Hotel Stocks: It’s time to check hotel stocks; Indian Hotel, Lemon Tree could yield 26-30% in 1 year; here’s why

The hospitality sector is poised for robust growth over the next few quarters thanks to a strong recovery in the Leisure segment, improved traction in business travel, a recovery in international travel and improved MICE (meetings, incentives, conferences and exhibitions) activity.

The hospitality industry has seen an upturn in demand for leisure and business travel, which has driven occupancy rates higher and led to higher average room rates (ARR).

Players can command better ARR from pre-Covid levels, with travel making a comeback. Industry-wide occupancy rates exceeded 60% for the first time on March 22 since the start of the pandemic.

Business demand has reached pre-Covid levels and overheads for the same have declined across the industry. The gap between demand and supply will intensify over the next five years, resulting in better achievements.

Among gamers, revenue per available room (RevPAR) increased year-on-year due to better occupancy, with ARR representing a recovery in travel.

According to Hospitality Valuation Services (HVS) ANAROCK, the occupancy rate across India hit the 65% mark on April 22 for the first time since the onset of the pandemic.

ARR has improved significantly in recent months – up 4% from April 2019 levels to INR 5,850 on April 22. This has led to a 5% increase in RevPAR to INR 3,804 from at April 19 levels.

Mumbai remained the market leader, with record occupancy rates of over 80%, thanks to the IPL and big-ticket conferences. Currently, business demand is at pre-pandemic levels. Generally, business demand is always higher in winter than in summer.

Aggregated revenues for the hospitality basket – IH, CHALET, LEMONTRE and

–rose 41% YoY in 4QFY22. On an aggregate basis, EBITDA increased by 2.7x year-on-year. Hospitality basket adjusted net profit was INR 162 million in 4Q compared to a loss of INR 1,838 million in 4QFY21.

Similar to FY22, we expect the strong recovery to also continue in FY23/FY24, based on: a) improving occupancy rates, driven by business travel as well as leisure segment; b) efforts to rationalize costs and c) an increase in F&B revenues, with the resumption of banquets and conventions.

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

Indian hotels: LTP: Rs 220|Target: Rs 278| 26% increase

Indian Hotel’s asset-light model along with new/reinvented revenue-generating avenues, with higher EBITDA margin, bodes well for RoCE expansion.

Similar to FY22, we expect a strong recovery in FY23 and FY24 on: a) improving ARR once economic activity normalizes; b) improved occupancy rates, driven by business travel as well as the Leisure segment; c) cost rationalization efforts; d) increased F&B revenue as banquets/conferences resume, and e) higher revenue from management contracts.

Management is aggressively developing its Ginger portfolio. Management guided double-digit openings of the Ginger brand in FY23.

Lemon Tree Hotels: Buy| LTP Rs 65.70 | Objective Rs 85 | More than 30%

With business travel traction improving, international travel picking up and MICE activity improving, Lemon Tree is expected to see strong growth as it derives approximately 86% of its business from business hotels. .

Management expects revenue growth of around 100% in FY23 with net EBIDTA margins of at least 50%.

(The author is Head – Retail Research,

Limit)


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