hotel stocks: Time to check into some hotel stocks! Lemon Tree could give 18% return

The hospitality industry has witnessed a strong recovery as the travel recovery bodes well for the sector. The hotel companies reported higher flow through (incremental EBITDA to incremental revenue) in 1QFY23 v/s 1QFY20.

While domestic demand is seeing a strong recovery, international travel is lagging. With the pick-up in foreign inbound travellers in 3Q and 4Q coupled with resilient domestic demand, 2HFY23 is expected to be significantly better.

Mumbai continued to be the market leader for the hotel sector, with occupancy of more than 80 per cent in May 2022, followed by Pune and Bengaluru. Players could command better ARR v/s pre-Covid levels with travel making a strong comeback.

Further, the demand v/s supply gap would be favourable in the next 3-5 years leading to better pricing power.

According to HVS Anarock, occupancy rate and average room rate (ARR) has been able to sustain over the pre-pandemic levels in 1QFY23, indicating a strong recovery.

RevPAR (revenue per available room) grew v/s pre-pandemic level across hotels fuelled by better occupancy and ARR with a gradual pick-up in leisure and business travel.

While the occupancy room rate (ORR) remained above pre-pandemic level throughout 1QFY23 at around 65 per cent, the average room rate (ARR) was on a rise in April 2022/May 2022/June 2022 being higher by 4/9/10 per cent v/s April 2019/May 2019/June 2019, respectively.

The occupancy rate is likely to improve further while ARR would remain resilient in anticipation of a resumption in foreign inbound travel that would continue to propel the top line.

The pan-India occupancies in June 2022 reached the 65 per cent mark (3 per cent up v/s June 2019) along with a higher ARR at Rs 5,850 (10 per cent up v/s June 2019). RevPAR improved 13 per cent v/s the pre-pandemic levels for the month.

Despite a drop in domestic air traffic by 8 per cent in June 2022 v/s the previous month due to seasonality, demand in hotels remained buoyant with travellers using other modes of transport.

As per the RBI, FASTag collections per day in June 2022 have seen a 2 per cent increase to Rs 1,434 million v/s Rs 1,409 million in May 2022, indicating that more and more travellers are opting for hotels within drivable destinations.

The hotel sector is poised to continue its robust growth momentum in the coming quarters driven by an expected strong recovery in international travel and improving MICE (meetings, incentives, conferences and exhibitions) activity.

We anticipate the strong demand scenario to sustain in FY23/FY24 based on: a) improved occupancies driven by business as well as leisure segment, b) cost rationalization efforts across hotels, and c) an increase in MICE and foreign inbound travel.

Here are 2 stocks with a 12-month investment horizon:

Indian Hotels: Buy | LTP Rs 307 | Target Rs 320 | Upside 4%

Indian Hotel’s asset-light model as well as new/reimagined revenue-generating avenues, with higher EBITDA margin, bodes well for an expansion in RoCE.

We expect the strong momentum to continue in FY23 and FY24, led by: a) an improvement in ARR and occupancy on account of favorable demand-supply dynamics; b) ongoing cost rationalization efforts; c) higher income from management contracts, and d) unlocking value by launching reimagined and new brands.

The company affirms its FY25/FY26 EBITDA margin guidance of 33 per cent each, with 35 per cent margin accruing in from new business.

Lemon Tree: Buy | LTP Rs 76 | Target Rs 90 | Upside 18%

Lemon Tree is in a sweet spot with business travel picking up, as ~86 per cent of its rooms are located in the business destinations.

We are positive about it due to its strong presence in the mid-priced Hotel segment, higher ARR markets and focus on management contracts. We expect Revenue/EBITDA CAGR of 54/88 per cent over FY22-24 and RoE to improve to 13 per cent.

(The author is Head – Retail Research, . Recommendations, suggestions, views and opinions are his own. These do not represent the views of Economic Times)