Hotel stocks have delivered 15-40% returns in just 3 months; What happens now?

The hospitality sector in India has been the worst-hit industry and has incurred heavy losses due to the Covid-19 pandemic. In 2020 and 2021, the Majority of listed companies reported negative profit growth and low revenue growth.

The hotel industry is a capital-intensive one, and as occupancy rates dropped, many players were forced to stop new investments. However, the Indian hotel industry has bounced back to its pre-Covid levels owing to factors like the revival of domestic and international tourism, resumption of international flights, recovery in business travel, and improving leisure and wedding demand.

As per HVS Anarock, industry occupancies fell below 50% on Jan 22 owing to Omicron impact before recovering to 55% in Feb 22 and 61% in Mar 22. This momentum carried forward into Apr 22 with occupancies reaching 65% (same as Apr 19) of pre-Covid levels and Apr 22 RevPAR at Rs3,803 or 103% of Apr 19 levels. May 22 industry RevPAR of Rs.3,744 was 10% higher than May 19 (pre-Covid levels) while Jun 22 industry RevPAR of Rs.3,803 was 12% higher than Jun 19 levels.

In Jul 22, while industry ARRs were 8% higher than Jul 19 levels at Rs.5,750, overall occupancy declined by 200bps in Jul 22 to 63% vs. 65% in Jul 19 resulting in Jul 22 industry RevPAR of Rs.3,623 or 105% of Jul 19 levels.

Since the beginning of the year, hotel stocks have increased by 30 to 80 percent. Shares of Lemon Tree Hotels soared nearly 98 percent in the past one year, and since the start of the year, the stock has rewarded 63.51 percent returns to shareholders. Lemon Tree Hotels posted a consolidated net profit of ₹13.9 crore for the quarter ended June 30, as against a net loss of ₹40.1 crore in the same quarter of last year.

The company has posted a net loss for nine consecutive quarters. The loss started during the March 2020 quarter and continued till the March 2022 quarter. The revenue from operations for the first quarter of FY 2023 stands at ₹192.3 crore versus ₹44.3 crore, an increase of nearly 334.08 percent year on year, driven by a sharp increase in room rates and higher occupancy.

While the EBITDA margin improved by 4354bps YoY to 48.1%, driven by cost efficiency measures, net margins improved by 220bps to 7.3% over the same period.

Similarly, shares of Indian Hotels Company Ltd. rose about 1% in Friday's trade and set a new 52-week high of ₹314.9 on the BSE. The stock has picked up steam since the start of the year, rising nearly 72.89% year-to-date (YTD) against a 1.76% rise in the benchmark Nifty.

The Q1 results were also way ahead of the estimates by the brokerages. The company delivered the best ever Q1 performance. Net sales increased by 267% YoY to ₹1,293.2 crore. The enterprise occupancy stood at 65.2%, the ARR stood at ₹8,315, the RevPAR stood at ₹5,424, the EBITDA margin  at 29.85%, and the company reported a positive PAT at ₹170.1 crore.

The company posted a net loss of ₹279.9 crore in the June quarter of 2020; a ₹230 crore loss in the September 2020 quarter, and losses kept going until the December 2021 quarter, when it posted a net profit of ₹76 crore

The company witnessed robust growth in signings, 10 hotels have been signed, with 3 hotels each under the Taj and Ginger brands, and 2 hotels each under the SeleQtions and Vivanta brands, and 15 more are expected to come by March-23. The pipeline for FY23 is 8,107 rooms 40% of operational inventory, said IDBI Capital.

In Q1FY23, IHCL’s RevPAR for domestic hotels in Mumbai, Bengaluru, and Delhi are back to pre-covid at 133%, 122%, and 120% respectively. As per management, the all-India trend remains positive and, except for a marginal lag in Rajasthan, the company has witnessed strong occupancy improvement in the business segment, according to the IDBI capital report.

On the other hand, Axis Securities expects IHCL's revenue will generate FCFF of ₹1,000-1,500 Cr per year after incurring a minimal Capex of ₹400 Cr per year over the next 3 years. The company is expected to incur a Capex on maintenance, Ginger Santa Cruz, and the Kevadia, which would be 10% of the overall Capex. It expects IHCL’s RoIC to improve to 13.2% (standalone RoIC of 24%) in FY24E and said the company's ROIC was dragged by two major investments of Searock Investment and international subsidiaries.

Meanwhile, Mahindra Holidays & Resorts shares have increased by 33% in the last six months, and the stock has returned nearly 23% in a year. The stock made a new 52-week high of ₹300 on September 5, 2022. It is currently trading 54% higher than its 52-week low of ₹185.6.

The company reported a consolidated net profit of ₹29.7 crore in the June-end quarter as against a net loss of ₹21.4 crore in the year-ago period. It reported a 52.39% increase in revenue to ₹637 crore from ₹418.3 crore in the April-June quarter of last year.

In Q1FY23, the operating profit increased to ₹99.7 crore from ₹27.8 crore. While the EBITDA margin rose to 16.48% in Q1FY23 as against 7.50% in the corresponding quarter of last year.

Demand is expected to grow strongly

According to Ventura Securities, demand in the Indian hotel industry grew at a 6.7% CAGR between FY16 and 20 compared to a 6.5% supply CAGR. Industry consultant Horwarth HTL expects demand to grow at a 6.5% CAGR over FY20-26E, outstripping the 5.1% CAGR growth in supply.

In the Indian hotel industry, occupancy and ARR are expected to return to pre-covid levels by the end of CY22 and mid-CY23, respectively, it said. ARR is expected to grow at 13% CAGR to ₹6,990 and occupancy to grow 400bps to 70% by CY24. Globally, the hotel industry acts as a hedge against inflation and augurs well for the sectoral players.

The midscale segment remains the market leader in terms of hotels signed in 2021, with over 55% of signed properties. With changing demographics and consumer preferences, the luxury segment is regaining the mindshare of hoteliers. The brokerage firm added that in terms of keys, the midscale segment is the most preferred in the country, accounting for 44% of the total signings by keys in 2021, followed by Upscale (32% of total signings), Luxury (13% of total signings), and Economy (11% of total signings).

It says that domestic guests constitute 2/3rd of the guest composition while the rest 1/3rd constitutes FTAs (Foreign Tourist Arrivals). With the airline industry now expected to normalize its operations in the coming months, Ventura Securities believes that FTAs will find India a good tourism spot given the recent war situation in Europe and Russia.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.