Hotels: 5 key reasons why Jefferies remains positive on hotel stocks post Q3

Indian Hotels , Lemon Tree Hotels , Chalet Hotels , EIH ltd  share prices have seen 70-136% rise in their share prices during last one year.

The strong pick up in occupancy and revenues as the travel and tourism normalized, has lifted performance. The third quarter remained strong for hotels helped by events such as world Cup cricket, holiday season and so on. 

Jefferies Indi Pvt Ltd in their Q3 review report said that India's hotel sector continued to witness healthy operating performance in 3Q with record margins and a healthy RevPAR (Revenues per available rooms) growth year-on-year. The same was on the back of higher average room rents (ARR) and occupancy for most companies. Industry ARR sustained double-digit growth and most management guided for strong FY25 as well. Robust demand trends amid macro tailwinds, and demand exceeding supply, give comfort on strong pricing outlook, said analysts at Jefferies. They continue to like the companies in the sector, with buy ratings on Indian Hotels

5 Key reasons for bullish outlook on Hotels

Strong demand trends boost occupancies- Large demand was lifted by key events as weddings side for banquet halls has also added to strong performance for Hoteliers, said analysts. Foreign Tourist arrivals are yet to return to pre-pandemic levels but should continue to improve through next year. Network occupancy improved 200bps year-on-year, 400 bps sequentially to 70% for Indian Hotels, improved 200bps YoY  and 700 bps sequentially to 79% for EIH , highlighted analysts at Jefferies.

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Robust 3Q pricing and outlook:  The performance remained robust in Q3 with Indian Hotels' standalone RevPAR growing 25% YoY, while network RevPAR grew 14% YoY. EIH Ltd and Chalet’s network RevPAR grew 23%  and 18% YoY, respectively.

The management commentaries also indicated towards good outlook. Indian Hotels management said double-digit revenue growth could continue in FY25 – on the back of strong macro tailwinds, growth in portfolio and expected growth in ARR and Occupancy highlighted Jefferies analysts. Management of Lemon Tree and Samhi Hotels  continue to guide mid-teens RevPAR growth over the next 2-3 years — citing pricing discount to global peers and a growing demand for quality hotels in India. Pricing and repricing strategy of Hoteliers is also partly reflect improvement in services to guests and overall market positioning added analysts at Jefferies.

Record margins across most peers: 

Most companies with exception of Lemon Tree reported strong growth in margins and earnings before interest tax depreciation and amortization. On sequential basis the improvement was also visible though helped by seasonality too. 

Analysts at Jefferies said that while Companies have not given any specific margin guidance for coming quarters, confidence on increasing ARR and RevPAR augurs well for margins going forward for the industry.

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Key pipeline for majors:

All Hotels are seeing strong addition to their existing capacities

Analysts highlighted that Indian Hotels maintained its outlook to open 20 Hotels in FY24 and expects pace of opening to increase to 2+ hotels every month in FY25 (implying 12% room adds CAGR in FY24-FY25); Company is close to launching a new brand in its portfolio. 

EIH target of opening 50 new hotels by 2030. Chalet said that work for its Delhi Airport hotel commenced in 3Q and expects opening by FY26/FY27. Lemon Tree management expects its operational inventory to be 105 plus hotels with more than 10,000 plus rooms by FY24 end (versus 9,687 as of 3Q). ITC Hotels talked about adding 22 properties in the last 24 months. Samhi Hotels reported revocation of lease of land that was to house its 350-key Hotel in Navi Mumbai.

Positive outlook

Industry ARR has sustained double-digit growth and most management guide for strong FY25 as well. Strong demand trends give comfort on strong pricing outlook said analysts at Jefferies. Further, new listings in the Hotel space are probably also driving better pricing and financial discipline among peers, they added.  For India Hotels which is top pick f Jefferies, they are building 7-9% growth in ARR for FY25-FY26 and model 18% Ebitda CAGR (compound annual growth) for FY23-FY26 estimated.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions

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