Hotel stocks: Good room for gains as demand-supply scene turns favourable

Strong occupancy rates and muted increase in new rooms to keep the demand-supply scenario favourable for the next 5 years; top listed players to benefit more

The September 2019 quarter (Q2) results of many listed hotel companies were not encouraging due to slow demand, which also warranted a downward revision by analysts in RevPar (revenue per available room) growth estimates for FY20. However, there is a sunny side to the story as well. Analysts say the sector’s prospects look good given the favourable demand-supply situation and growth expectations over the medium term.

Archana Gude, an analyst at IDBI Capital, says, “We believe that the hotel industry in India is on a strong revival path. The expected improvement in occupancy and in average room rates (ARR) indicate robust growth for the sector over the medium to long term.”

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Though there was some deceleration in occupancy rates in the last two quarters due to the general election and slow economic growth, and the trend in the December quarter would be a key monitorable, the average occupancy rate of 68-70 per cent is believed to be reasonably good and is likely to improve FY21 onwards. Factors such as government initiatives to promote domestic tourism, rising urbanisation, among others, should lead to an improvement in occupancy rates. In fact, the recent reduction in goods and services tax (GST) for certain room categories and lower corporate tax rates should give further upward thrust to hotel occupancy. Experts say corporate travel is likely to go up with the slash in corporate income tax rates and expected uptick in economic growth. Listed major players such as Indian Hotels and EIH are likely to reap more benefits of the above factors.

For instance, the occupancy rate is expected to be around 72 per cent over the medium term, and much better for major listed players. And, once the 70 per cent occupancy level is crossed, it should lead to better pricing power for the players.

Notably, the favourable demand-supply scenario in the hotel sector is likely to stay for some time, providing sustainable support to ARR and in turn to overall RevPar. According to Sanjay Sethi, MD & CEO of Chalet Hotels, “It takes 4-6 years to build a hotel, from the planning stage. Currently announced supply shows weak supply side for the next few years.” Some other experts echo similar views. They also do not see meaningful supply addition in the hotel space at least in the next five years.

Overall, hotel stocks offer a good investment opportunity to medium- and long-term investors. According to Bloomberg, analysts’ target prices of four listed hotel stocks (Indian Hotels Company, EIH, Lemon Tree Hotels and Chalet Hotels) indicates 11-29 per cent upside from current levels.