Hotels sector records healthy growth in Q1, offers strong outlook for H2: Jefferies

The sector experienced sequential declines in ARR and RevPAR across the board due to the seasonality factor and changes in the customer profile mix. The Lemon Tree management anticipates sequential growth in ARRs from the third quarter onwards, indicating a positive trend.

Read: Hotel industry's contribution to India's GDP to hit USD 1 trillion by 2047: HAI

Occupancy Trends and Prospects

Occupancy rates displayed varied landscape during the first quarter. While IHCL and Lemon Tree recorded on-year growth in occupancies, EIH and Chalet witnessed declines. The management teams indicated that select city hotels managed to outperform, and Lemon Tree's management suggested that the normalisation of demand in the leisure segment contributed to this trend. Factors like milder summer weather in cities like Shimla impacted occupancy figures, but the hospitality industry sees a robust recovery in the second half of the year, according to Jefferies.

The anticipated increase in foreign tourist arrivals and the hosting of major international events such as the G20 Summit, Cricket World Cup, and Miss World pageant are expected to drive an uptick in occupancy rates in the latter part of the year.

Read: G20 Summit: Delhi’s hotel occupancy expected to be at a decadal high of 70-72%

Mixed Margins and Future Outlook

EBITDA margins experienced a mixed trajectory on a year-on-year basis. All companies, except IHCL, reported improvements in EBITDA margins, primarily attributed to the sequential growth in RevPAR. However, on an on-quarter basis, all companies faced margin declines due to lower RevPAR figures and increased overhead and renovation-related costs.

IHCL's margin decline was attributed to investments in new brands, human capital, and renovation activities. Despite these challenges, the IHCL management emphasised its proactive approach to enhancing the customer experience and driving topline growth.

Pipeline and Expansion Plans

As per the Jefferies report, IHCL led the expansion front by opening five hotels in the first quarter, raising the total operating hotels count to 191 across various brands. The room pipeline also grew to 11,200, signalling the sector's confidence in future demand. Chalet unveiled its operations in Hyderabad and reported significant progress in Pune, with an 88-room expansion awaiting approvals.

Lemon Tree's pipeline showed strong expansion with six management and franchise contracts signed in the first quarter, adding 548 rooms to their growing inventory. The operational inventory for Lemon Tree stood at 90 hotels with 8,500 rooms, and an additional 46 hotels with 3,700 rooms were in the pipeline as of June 2023. Lemon Tree aims to sign contracts for 40 more hotels and achieve an operational room count of 10,500 by the end of fiscal year 2024.

2H Expectations and Valuation

The Jefferies' report forecasts a seasonally weak second quarter (2Q) for the sector, followed by a pickup in RevPAR figures from the second half of the year, driven by improved occupancy rates and ARRs. The anticipation is that this will lead to a double-digit YoY growth in RevPAR for the entire fiscal year 2024.

Jefferies maintains a 'buy' rating on Indian Hotels Co Ltd (IHCL) with a price target of Rs 445 based on a Sum of the Parts (SOTP) valuation methodology. The key risks outlined include a potential slowdown in the global or domestic economy, the resurgence of pandemic-related issues, delays in capacity ramp-up, and an increase in supply pressure potentially impacting improvement in ARRs.

As the Indian hotels sector navigates these dynamics, the industry remains cautiously optimistic about a strong performance in the latter part of the year, buoyed by a promising outlook for occupancy rates and ARR growth.