Hotel sector stocks have been witnessing traction of late as the fears of Covid-19 have waned and restrictions on travel are gone.
Stocks such as Chalet Hotels, Lemon Tree Hotels and Indian Hotels Company have jumped 46 percent, 42 percent and 39 percent, respectively, in the current calendar year so far against a 2 percent gain in the benchmark Sensex.
The sector had to endure immense pressure after the coronavirus pandemic hit the world. Now the industry to getting back to normalcy and the demand is expected to hit pre-Covid levels.
According to the India Hospitality Industry Overview 2021 by HVS Anarock, industry level occupancies are expected to touch pre-Covid levels of 66 percent sometime in the calendar year 2022 (CY22) and financial year 2022-2023 (FY23) and reach 70 percent in CY24, brokerage firm ICICI Securities pointed out.
ICICI sees many positives in favour of the hotel sector. Factors including a decline in Covid cases, the ramp-up in physical occupancy in offices, resumption of regular international flights, pent-up wedding demand and strong leisure demand for hotels are expected to augur well for the sector.
"Heading into FY23, the beleaguered hospitality sector, which has borne the brunt of multiple Covid waves impacting business, is seeing a confluence of positives with leisure demand remaining strong and business travel set to see a strong leg up with reopening of offices, resumption of international flights and events/conferences also seeing a pickup," said the brokerage.
The travel and tourism industry is an integral part of the Indian services sector, providing direct and indirect employment to nearly 8 crore people and helping garner about $30 billion in foreign exchange.
Venil Shah, Equity Analyst - PMS at Prabhudas Lilladher said that prior to India being hit by a severe pandemic, the foreign tourist arrivals stood at nearly 1.1 crore in 2019 which gives him confidence in the industry’s V-shaped recovery in the coming months.
Shah believes with the end of the pandemic threat, deferred leisure and business travels have gained momentum already and 2022 could be the year where heavy pent-up demand leads to a record jump in tariffs and occupancy levels.
"Being a high fixed cost business (hotels have also taken the down-cycle as an opportunity to reduce fixed costs meaningfully), hotels stocks could deliver non-linear earnings growth as operating leverage plays out. We are bullish on the prospects of the hotel industry over the short to medium term as strong earnings growth will drive stock performance," Shah said.
"We at Prabhudas Lilladher launched a smallcase portfolio called Travel Boom last month to capitalize on this opportunity in the space of travel, hospitality and aviation. It has already given 21 percent returns in the last one month itself," said Shah.
Likhita Chepa, Senior Research Analyst at CapitalVia Global Research expects business travel to rebound with people returning to offices.
There has also been improvement in key metrics like occupancy levels and average room rates. Occupancy levels dropped below 20 percent due to the pandemic and are now above 60 percent which depicts recovery. With expanding, demand and things returning to normalcy, investing in quality hospitality stocks can offer invest decent returns over the medium to long term, Chepa said.
What to buy?
ICICI Securities has a buy call on Indian Hotels Company and Lemon Tree Hotels. For Indian Hotels, it has revised its SoTP-based target price to ₹285 from ₹237 earlier, valuing the stock at 22 times March 24E EV/EBITDA against 21 times earlier which factors in the recent QIP fundraise.
For Lemon Tree Hotels, ICICI Securities has increased FY23-24E revenue and EBITDA estimates by 7 percent and 9 percent, respectively, and maintained a 'buy' rating with a revised SoTP-based target price of ₹80 from ₹72 earlier at an unchanged EV/EBITDA multiple of 20 times on March 24E EV/EBITDA.
CapitalVia Global Research has a buy call on Lemon Tree Hotels.
"The company operates in upscale, midscale and economy segments. It has a presence across 57 domestic locations and is also present in Dubai and Bhutan. With the company’s focus to increase its presence internationally, increasing market share to 22 percent from its existing 17 percent and increasing its network to 100+ hotels, its outlook appears to be constructive. We can expect 18 to 20 percent upward momentum in this stock from its current levels," said the brokerage firm.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.