JM Financial initiates coverage on these 3 hospitality stocks with a 'buy' rating; sees up to 29% upside

The Indian hospitality sector has displayed a robust recovery in FY23 after a two-year slump due to the Covid-19 pandemic impact. The revival can be attributed to the rebound in both domestic and international tourism, the resumption of international flights, the resurgence of business travel, and a resurgence in leisure and wedding-related demand.

Listed hospitality companies have shown impressive performance in FY23, marking strong average room rate (ARR), revenue per available room (RevPAR), and occupancy levels.

Looking ahead, the hospitality sector's prospects remain promising as the demand trajectory continues to ascend, propelled by buoyant domestic demand revival of inbound tourism and upcoming events like the G-20 summit and the ICC Cricket World Cup, said Global brokerage firm JM Financial.

The supply of rooms will be playing catch-up, and this augurs well for the incumbents. The room supply growth is expected to be 5-6% for FY23–FY27E alternatively, hotel room demand is expected to grow at 8–10%, the brokerage said, citing various industry estimates.

The brokerage builds in higher occupancy levels and 8–10% ARR growth, arriving at an estimated revenue and EBITDA CAGR for its coverage universe at 12.5%–21.2% and 15.9%–30.9% over FY23–26E.

The brokerage underlines that most of the hospitality brands (including brand owners in its coverage universe: Indian Hotels and Lemon Tree Hotels) have been careful about portfolio expansion and have built an asset-light development pipeline. This approach, according to the brokerage, has led to a leaner balance sheet, leaving ample room for growth.

Considering these factors, the brokerage has initiated coverage on Chalet Hotels, Lemon Tree Hotels, and Indian Hotel Company with 'buy' recommendations.

Chalet Hotels: Target Price: ₹620 - Upside 28.6%

Chalet Hotels is the owner, developer, asset manager, and operator of a high-end hospitality portfolio located in the key markets of Mumbai Metropolitan Region, Hyderabad, Bengaluru, New Delhi, and Pune. With limited room supply coming into the subject micro-markets, it is well placed to benefit from the imminent upcycle, said JM Financial.

Banking on continued strength in the hospitality sector and an expected recovery in CRE, an ambitious expansion is underway. Chalet has embarked on an expansion plan to grow its room inventory from 2,802 keys in FY23 to 3,770 keys by FY26E.

Notably, 30% (288 rooms) of this incremental room capacity expansion is set to come from brownfield expansion in the existing properties of Pune, Lonavala, and Bengaluru. In addition, the company has forthcoming properties in Airoli, Navi Mumbai (280 keys), and DIAL complex (400 keys).

The company's high-end hospitality portfolio, active asset management strategy, and K Raheja C’s lineage give it a distinct competitive advantage when the industry is focusing on asset-light growth, as highlighted by the brokerage.

Anticipating Chalet's trajectory, JM Financial forecasts a revenue and EBITDA CAGR of 21.2% and 30.9% over FY23-FY26E, while RoE is projected to improve from 10.0% in FY23 to 18.9% by FY26E.

In light of this, the brokerage has initiated coverage on the stock with a 'buy' recommendation and assigned a SoTP-based target price of ₹620 per share. This target price signals an upside of 28.6% for the stock from its previous closing price of ₹482.20.

Lemon Tree Hotels: Target Price: ₹115 - Upside 20%

Lemon Tree Hotels is the market leader in the mid-priced segment and one of the largest owners and operators of rooms in India. It operates seven brands with a considerable presence at the lower end of the market. Its entire range of proprietary brands is differentiated and targets distinct segments without any overlap or brand dilution, according to the brokerage.

The company operates a portfolio of 90 operational hotels with 8,491 rooms and a development pipeline of 46 hotels with a total of 3,724 rooms as of Q1FY24.

JM Financial highlights the potential for significant earnings growth driven by Aurika Sky City. Positioned near Mumbai airport’s T2 terminal and set to commence operations in October 2023, this flagship property offers 669 rooms, extensive MICE amenities, and multiple F&B outlets.

The brokerage expects Aurika Sky City to achieve occupancies of 60% and ARRs of ₹12,100 in FY25E. With an expected property EBITDA margin of 55%, it is likely to generate revenue and EBITDA of ₹2.4 billion and ₹1.2 billion in FY25E, and the contribution to LT’s consolidated EBITDA would be 17.0%, it added.

Lemon Tree's strategic emphasis on asset-light expansion, coupled with the flagship Mumbai property, is expected to steer future earnings. JM Financial anticipates a revenue and EBITDA CAGR of 19.5% and 19.3% over FY23–26E, with EBITDA margins maintaining at 50%.

The brokerage expects RoE to improve further, from 13.6% in FY23 to 19.6% in FY26E. Considering these growth factors, the brokerage has initiated coverage on Lemon Tree Hotels with a 'buy' rating and a price target of ₹115 apiece, reflecting an upside of 20%

Indian Hotels Company: Target Price: 450 - Upside 17.8%

According to JM Financial, Indian Hotels Company stands as the second-largest operator of branded rooms, following Marriott, and is the premier owner/operator of hotels in India.

The brokerage said the company has focused on an asset-light expansion strategy and has been fairly successful in expanding the portfolio to 263 hotels (including pipeline hotels) currently, despite the Covid-19 disruptions during FY21–FY22.

Successful re-positioning of certain businesses, such as Ginger and TajSATS, has resulted in substantial earnings growth. Leveraging the strong brand recall of 'Taj' and 'Tata,' the company has ventured into adjacent categories, creating a comprehensive hospitality ecosystem, it noted.

The brokerage pointed out that the company's unmatched pan-India coverage, comprehensive presence across all customer segments, vastly improved brand architecture, and a sharper focus on capital allocation, coupled with the favourable demand situation, are yielding results with a positive flow-through into earnings.

JM Financial estimated a revenue and EBITDA CAGR of 12.5% and 15.9% over FY23–26E for Indian Hotels and expects RoE to improve further from 13.3% in FY23 to 14.9% in FY26E. It has initiated coverage on the stock with a 'buy', setting a target price of ₹450 apiece, which indicates an upside rally of 17.8%.

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