Indian Hotels vs EIH vs Lemon Tree: Which is a better hotel stock for long term?

The Indian hotels industry has witnessed strong growth in the past few months on the back of higher room demand after months of low occupancy and falling average rates due to the pandemic. Going ahead, hotel companies are expected to deliver strong performance aided by strong room demand from domestic leisure travel, and revival in corporate travels, coupled with strong double-digit growth in room rentals and higher occupancies.

This recovery in the hotel industry is expected to last for the next 4-5 years. According to the most recent industry data, demand is expected to continue to grow by double digits due to the strong domestic travel segment and a rebound in inbound tourism. Margins of the hotel companies are also likely to expand aided by better operating leverage coupled with various cost-saving initiatives undertaken by the companies.

Amid this rise in hotel demand driven by more domestic travel post the pandemic and the strong outlook ahead for the industry, let's find out between Indian Hotel Company, EIH and Lemon Tree Hotels, which is a better hotel stock for the long term.

Stock price trend

While Indian Hotel has jumped nearly 45 percent in the last 1 year, Lemon Tree has advanced 32 percent and EIH is up 10 percent in this period.

Meanwhile, in 2023 YTD, Indian Hotel gained 6 percent, giving positive returns in 3 of the 4 months. It has added 4 percent each in April and March, and 3 percent in February. However, the stock lost 5.5 percent in January this year.

EIH, on the other hand, has advanced 7.5 percent in 2023 YTD. It surged 15 percent in April after a 5.3 percent rise in March. However, it fell 3.5 percent and 8 percent in February and January, respectively.

Lemon Tree is up just 3 percent in 2023 YTD, giving positive returns in 2 of the 4 months of the current calendar year. It has rallied 14 percent in April after falling around 1 percent in March. Meanwhile, it rose 2 percent in Feb but fell 10.7 percent in January.

All three stocks have given exceptional returns from their COVID lows. Indian Hotels surged 460 percent from its COVID low of ₹60, hit in May 2020, to currently trade around ₹338. EIH also jumped 243 percent from its COVID low of ₹53.7, hit in May 2020, to currently trade around ₹190. Lemon Tree rose the highest, skyrocketing 527 percent from its COVID low of ₹14, hit in May 2020, to currently trade around ₹88.

About the firms

The Indian Hotel Company manages a portfolio of hotels, resorts, jungle safaris, palaces, spas and in-flight catering services. The company is part of India's Tata Group. It is headquartered in Mumbai where its flagship hotel Taj Mahal Palace Hotel is also located. Brands include Taj, Vivanta, and Ginger. It owns a portfolio of 232 hotels, including 61 under development, globally across four continents, 12 countries and in over 100 locations.

EIH Limited is the flagship company of the Oberoi Group, one of the largest luxury hotel chains in India. It operates hotels under the three renowned names of Oberoi, Trident and Maidens. The company owns and/or manages approximately 20 hotels under the luxury brand of Oberoi Hotels & Resorts and approximately 10 five-star properties under the Trident Hotels brand. It also owns and manages Clarkes Hotel, Shimla and Maidens Hotel, New Delhi. The company is also engaged in flight catering, airport restaurants, project management and corporate air charters.

Lemon Tree is a hotel chain company. The company operates in the upscale segment and in the mid-market sector, which consists of the upper-midscale, midscale and economy segments. The company operates through various brands, including Aurika Hotels and Resorts, Lemon Tree Premier, Lemon Tree Hotels, Red Fox Hotels, Keys Prima, Keys Select and Keys Lite. The company operates approximately 8,350 rooms in 87 hotels across 53 destinations, in India and abroad, under its various brands.

Earnings

In the December quarter, Indian Hotel reported an over four-fold rise in consolidated net profit at ₹403.56 as against a consolidated net profit of ₹95.96 crore in the year-ago period. Its consolidated revenue from operations rose by 51.6 percent to ₹1,685.8 crore as against ₹1,111.22 crore in the corresponding period previous fiscal. The company saw strong demand in the third quarter, both leisure and business.

