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Near-term gains factored in, rally may not hold in aviation, hotel stocks

Rise in costs, lower realisations could keep profitability under pressure

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For the hotel sector, occupancies have increased from 10 per cent in April to over 30 per cent currently led by domestic leisure travel.
Ram Prasad Sahu Mumbai
3 min read Last Updated : Dec 09 2020 | 12:17 AM IST
Led by Lemon Tree Hotels and SpiceJet, which are up 69-92 per cent over the past month, aviation and hotel stocks have been the biggest gainers over this period.

The expected availability of vaccine late December or early next year, a rise in leisure travel, an increase in the cap on load factors, and expected market share gains for larger players have led to the rally in the two sectors. Binod Modi of Reliance Securities says that improved prospects of Covid vaccination resulted in a rebound in these sectors, which were under pressure on worries of a late recovery from the pandemic.

For the hotel sector, occupancies have increased from 10 per cent in April to over 30 per cent, currently led by domestic leisure travel. In addition to seasonal demand (weddings) and local travel, occupancies are expected to improve as outbound travellers opt for domestic destinations, given restrictions on international travel. Brokerages expect occupancies and revenue per available room of hotel companies to improve on a sequential basis, led largely by leisure travel, with business/exhibition-related activities picking up in the June quarter next year after the launch of the vaccine.

While earnings for FY21 are expected to remain weak, analysts at Motilal Oswal Research expect a sharp recovery in FY22 on a low base. This should be led by an improvement in average room rents, occupancies, cost rationalisation and an increase in food and beverage income as banqueting/conferences resume. They expect higher incomes from management contracts to add to the overall revenue.


For the aviation space, the near-term rally has led by the government's decision last week to increase the capacity cap from 70 per cent to 80 per cent of pre-covid levels. Analysts at Kotak Institutional Equities believe market share gains from rail are giving a meaningful fillip to volumes of air travel. Though most gains in load factors have been a function of leisure or visiting friends or family category, they highlight that load factors could have crossed the 80 per cent level in the exit week of November and might suggest the return of business travellers. While higher load factors and average prices should help the recovery, the rising crude oil prices could weigh on profitability.

Rahul Shah, VP Equity Advisory, Motilal Oswal Financial Services, expects the stocks in the two sectors, especially hotels, to see an uptick in the near term, given the rise in occupancies and affordable valuations.

Despite the rally barring InterGlobe and Indian Hotels, the top listed companies in the two sectors are still 24-90 per cent away from their 52-week highs.

However, other experts believe while there are fundamental triggers, the rally has factored in most of the near-term gains. Pankaj Murarka of Renaissance Investment Managers says the rally was on the back of pent up and seasonal demand. Further larger players are expected to consolidate their market share and it will become more difficult for smaller players to survive. However, he believes it will take at least a year and a half to rebound to pre-Covid levels. The sector is expected to consolidate in FY22 after the FY21 washout and strong earning recovery being pushed to FY23.

Ambareesh Baliga, an independent consultant, believes there is exuberance in the two sectors as, despite the recovery in occupancies, realisations in both hotel and aviation sectors are still low. With operational (Covid-related) and raw material (crude oil) costs going up, it will be a while before they can reach the pre-Covid realisations and margins.

 

Topics :Aviation stockshotel stocksMarkets

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