Indian hospitality sector: demand revival brightens future prospects

What is driving the momentum?

An increase in leisure travel and revenge tourism (a phenomenon that causes a rush for travel by people tired of lockdowns), the start of so-called MICE activities and so on are the biggest drivers behind the renewed interest in the sector. MICE is short for meetings, incentives, conferences and exhibitions. ..

“After a  two-year roller-coaster ride of leisure travel plans, people are desperate to move out of home and looking forward to enjoy holidays with friends and family. In addition, most of the offices have begun opening up and going forward, business travel is also likely to begin full steam.” said Sunny Agrawal, head of fundamental research at SBI Securities Ltd.

Corporate travel contributes almost half of hotel revenue in the form of room bookings and also from MICE.

“With corporate travel and events opening up, hotels are seeing an uptick in occupancy levels similar to pre-COVID times while leisure travel has also picked up sharply,” said Abhay Agarwal, founder & fund manager, Piper Serica Advisors Pvt Ltd.

Data shows that occupancy levels during COVID-19 had fallen below 20 percent; occupancy has since risen to more than 65 percent. Key performance indicators for hotels are approaching pre-COVID levels, which in turn will lead to increased traction in the food and beverage business.

“The hotels are also able to increase the average room rates (ARRs) by 5-10 percent, which provides a geometric expansion in earnings for the hotel industry as a whole”, added Agarwal of Piper Serica.

In addition, cost-efficiency programs implemented during COVID-19 have helped the hotel industry improve metrics like employees per room to their best levels.

“We believe that with a very limited supply of new rooms and rapidly expanding demand, the earnings of hotels will hit a purple patch over the next couple of years,” said Agarwal of Piper Serica.

Is the momentum sustainable?

Experts are confident that the sector will be able to sustain the momentum and things will move in a positive direction or the hospitality industry.

Because of the pandemic, leisure travel had become almost non-existent and now there is huge pent-up demand, which is helping hotel company stocks.

“We are witnessing a broad increase in ARRs and occupancy levels in tourist locations while business travel has also improved steadily,” said Nishit Master, portfolio manager at Axis Securities Ltd.

An increase in weddings and the start of MICE activity are other positives. “We expect these demand drivers to be sustainable over the next couple of years and thus are positive on the space,” added Master.

The hospitality sector has been one of the biggest beneficiaries of a revival in the economy in the post-COVID era.

Agrawal of SBI Securities expects “this trend to continue given the easing travel restrictions, improving passenger air traffic (103% YoY growth in 9MFY22) and improving occupancy in the hotel industry”

Mutual funds buying hospitality stocks

Experts say that mutual funds are riding the recovery wave and buying stocks in the sector.

“They are also playing the opening-up theme and believe that the concept of revenge tourism is real, which can be seen from higher occupancy levels and ARRs in tourist locations,” said Master of Axis Securities.

Increase in MICE activity and a pick-up in business travel are others triggers. The other important point is that after two years of COVID, incremental capacity additions in the sector over the next couple of years are likely to be fewer, which will aid the demand-supply scenario.

“Mutual funds typically back an emerging trend and make long-term investments.  They are seeing a sharp revival in demand for hotels and are backing that conviction by investing in hotel stocks,” said Agarwal of Piper Serica.

Which stocks are benefitting

Experts would prefer to play the sector through quality names like EIH Ltd, Indian Hotels, EIH Associates, Lemon Tree Hotels, Chalet Hotels, Mahindra Holidays & Resorts and Taj GVK.

Agarwal of Piper Serica says investors should “focus on large hotel chains since size is critical to driving down costs. They should also look at hotels that are well-diversified across locations and have a portfolio across all segments – luxury to budget.”

Hotels that have a diversified client base – a mix of leisure and corporate -- typically have steadier earnings. Their balance sheet should also be strong and not overleveraged.

“Looking at all these aspects we particularly like Lemon Tree Hotels since it checks all these boxes,” said Agarwal of Piper Serica.

Indian Hotels, Lemon Tree and Mahindra Holidays are the top picks of Agrawal of SBI Securities. “Post-recently concluded QIP of Rs 2,000 crore, Indian Hotels’ balance sheet looks much better and is well poised to encash on growth opportunity in hotel industry,” he added.

QIP is short for qualified institutional placement.

Agrawal of SBI Securities also likes Mahindra Holidays & Resorts as well as Lemon Tree Hotels due to the fact that the occupancy level of the former reached 80 percent in the third quarter of the financial year and the company looks well-placed to tap domestic leisure travel demand on the back of a strong pipeline for room additions in thenext two to four years.

In the case of Lemon Tree, its management expects occupancy levels to rise well above pre-COVID-19 levels in the first half of financial year 2023 and the fact that the company strives to be debt- free by financial year 2025-26 make it an attractive buy.

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