EIH also reported an over three-fold rise in consolidated net profit at ₹151.08 crore in the December quarter, on the back of higher revenue. The company had posted a consolidated net profit of ₹41.85 crore in the same quarter a year ago. Its consolidated revenue from operations during the quarter under review jumped 63 percent to ₹586.41 crore in Q3FY23 as compared to ₹360.12 crore in Q3FY22.

Lemon Tree's consolidated net profit came in at ₹40 crore in Q3 versus a loss of ₹1.8 crore in the year-ago period. Its revenue surged 60 percent to ₹234 crore in the quarter under review as against ₹146 crore in the same period last year.

Which is a better Hotel stock?

Deepak Jasani, Head of Retail Research, HDFC Securities, has picked Indian Hotels between the three.

"Indian Hotels being a leader in the premium segment is our preferred choice amongst hotel stocks. With 182 hotels and 21,094 rooms, the Indian Hotel is a perfect play in the hospitality sector as its portfolio straddles across some of the best properties, locations and multiple income groups. 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 the Ginger brand, and (5) increasing contributions from ancillary businesses and services like Qmin, ama, Chambers, among others," it explained.

Kruttika Mishra, Research Analyst, Sharekhan by BNP Paribas, prefers Indian Hotels Company and Lemon Tree from a long-term perspective.

Sharekhan has a Buy rating on Indian Hotels Co with a price target of ₹380 and a positive view on Lemon Tree Hotels with an expected upside of 23 percent (target ₹108). Indian Hotels Company is the leading player in the domestic Industry and has a strong presence in leisure, premium, mid-premium and budget hotels. On the other hand, Lemon Tree Hotels is enhancing its presence in the mass-to-mid-premium segment, she noted.

Suman Bannerjee, CIO, Hedonova, also said that Indian Hotels appears to be a better choice when it comes to long-term investment in the Indian hotel industry.

This is because it is one of the oldest companies in the hospitality industry and operates over 165 hotels worldwide, catering to all segments with their brands Taj, Vivanta, and Ginger, making it present across the entire hospitality value chain. It is also one of the top 2 hotel chains in India, with 17 percent of the hotel inventory and 24 percent of room inventory, Bannerjee noted. On the other hand, Lemon Tree is India's largest mid-priced hotel-chain owner, operating 87 hotels in 52 cities, with a higher revenue growth rate than Indian Hotels, except for the one-time effect of Covid-19 in the financial year 2021, however, it primarily operates in the mid-market segment, making it less diverse compared to Indian Hotels, the expert added.

EIH, on the other hand, has been impacted by the pandemic but has shown a strong recovery in recent quarters, with a higher revenue growth rate than Indian Hotels in recent years. It primarily operates in the luxury segment, making it a good option for investors seeking exposure to this segment, however, it remains a smaller player in the market, stated Bannerjee.

"In conclusion, Indian Hotels and EIH have their strengths and weaknesses, and the choice between the two will depend on an investor's priorities and risk appetite. For investors looking for a diversified portfolio with exposure to different segments of the hospitality industry, Indian Hotels would be a good choice. For those seeking exposure to the luxury segment and are comfortable with a smaller company, EIH may be a good option," he explained.

Nirav Karkera, Head of Research at Fisdom, believes EIH looks attractive compared to Indian Hotels and Lemon Tree.

"These companies' robust expansion plans, focusing on an asset-light model, position them for solid revenue growth in the future. Overall, EIH, Lemon Tree, and Indian Hotels are in a stable position to achieve financial stability and success with their strategic approach, however, from a relative valuation and growth prospects standpoint, EIH looks attractive compared to Indian hotels and Lemon Tree," he recommended.

Vinit Bolinjkar, Head of Research, Ventura Securities, believes that all three hotel companies – Indian Hotels, Lemon Tree and EIH – are fundamentally sound stocks, but recommends investing in Lemon Tree for the long term.

This is due to:

1) Its strong share in mid-market hotels, where the scope for market share gain from unorganized space is higher compared to the premium segment, where most of the market is organized.

2) Its growth plan is to expand its room inventory from 8,303 (as on 31st Dec 2022) to 10,900 by FY25.

3) Its lower valuation compared to Indian Hotels and EIH. Despite the recent surge in stock price, Lemon Tree is trading at FY25 P/E of 26.3X, which is lower than 35.7X of Indian Hotels and 29.5X of EIH.