scorecardresearchHDFC Securities initiates coverage of these 2 hotel stocks with up to 44%

HDFC Securities initiates coverage of these 2 hotel stocks with up to 44% upside; See list

Updated: 09 Feb 2023, 03:25 PM IST

The brokerage has initiated coverage on Indian Hotels with an ADD rating and a target price of 345 and Lemon Tree Hotel (LTH) with a BUY rating and a target price of 108.

The brokerage has initiated coverage on Indian Hotels with an ADD rating and a target price of  <span class='webrupee'>₹</span>345 and Lemon Tree Hotel (LTH) with a BUY rating and a target price of  <span class='webrupee'>₹</span>108.

The brokerage has initiated coverage on Indian Hotels with an ADD rating and a target price of 345 and Lemon Tree Hotel (LTH) with a BUY rating and a target price of 108.

After a massive decline during the COVID-19 pandemic, India’s hotel industry has witnessed a robust turnaround in demand. This surge in demand has been driven by the rising discretionary spending on tours and travels, revenge tourism, improving economic environment fuelling corporate travels and revival of mega wedding season and other cultural events, a report by domestic brokerage house HDFC Securities highlighted.

Amid this background, the brokerage has initiated coverage on Indian Hotels with an ADD rating and a target price of 345 (22x FY25 EV/EBITDA) and Lemon Tree Hotel (LTH) with a BUY rating and a target price of 108 (17xFY25 EV/EBITDA), considering a discount to the average two-year forward multiple of the past five years.

The targets imply an 18 percent upside for Indian Hotels and 44 percent potential upside in Lemon Tree.

The brokerage further noted that with the demand outpacing supply, which the latter is unlikely to catch over the next 2-3 years, it expects both average room rates (ARRs) and occupancies to remain strong, leading to higher RevPar for the industry.

The current trend is very similar to the last upcycle the sector witnessed from 2004 to 2008, which commanded improved margins and multiples for listed entities, it pointed out.

Also, with international travel yet to pick up and corporate events gradually gaining pace, HDFC believes that domestic hotel players having strong hotel pipelines and healthy balance sheets are in a very sweet spot to seize the opportunity that the upcycle in the sector would throw up.

Hotel Sector Outlook

As per the brokerage, India’s tourism sector’s contribution to the GDP is expected to grow to $250 billion by FY30 vs $178 billion in FY21. This is backed by the fact that rising urbanisation in several tier-2 and tier-3 cities will drive the demand for hotels in different segments. Factoring this in, the industry is expected to witness a robust room addition (42,000 rooms) by FY27, which will increase total supply by 28 percent to almost two lakh rooms, stated HDFC.

It further noted that hoteliers undertook various sustainable cost-reducing initiatives during the pandemic like multitasking workforce, reducing staff/room ratio, lowering overhead expenses, etc., which are yielding a high margin now, aided by improved demand and ARR.

Sector to stay in sweet spot with series of key events, highlights HDFC:

G-20 Presidency: After two long years of absolute stalling, the G20 event has come as an excellent opportunity for the tourism and hospitality industry. The country is expected to host over 200 meetings at 56 locations, which not only include heritage sites like Udaipur, Agra, Varanasi, Hampi but also other lesser-known destinations.

Wedding season: The wedding business for hotels is almost back at the pre-COVID level. While weddings after the pandemic generally have fewer guests, the expenditure ranges more or less in the same range as that of pre-COVID. Since people didn’t get to enjoy the big fat Indian weddings during the pandemic, the wedding business would keep the hotels running during the season.

Cricket World Cup: Sports tourism in India is also on an upswing and these events have turned out to be an accelerator for driving the demand for travel. According to Future Market Insights (FMI), the total spending in the Indian sports tourism market that was pegged at $9.5bn in 2022 is expected to rise to $37.6 bn in 2032 at a CAGR of 14.8 percent; during this period, the number of sports tourists will go up from 37.2 mn to 213.3 mn. Of this, the inbound market has a growth prediction of 9.4 percent, while outbound would nearly double at 17.4 percent. With India hosting the upcoming Cricket World Cup in CY23, inbound tourism is expected to benefit.

Indian Hotels and Lemon Tree

As per the brokerage, both companies have a strong pipeline of room additions based on an asset-light model. This, along with sustainable cost reduction initiatives undertaken during the pandemic is likely to drive their toplines and spur margins without leveraging their balance sheets, it said. Rather, the improving RoCE and strong cash flow would help both IHCL and LTH bring down their net D/E significantly by FY25E-FY26E to -0.3 percent and 0.9 percent respectively, forecasted HDFC.

Indian Hotels

"IHCL is strongly placed to benefit from this strong demand and limited upcoming supply trend, as the company plans to add 8,700 rooms (+42 percent from FY22 inventory level) over the FY23-FY26 period. The underpinnings of IHCL’s success lie in: (1) pricing power due to increased demand and reduced supply in the market, (2) a strong pipeline, (3) an asset-light strategy, (4) rejuvenation of Ginger, and (5) increasing contributions from ancillary businesses and services like Qmin, ama, Chambers, among others," explained HDFC.

It expects IHCL’s consolidated revenue/EBITDA/PAT to grow at CAGRs of 28 percent/76 percent/272 percent over FY22-FY25E. EBITDA margin is expected to enhance to 34 percent in FY25E from 13.2 percent in FY22.

With 182 hotels and 21,094 rooms, The Indian Hotel Company Ltd (IHCL) is a perfect play in the hospitality sector as its portfolio straddles across some of the best properties, locations and multiple income groups. It boasts of an unparalleled market share of 11.6 percent by inventory in the Indian market with a presence in 77 cities, informed the brokerage.

The stock has surged 50 percent in the last 1 year on the back of a recovery in travel demand. The stock is up 6 percent in Feb so far after a 5.5 percent fall in January.

Indian Hotels stock price trend

Lemon Tree

With 85 hotels and 8,303 rooms, LTH is well-poised to benefit from the expected uptick in the hotel business cycle, owing to its strong presence in the midscale and upper-midscale segments, said the brokerage. Also, the robust surge in demand for rooms in the mid and upper-mid-scale categories and limited incremental supply available over the next 2-3 years will continue to drive ARRs and occupancy for LTH, it added.

"Its strong pipeline of inventory addition, rising focus on an asset-light business strategy, foraying into both low economic (key hotels) and premium (Aurika—Udaipur and Mumbai) segments and various cost-saving initiatives during the pandemic would act as key catalysts for earnings growth, going ahead," noted HDFC.

Key risks are rising COVID cases globally, which could restrict travel and impact occupancies and ARRs in Q4FY23, cautioned the brokerage. However, as the sector has already lived out three COVID waves in the past two years and pulled through strongly on each occasion, it believes any potential correction in the price should be considered an opportunity to invest in the LTH stock. It expects the company to clock net sales/EBITDA/PAT CAGRs of 48 percent/68 percent/238 percent over FY22-25E. EBITDA margin is expected to enhance to 48.9 percent in FY25E from 24.3 percent in FY22.

The stock has advanced 55 percent in the last 1 year. It hs flat in Feb so far after an 11 percent and 15 percent decline in January and December.

Lemon tree hotels stock price trend
First Published: 09 Feb 2023, 03:25 PM IST