If India lifts the 2023 Cricket World Cup trophy, it would be icing on the cake for investors in hotel stocks. After all, the sector was seen as among the potential beneficiaries of this event. Even so, investors have a lot to like.
The hotel sector continued its solid momentum in the September quarter (Q2FY24) and ticked many of the right boxes. The key operating metrics of average room rate (ARR) and revenue per available room (RevPAR) recorded double-digit growth. Based on HVS Anarock data, Motilal Oswal Financial Services derived that the RevPAR of the hotel industry in Q2 grew by 13%. This was led by 15% year-on-year (yoy) growth in ARR to Rs6,767. Occupancy, however, was lower by 120 basis points at around 61% due to a high base, the brokerage firm said. One basis point is one-hundredth of a percentage point.
Here, the premiumization trend played out as companies like The Indian Hotels Co. Ltd (IHCL), Chalet Hotels Ltd and EIH Ltd saw 11-21% yoy growth in ARR. On the other hand, this measure for Lemon Tree Hotels Ltd was 7% in Q2, as its portfolio contains relatively less high quality hotels.
The favorable demand-supply dynamic is expected to continue in Q3. At least that’s what management commentary suggests. IHCL said much of October was robust, and the momentum is likely to continue. However, one-time triggers did not play as expected. Revenue from the G20 summit till September formed only 1% of IHCL’s FY23 corporate revenue. Furthermore, IHCL expects incremental revenue from the cricket world cup to be only 0.5% of FY23 corporate revenue.
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However, foreign travel, which is still below pre-pandemic levels, is expected to accelerate from Q3. In addition, the wedding season, domestic travel and an improvement in corporate travel should keep the occupations of the sector in a good place. Therefore, the marginal trajectory of the sector would benefit from increasing RevPARs in the previous quarters.
The moot question is whether the strength in operating metrics will continue in FY25. It helps that a relatively slower addition of rooms would support pricing power. Over the next five years, hotel supply is expected to grow at a compound annual growth rate of 5-6%, and demand at 8-10%, according to IHCL. It believes that an increase in demand is behind a structural change in consumer behavior.
Further, the premiumization trend is expected to continue. EIH noted that a majority of the supply is likely to come in the non-luxury segment, and this would support prices in the luxury segment. “Given the high base, we expect the hotel industry’s RevPAR to see only mid to high single digit growth in FY25,” said Jinesh Joshi, analyst at Prabhudas Lilladher.
Indeed, shares of IHCL, Lemon Tree and EIH are up 31-35% in 2023 so far, while Chalet’s is up nearly 68%. After this steep rally, valuations for hotel stocks like IHCL are no longer cheap. For the overall hotel sector, Nuvama Research expects growth momentum to remain robust, but not strong enough for significant earnings upgrades. Some analysts are worried that unlike previously predicted, the ICC World Cup, which ended on 19 November, may not have been a big contributor of RevPAR for hotels in cities where cricket matches were played. This could affect the sector’s FY24 revenue estimates.
Apart from sector trends, company-specific factors would also decide the future course of stocks. For example, Lemon Tree and Chalet profit prospects would be helped by new assets or hotels that started operations recently.