Short Call: Hotel stocks, Macrotech’s Vertigo, cost of higher rates

Buy on dips, anyone?

One can’t recollect the last time the Nifty fell six days in a row. Global cues hold promise of more pain. US personal consumption expenditure, an inflation indicator, came in higher than expected, causing stocks to fall. But a relief rally for India could be very much on the cards since the Nifty has anyway been out of sync with global markets for a while. Buy on dips, anyone?

No new check-ins

Hotel stocks were the rage till a couple of months back. The story was about revenge travel, rising average room rates(ARRs), demand far exceeding supply, and supply unlikely to go up anytime soon. Some bits of that story still hold water. Room rates remain high—exorbitantly high in many cases—making even the well-heeled wince as they reach out for their wallets. That itself should be reason enough for investors to chase hotel stocks higher. But they have been struggling along with the rest of the market; even strong December quarter earnings have been largely ignored. What then could explain this trend?

Big picture

If you look at the long-term charts of hotel stocks, it is evident that they have not made decent returns for investors, says Hawk Eye. I can’t use his real name because of his contract with a rival publisher. But this is what he has to say: “People are aware that hotels are a cyclical business. They may have given good returns post-Covid, but given their poor track record for creating wealth in the long run, nobody wants to overpay.”

Hawk Eye is bullish on hotel stocks, but feels investors will have to dig in for longer. “Pricey real estate and high construction costs will keep the pace of supply (of new rooms) in check,” he says.

The bear view

Hotel industry veteran and ITC-baiter Manu Rishi Guptha of MRG Capital is less sanguine. “Rates are high, and they may stay that way for a while, but the climb seems to have been arrested,” he says. “Fact is, hotels have outpriced themselves. We have seen this in the past too. The high ARRs seen during the 2007 bull market were not crossed till many years later. GMs (general managers) of hotel chains have presented ambitious plans for the next five years using current ARRs as the base. But the stock prices clearly tell you that the market is factoring in a much slower growth in earnings.”

Realty bites

A similar problem seems to be playing out in the real estate sector as well. Last week, an image of a crowd at the launch of DLF’s luxury project at Gurugram went viral on Twitter. There is no doubt that demand for residential property remains strong in key cities. That begs the question: why aren’t investors rushing to buy stocks of realty firms?  More importantly, why are the stocks sliding.

Till recently, realtors were confident that rising interest rates posed no threat to demand for homes. But the stock prices are telling a different story. Rising rates pose problems for home buyers and also realtors who are known to borrow off-market at rates above what banks charge. And while property rates are sky high for now, the market appears to be betting that earnings may have peaked out for now

Sudden drop

Macrotech shares have collapsed 42 percent in just over a month, without any visible deterioration in fundamentals. December quarter numbers were tepid, but nothing that would have come as a nasty surprise to the street. The steep fall would most likely have to do with a distress seller liquidating his position in a hurry.

The big unwind

Keep a close eye on midcaps in the coming days, especially those which rose sharply without the fundamentals to support. When times were good and money cheap, promoters got into cosy deals with operators to keep stock prices aloft. Now that interest rates are climbing and market conditions have gotten tough, it will be much tougher to maintain those positions.

Some relief

Investors say the dollar is on the way down because the bulk of Federal Reserve rate increases is over, and virtually every other currency will strengthen as their central banks keep tightening. While recent data have led traders to rethink how high US rates will go, a shift to risk assets from equities to emerging markets is already underway on bets that the greenback’s strength will ease.

With inputs from Bloomberg