Time to check in hotel stocks; Indian Hotel, Lemon Tree could give 26-30% in 1 year; here’s why

The hotel sector is poised for robust growth in the coming quarters on the back of a strong recovery in the Leisure segment, improving traction in corporate travel, resumption in international travel, and an improvement in MICE (meetings, incentives, conferences, and exhibitions) activity.

The hotel industry witnessed a demand revival in leisure and corporate travel, pushing up occupancies and leading to higher average room rate (ARR).

Players can command better ARR from pre-Covid levels, with travel making a strong comeback. Industrywide occupancies have breached 60% for the first time in March ’22 since the onset of the pandemic.

Corporate demand touched pre-Covid levels and overheads for the same have reduced across the industry. The demand v/s supply gap will intensify over the next five years, resulting in better realizations.

Across players, Revenue per available room (RevPAR) grew YoY due to better occupancy, with ARR accounting for a pickup in travel.

As per Hospitality Valuation Services (HVS) ANAROCK, pan India occupancies touched the 65% mark in Apr’22 for the first time since the onset of the pandemic.

ARR has improved significantly in recent months - up 4% from Apr’19 levels to INR5,850 in Apr’22. This led to RevPAR rising 5% to INR3,804 from Apr’19 levels.

Mumbai remained the market leader, with record-high occupancies of over 80%, owing to IPL and large-ticket conferences. Currently, corporate demand touched pre-pandemic levels. Generally, corporate demand is always higher in the winter season than in summer.

Aggregate revenue for the hospitality basket – IH, CHALET, LEMONTRE, and EIH –rose 41% YoY in 4QFY22. On an aggregate basis, EBITDA rose 2.7x YoY. Adjusted net profit of the Hospitality basket stood at INR162m in 4Q v/s a loss of INR1,838m in 4QFY21.

Like FY22, we expect the strong recovery to sustain in FY23/FY24 as well, based on: a) improved occupancies, driven by business travel as well as the leisure segment; b) cost rationalization efforts and c) an increase in F&B income, with the resumption of banquets and conferences.

Here are 2 stock picks we have from the Hotel sector. LTP as of 10 June| Time Horizon 12 months

Indian Hotels: LTP: Rs 220|Target: Rs 278| Upside 26%
Indian Hotel's asset-light model as well as new/reimagined revenue-generating avenues, with higher EBITDA margin, bodes well for RoCE expansion.

Like FY22, we anticipate a strong recovery in FY23 and FY24 on: a) improvement in ARR once the economic activity normalizes; b) improved occupancies, led by business travel as well as the Leisure segment; c) cost rationalization efforts; d) an increase in F&B income as banqueting/conferences resume, and e) higher income from management contracts.

The management is aggressively expanding its Ginger portfolio. The management has guided double-digit openings of the Ginger brand in FY23.

Lemon Tree Hotels: Buy| LTP Rs 65.70| Target Rs 85| Upside 30%
With improving traction in corporate travels, resumption in international travels, and improving MICE activity, Lemon Tree is expected to witness strong growth as it garners ~86% of its business from the business hotels.

The management expects to grow revenue by around 100% in FY23 with net EBIDTA margins of at least 50%.

(The author is Head – Retail Research, Motilal Oswal Financial Services Limited)

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)