JM Financial initiates coverage on hotel sector with a positive outlook

Majority of hospitality brands are prioritising prudent portfolio expansion and established asset-light development pipelines.

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Brokerage firm JM Financial has initiated coverage on hotel sector with a positive outlook. The brokerage firm has initiated coverage on Indian Hotels, Lemon Tree Hotels with a buy rating and a target price of Rs 450 and Rs 115 a share, respectively. It resumes coverage on Chalet Hotels with a buy ratings with a target price of Rs 620 a share.

Rising demand, fueled by domestic interest, revived inbound tourism, and upcoming major events like the G-20 summit and the ICC Cricket World Cup, is contributing to this trend, the report said. Additionally, the room supply is expected to align with demand, benefiting existing industry players, the report said.

"As per various industry estimates, room supply growth is expected to be 5-6% for FY23-FY27E(estimated); alternatively, hotel room demand is expected to grow at 8-10 percent. We build in higher occupancy levels and 8-10% ARR growth, arriving at an estimated Revenue/EBITDA CAGR for our coverage universe at 12.5 percent-21.2 percent/15.9 percent-30.9 percent over FY23-26E", JM Financial said in a note to investors.

Strategic approach

Majority of hospitality brands, including those within JM Financial coverage like Indian Hotels and Lemon Tree, are expanding in a measured manner and have  established asset-light development pipelines. This strategic approach has resulted in streamlined balance sheets, offering room for further growth, the report said.

Indian Hotels has a 9,900-room pipeline, with 74 percent utilising the asset-light approach. Lemon Tree's pipeline consists of 3,285 rooms, of which 78 percent are being pursued through the managed or franchised model. JM Financial see this trend is anticipated to persist in the near to medium term, with industry portfolios gravitating towards a balanced mix of owned/leased properties and asset-light arrangements, often at a 50:50 ratio.

As properties approach optimal occupancy rates, the synergy between operating leverage and cost optimisation measures implemented during the Covid-19 period is expected to enhance profitability, resulting in significant free cash flows (FCF), JM Financial said.

" We expect Net Debt/EBITDA for our coverage universe to decline from 1.2x in FY23 to net cash positive in FY26E. Valuations are at 18.0–22.0x Sep’25 EV/EBITDA and reasonable given the favourable demand outlook and other tailwinds in the sector. ", the report said.

" Some alternative routes for monetisation like REIT listing of the hotel Prop Cos are also being evaluated. We expect companies to deploy the liquidity generated in further growth. With adequate headroom to raise and deploy more capital, we should expect opportunistic buyouts (both brownfield expansion and portfolio acquisitions) along with greenfield expansion across geographies and business segments", the report added