Chart Beat: With room rates at peak, sunny side up for hotel stocks

The hotel industry has seen a strong post-pandemic recovery, led by a balancing of supply and demand for branded hotel room inventory. (Image: Pixabay)
The hotel industry has seen a strong post-pandemic recovery, led by a balancing of supply and demand for branded hotel room inventory. (Image: Pixabay)

Summary

  • Hotel stocks valuations have soared, requiring sustained earnings growth to justify their premium

The good run for hotels companies is expected to continue into fiscal year 2025 (FY25). For the first 11 months of FY24 (11MFY24), average room rates (ARR)—a key metric for the sector—increased by 14% year-over-year to 7,560 per day. In February alone, ARR in India reached a record high of 8,900 per day, a 7% increase from the previous year, along with a robust occupancy rate of 73%, resulting in a revenue per available room (RevPAR) of 6,500 per day, according to a report from Kotak Institutional Equities. Effectively, this sets up for a strong double-digit ARR growth for FY25 based on the current run-rate, added the report.

As a result, the brokerage has upgraded its FY25 Ebitda projections for stocks it covers by 2-6%. The sector's offerings have become more diversified, now including mid-scale and budget hotels in addition to the previously dominant luxury and premium segments. However, the inclusion of lower-priced hotels has also affected the national weighted average ARRs.

Still, medium-term outlook remains upbeat. With various industry estimates pegging industry supply CAGR at 5-6% over FY24–28E, compared to a demand CAGR at of 10%, ICICI Securities expects high single-digit ARR CAGR of 7-9% across hotels over FY24-26E with occupancies rising 100-200 basis points each in FY25E and FY26E. CAGR is compound annual growth rate.

However, after a sharp rally over the past year, the valuations of hotel stocks have become expensive and now require sustained earnings growth to justify their prices.

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