Hotel stocks set to simmer as room rates shoot up on surging demand


Feb 23, 23 | by: Kimberly Paes

Ever since India opened its doors after the lifting of pandemic-induced restrictions, the travel and tourism sector has bounced back. Occupancy levels at hotels are inching back to pre-pandemic levels and average room rates are trending higher.

Analysts said hotel stocks could gain further, after the re-open rally that played out in 2021 and 2022.

“Major events such as G20 and Cricket World Cup in 2023 are expected to further boost demand and contribute to higher RevPar (revenue per available room), with some leading hotel players expected to grow operating profits at 20 percent CAGR over FY23-25e leading to a robust outlook for the industry,” said Kimberly Paes, AVP - research at Research & Ranking.

The CWC will be hosted by India during October and November. India took over the presidency of the G20 in December. The 18th G20 Heads of State and Government Summit will take place on September 9-10 in New Delhi, after a series of meetings throughout the year among ministers, senior officials, and civil societies.

Demand outlook

According to HDFC Securities, apart from G20 and CWC, urbanisation and an online push are key triggers for the sector. India’s urban population is expected to reach 38 percent of the total by 2036 from 27 percent in 2021, which can be a major demand driver.

Online travel agents are seeing increased traction, with 68 percent of travel and tourism bookings made online in FY22. Make My Trip recorded a 150 percent increase in hotel bookings in FY22.

Demand for hotel rooms is outpacing supply, which is unlikely to catch up for the next 2-3 years, according to HDFC Securities. Demand is expected to increase 10-12 percent compared with supply growing at 3-5 percent, said Paes. That’s because not too many hotels have gone into the development phase over the past three years.

Budget Push 2023

One of the key highlights of Budget 2023 was the emphasis on domestic travel promotion through the selection of 50 destinations to improve the tourist experience.

“There is large potential to be tapped in tourism. The sector holds huge opportunity for jobs and entrepreneurship for youth in particular. Promotion of tourism will be taken on mission mode with the active participation of states, the convergence of government programme and public-private partnership," finance minister Nirmala Sitharaman said in her budget speech on February 1.

This has come as a further impetus for hotel stocks, analysts said.

Cost optimisation

The lockdowns came as a huge shock for the travel sector, which had to cut costs to protect margins with initiatives such as inducting multitasking workforces and lowering overhead expenses.

“The industry has optimised staff-to-room ratio, which is now lower by 15-20 percent versus pre-pandemic levels,” said Paes.

According to HDFC Securities, shifting focus to asset-light management contracts and repayment of debt through fundraising has helped make the balance sheets of Indian Hotels Company and Lemon Tree Hotels leaner.

Stocks to watch

Indian Hotels and Lemon Tree Hotels are the top picks in the sector, given their brand loyalty, robust pipeline, strong managements and improving debt-to-equity ratio. According to a Bloomberg consensus, IHCL has 15 buy ratings, 1 hold and 1 sell call. The target price on the stock is Rs 377, indicating a 25 percent upside from the current level.

LTH has 13 buy ratings, zero holds and 1 sell call, with a target price of Rs 106.

Indian Hotels’ occupancy came in at 72.1 percent in Q3 against pre-COVID level of 73.3 percent, while the average room rate jumped 25 percent to Rs 15,456.

Lemon Tree’s occupancy came in at 67.6 percent (370 basis points lower than pre-COVID level) while the average room rate jumped 24 percent to Rs 5,738.

Analysts are also optimistic about Mahindra Holidays and Resorts even after it posted a loss in Q3,. It has 4 buy calls, 1 hold and zero sell calls. The management said it is adding properties to keep pace with demand.

Oberoi Group’s EIH, which posted a three-fold rise in consolidated net profit for the December quarter, has 3 buy and nil hold or sell calls. The consensus target on the stock is Rs 220, which is a 40 percent upside from the current price.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.

Chat with us