Motilal Oswal bullish on these 2 hotel stocks; expects 22-45% rally

Aggregate revenue for the hospitality sector increased 5 percent YoY in Q3FY20, led by Lemon Tree (up 39 percent YoY) and Chalet Hotels (up 12 percent YoY). However, EIH's performance (down 4 percent YoY) was dragged by loss of flight catering business from Jet Airways.

Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation for Ind-AS 116) for the sector was up 12 percent YoY, driven by Lemon Tree (up 48 percent), Chalet (up 25 percent) and Indian Hotels (up 13 percent). EIH disappointed on this front too with a decline of 8 percent YoY.

Indian Hotels' consolidated revenue grew 4 percent YoY, while adjusted EBITDA was up 13 percent YoY, mainly driven by its standalone business (revenue/adjusted EBITDA up 7/13 percent YoY). Subsidiary revenue was down 1 percent YoY, but EBITDA increased 13 percent YoY led by cost-rationalization measures.

Lemon Tree Hotels delivered robust 39 percent YoY growth in revenue, mainly due to inventory addition (absent in the base quarter) and 7.5 percent revenue per available room (RevPAR) growth on a same-hotel basis. Its adjusted EBITDA was up 48 percent YoY, but on a same-hotel basis, revenue/EBITDA grew 6/19 percent YoY.

"Industry demand increased 4.7 percent YoY and supply was up 2.5 percent YoY in the quarter, indicating favourable a demand-supply scenario for the second straight quarter post elections," said Motilal Oswal.

"After dipping in Q1FY20 owing to elections, industry RevPAR growth appears to have come back on track at 5.5 percent YoY in Q3FY20 (up 2.5 percent in Q2FY20)," it added.

Indian Hotels' RevPAR grew 5.6 percent YoY to Rs 7,224 in Q3FY20; its network hotels delivered higher growth of 7-10 percent in key markets of Mumbai, New Delhi, Chennai, Hyderabad and Bengaluru. Domestic hotel network room/F&B revenue grew 7/11 percent YoY.

Lemon Tree Hotels' RevPAR was up 1.9 percent YoY at Rs 3,311 in Q3. On a same-hotel basis, RevPAR was up 7.5 percent YoY (with ARR up 5.4 percent and occupancy up 148bp to 76.2 percent).

These companies in their conference call commonly said GST rate cut has boosted demand from retail customers, driving ARR growth for the quarter. Mix of retail customers has been on an uptrend over the last few years.

Hence Motilal Oswal feels the outlook for FY21 appears encouraging for free individual traveller (FIT) led by the GST rate cut and the likely recovery in the economy. "This should translate into ARR growth."

Indian Hotels said it has signed 24 management contract hotels with inventory of over 2,800 keys in FY20 – an industry-leading figure. The company has repositioned 20 percent of the Ginger portfolio as lean-luxe hotels which have a premium of 26 percent in ARR. It will have around 370-room hotel under the Ginger brand in Santacruz, Mumbai, and will apply for Certificate of Commencement.

"Demand from large corporates and SMEs has been impacted, but the same is more than compensated by the retail segment. Retail share was up to 39 percent from 36 percent in Q3FY19. Cancellation trend was evident due to the coronavirus outbreak, but the same was offset by higher domestic demand," said Lemon Tree.

The company has taken a price hike of 3-4 percent for large corporates, 5-6 percent for SMEs and 8-10 percent for retail.

Indian Hotels Company was quoting at Rs 131.40, up Rs 0.60, or 0.46 percent and Lemon Tree Hotels was at Rs 59.70, up Rs 0.70, or 1.19 percent on the BSE at 1125 hours IST.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.