A growing penchant for travel is improving the prospects for the hotel and hospitality sectors, which are seeing steady capacity additions.

Air passenger traffic is seeing strong growth.

Foreign tourist arrivals so far this calendar year are significantly better than a year ago.

Karan Anand, head (relationships) at Cox and Kings Ltd, claims that government initiatives have attracted a large number of business visitors.

Given the hike in salaries for government employees and low air travel costs, Icra Research thinks domestic tourism will remain strong in the current year. “According to the World Travel and Tourism Council, India’s travel sector should grow at a CAGR of 7.9% for the next decade, while the world travel sector is expected to grow at a CAGR of 4.2%," HSBC Global Research said in a note. CAGR is short for compound annual growth rate.

These trends augur well for the hotel and hospitality sectors. Elara Securities (India) Pvt. Ltd expects the average occupancy rate of premium hotels to improve in the September quarter from a year earlier, resulting in better economies of scale. The estimate is for premium hotels at pan-India level covering 12 major cities.

Higher demand from organizers of meetings, conferences and exhibitions as well as corporate and leisure travellers are expected to improve utilization levels. This is expected to strengthen room rates, though modestly. “Average room rates at the pan-India level are expected to increase by 3.3% YoY (year-on-year)," Elara Securities said in a note. “Average revenue per available room in the premium segment in Q2FY17E is likely to rise by ~11.6% YoY."

Icra Research expects the improvement in average room rate to drive revenue per available room (realizations) for its industry sample by 6-7% in the current fiscal year. From 3% in the first quarter, the ratings agency expects the revenue of its industry sample to rise by 7% in the current fiscal year.

But the stocks are seeing divergent performances. Indian Hotels Co. Ltd, and Mahindra Holidays and Resorts India Ltd have seen good gains in the last six months. EIH Ltd is up more modestly, while Hotel Leelaventure Ltd is little changed.

That is due to company-specific issues. Some are facing high leverage and going through restructuring. Also, change in accounting policies and divestments (at Indian Hotels) mean the quarterly earnings numbers, especially on the revenue front, can defy underlying business trends. So the earnings trajectory is unclear as of now.

But these issues are transitory. The key for the stocks is sustainable recovery in occupancies and room rates. Occupancies have ample scope for improvement, as they stood at around 60% in the first quarter. A sustained improvement in the coming quarters will build investors’ confidence and drive the performance of the stocks.