Citing robust demand, improving customer mix and balance-sheet strengthening, HDFC Securities has initiated coverage on Indian Hotels and Lemon Tree Hotels.
It has set a target price of Rs 150 on Indian Hotels, while for Lemon Tree, it has a target of Rs 86 apiece.
The brokerage house believes that occupancies are set to improve, while average room rate (ARR) is set to increase significantly in the next two to three years.
Further, it highlighted that demand is set to outpace supply in the near term as well, which will be the driver for healthy ARR growth over FY19-21. Interestingly, this demand has been not just from large corporates.
“Traditionally, large corporate (50%) has been one of the major demand drivers with strong bargaining powers followed by SMEs (35%) and Individuals (15%) for branded hotels. However, contribution from the millennials has been on the rise,” analysts at the firm wrote in their report.
This, it said, is owing to greater affordability, changing attitudes, improved connectivity and increasing number of short stay vacations.
Additionally, consolidation of inventory among branded asset owners through management contracts (asset light) is also adding to the sentiment. This, it said, improves pricing.
Among key risks to its thesis are:
(a) Increase in competition as the industry revives
(b) Reluctance from hoteliers to raise rates
(c) Downgrading by customers
(d) Higher ARR and tax incidences may divert domestic leisure and MICE (meetings, incentives, conventions and exhibitions) demand overseas. Poor infrastructure may accentuate this as travel numbers are burgeoning, but airport/highway capacities are coming under pressure
On Wednesday, the stock ended at Rs 120.35, up Rs 2.15, or 1.82 percent, while Lemon Tree Hotels was quoting at Rs 71.00, up Rs 1.25, or 1.79 percent, on the BSE.