotel stocks surge over 50% as industry checks in to growth phase with strong fundamentals

Leaner operating costs, increase in occupancy levels and average room rate reflect the strong uptick in the stock prices of Indian Hotels Company, EIH Ltd and Lemon Tree Hotels

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A 50-percent spike in the share price of listed entities and robust fundamentals stand evidence for the fact that the hospitality sector in India has stayed the course and revived firmly after being battered by the pandemic.

The Indian hotel industry was one of the biggest sufferers of the travel related restrictions imposed during the pandemic. With zero or minimal occupancy, the industry was forced rationalise its cost structure, become leaner in terms of costs, bring in more efficiencies, and get future ready.

Revenge tourism, as the post-Covid spike in travel was referred to, has resulted in a pickup in leisure travel, while business and international travel have accelerated with the full opening up of the economy and lifting of all restrictions.

The results are now visible in improved performance of the companies in terms of operating costs and outlook for the sector. This is reflected in the strong uptick in the stock prices of listed players like Indian Hotels Company, EIH Ltd and Lemon Tree Hotels. While the EIH Ltd shares have surged nearly 57 percent from its June 2021 lows, the shares of Indian Hotels have gained around 46 percent those of Lemon Tree Hotels 30 percent over last year.

“FY23 began on a strong note for the hotel sector in terms of growth and margin expansion,” said a report from ICICI Direct Research. “With the full re-opening, corporate demand and MICE (meeting, incentive travel, conferences and exhibitions) segment also joined the growth bandwagon in Q1FY23, while leisure continued to perform well.”

This, in turn, helped the hotel players to raise room tariffs without disturbing the demand. According to a report from global research firm Jefferies, based on a survey conducted by hospitality consulting firm Hotelivate, the demand growth is expected to outpace supply in the near to medium term.

It forecasts that industry occupancy can shoot past 68 percent in FY23 and hover at 70 percent in the next financial year, which will jack up the rates. But the capacity addition is likely to record a mid-to-single-digit average growth rate in supply through five years.

Shift in strategy

In the first quarter of FY23, the average room rate (ARR) was reported to be higher by 20-25 percent, compared to the pre-Covid level, which has led to a sharp revenue growth of over 24 percent.

“The change in strategy from occupancy-led growth during pre-Covid era to ARR-led growth was clearly visible in the current quarter,” said the ICICI Direct report. “We expect ‘Occupancy + ARR-led’ growth during H2FY23 that would also support further margin expansion.”

Hotel occupancy rebounded sharply, beating the pre-Covid levels, in the first quarter, and the industry saw one of the strongest first quarters in many years, as reported by most companies in the space. July and August 2022 registered their best ever performances for several markets and the bookings for the coming months are strong across markets.

“Leisure locations continue to outperform urban markets; however, city hotels have also seen an upswing in demand. Return of international travel will further benefit the industry in months ahead,” said the Jefferies report.

It forecasts that FY23 will achieve more than 68 percent occupancy – revised from an original estimate of 64.9 percent – on the back of 50 percent occupancy in FY22. “Nationwide ARR may be closer to Rs 5,700 in FY23 (a growth of 15 percent YoY) while for FY24 occupancy is expected to be close to 70 percent at an ARR of ~Rs 6,000 (higher 5 percent YoY),” it said.

Top picks

ICICI Direct has Indian Hotels, EIH, Lemon Tree Hotels and Easy Trip Planners as its top picks from the sector while Jefferies, too, has Indian Hotels as its top pick.

Tata Group-controlled Indian Hotels has a large presence in luxury and mid-scale hotel segment across India and international destinations. “Expect revenue CAGR of 40.9 percent during FY22-24, while margins are seen at over 32 percent in FY24, which has potential to further expand by 100 bps thereafter,” the ICICI Direct report said. The brokerage has a ‘buy’ rating with a target price of Rs 365 per share.

Premium luxury player EIH Ltd has 33 properties and a strong presence in key gateway cities like Delhi and Mumbai. It will now benefit from a spike in foreign tourist arrivals. “Expect business to recover to pre-Covid levels with EBITDA surpassing pre-Covid levels in FY23 and margins reaching close to 28 percent by FY24,” ICICI Direct said.

Given the company’s strong balance sheet and strategic premium room portfolio, ICICI remains positive on the stock and has set a revised target price of Rs 240 per share.

Lemon Tree Hotels, which is the largest hotel chain in the mid-priced segment in India and operates 8,489 rooms in 87 hotels across 54 destinations within and outside the country, is on course to expand to 10,462 rooms in 105 hotels across 64 destinations by FY24.

“The company’s large asset base, strategic partnership and financial flexibility would continue to support its liquidity profile if further need arises,” ICICI Direct said, retaining the ‘buy’ rating on the stock.

EaseMyTrip.com owner Easy Trip Planners is the fastest growing and most profitable company among the online travel portals in India. ICICI Direct expects its GBR (gross booking revenue) to log in 39 percent CAGR during FY22-24.

Its Lean cost model and no-convenience-fee strategy remain key pillars supporting such rapid and profitable growth while its low cost business model and healthy balance sheet provide confidence to the investors. “Considering strong growth potential of this technology platform in travel, we maintain our ‘buy’ recommendation with a target price of Rs 505 per share,” the brokerage said.

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