Hospitality sector: rally on, restrictions gone
Shrugging off the lull of pandemic times, India’s hospitality industry is warming up for a rocking summer holiday season. The end of international travel restrictions, pent-up demand for leisure travel and resumption of work-from-office bode well for the India’s hospitality sector.
No wonder stock markets are excited about hospitality stocks nowadays. Many of them have rallied 14%-33% in the past 5 months. But does that mean all the potential positives are already factored into prices? Perhaps not yet.
Are you wondering which hotel stocks to buy?
Ventura Securities’ technical expert recently discussed two hospitality stocks—Indian Hotels and Lemon Tree Hotels—in his video recommendation series, Stock Talk with BKG, on YouTube. He believes both these stocks can rally about 40% from their recommended levels. Click here to watch the complete video.
Note: If you happen to follow the recommendation of our technical expert, please pay attention to crucial price levels he’s referred to in the video
The story in detail…
In an interview given to a famous business channel, the MD and Chairman of Lemon Tree Hotels recently made some bullish comments. He sounded positive on the sector’s long term growth prospects and thought India’s hospitality sector is in a multi-year upcycle which may last for at least 3-4 years. The last such cycle was experienced between 2003 and 2008.
According to him, in the absence of capacity additions over the last few years, demand-supply equilibrium is clearly tilted in favour of hotels. In plain English it means, not only are the occupancies at existing properties likely to be high, but the room rates may also firm up in future.
Well, going by technical and fundamental cues, it looks like the upcycles in the hospitality industry have a lot to do with the underlying economic growth trajectory.
As far as India’s hospitality sector is concerned, demand trends appear strong at this juncture.
RevPAR (Revenue Per Available Room), which factors in the average daily room rate and the occupancy rate, is one of the most crucial performance measurement metrics for hotel companies. Occupancy and average daily rates depend on the luxury quotient of the properties, trends in business and leisure travel, seasonality, composition of target market and so on.
For instance, Chalet Hotels has a presence in four cities—Mumbai, Pune, Hyderabad and Bengaluru. It has 2,554 keys—an industry term for rooms. It had the average occupancy of 60% in Q3FY22 and its RevPAR was ~Rs 3035.
Lemon Tree Hotels, on the other hand, operates in 54 cities and has 8,489 rooms; at 58% occupancy in Q3FY22, its RevPAR was Rs 2,246.
In the case of EIH, the RevPAR improved 64% Quarter-on-Quarter (Q-o-Q) in Q3FY22 to Rs 7,186. Indian Hotels reported a RevPAR of Rs 5,067 in Q3FY22 at the enterprise level.
The Indian hospitality sector had the RevPAR of Rs 3,010 in Q3FY22 vs 3,804 in Q3FY19 (pre-covid). Occupancies recovered nearly 87% as compared to pre-covid levels.
In Q4FY22, the hotels industry is expected to do even better, going by the commentary of industry honchos.
Hotels and their brands
Factors to watch out for while investing a hotel stock:
- The segment it targets—i.e. Luxury/premium, mid-premium, budget etc.
- Geographies and markets it has a presence in—which is a crucial factor for occupancies
- Business model—asset light vs asset heavy—owned/leased/managed properties etc.
- Revenue contribution from allied services, if any
- Other differentiating factors, if any
Most listed hotel companies cater to premium and mid-premium categories and are professionally run.
Hotels carrying lean cost structures are likely to have an edge over those that have relatively rigid cost models. Should inflation keep rising, competition in the mid-premium and budget segments might intensify.
FMCG companies have already started witnessing down-trading—a jargon to suggest that consumers are shifting to cheaper alternatives. This may seem like an apple-to-orange comparison but given that households typically have limited resources, it’s imperative to take into account the affordability angle while evaluating hotel stocks.
The luxury/premium market is relatively price-inelastic. After all, once you taste five-star treatment, you don’t mind paying a premium for the same experience. However, in an inflationary scenario, running a chain of hotels offers better economies of scale than running a standalone hotel.
Besides, you shouldn’t ignore a peculiar distinguishing factor every company has and progress it makes on that front. For example, EIH has an airline catering business. Won’t that flourish should the airline industry experience a strong growth momentum?
Similarly, ~13% of Chalet Hotel’s revenue comes from rentals/annuities. The company has some high-value projects under development which includes a commercial tower at Renaissance Complex in Mumbai, and a commercial tower in the Marriott Complex in Bengaluru.
Indian Hotels has a portfolio of 19, 920 rooms, of which nearly 1/3rd are on contract management from which it earns a management fee—something that you shouldn’t ignore.
Is the hotel industry really in a multi-year upcycle or will it resume a normalized growth pattern after experiencing some pent-up demand? Well, we don’t know at this juncture. That said, the worst seems to be behind us and the learnings of the pandemic time have been invaluable to professional managements.
Keep an eye on the stock prices and key performance metrics of listed hotel companies.
Many of you might be worried about rising stock prices despite hotel companies still making losses. Well, there are two reasons—contact-based services industries such as hospitality suffered during the second wave, and two, they usually have huge depreciation claims, which are just accounting adjustments, without any actual outgo of cash.
In one of our blogs earlier this month, we explained why you should consider cash earnings for calculating earnings multiples. This concept is extremely relevant in the case of hotels, given that they have sizable depreciation claims on their profit and loss account.
Read the full article: No voting, no betting what matters in the stock market is only weighing!
You may also like to read: Can fast-food companies make you a quick buck?
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