Mumbai: Investors gave a thumbs up to the cut in goods and services tax (GST) rate on hotel tariffs. Hotel stocks zoomed with the opening bell on Monday.

Shares of premium luxury hotels such as The Indian Hotels Company Ltd, Hotel Leela Venture Ltd and EIH Ltd soared about 5%, adding to the rally last week in anticipation of a rate cut. Even those of mid-sized hotels such as Taj GVK Hotels Ltd, Chalet Hotels Ltd and Kamat Hotel (I) Ltd rose significantly, reacting to the favourable news.

The bonanza was better than anticipated for hotels. GST rate is down across the board -- for room tariffs between 1,000 and 7,500 per night to 12% from18% and for tariffs above 7,500, it has been slashed to 18% from 28%.

That said, investors must note that these benefits, unlike the corporate tax cut, will not translate into immediate earnings growth.

According to Rashesh Shah, analyst with ICICI Securities Ltd, “Hotels will pass on the rate cuts to customers by way of lower room rates. This will eventually boost demand across hotel segments. India will become more attractive and competitive as a tourist destination too."

Until now, consumer mood was pessimistic. June quarter results of premium hotels had disappointed investors as industry occupancy rates were about two percentage points lower at about 65-66%. This was partly due to low business travel and general elections in May.

Hotel occupancy rates, which failed to recover even after elections, would have been hit further due to economic slowdown and sluggish foreign tourist arrivals in the last few months. Lower occupancy would have led to lower revenue per room, which in turn would have hit earnings. But the sharp cut in GST rate is a manna from heaven. Results of the tax rate cut would mirror in the following quarters, if not in the September quarter. Investors' euphoria, therefore, is not surprising.

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