Hotel stocks: Up on higher room demand

Since October, stocks of hotel companies have done reasonably well having outperformed the BSE Sensex. While most of them have underperformed the broader market since January last year till March 2009, the key reason for the recent upmove is that the fundamentals of the industry are showing signs of improvement helped by the domestic demand.

Additionally, figures provided by the Ministry of Tourism suggest that the trend in foreign tourist arrivals (FTAs) is also improving. For instance, while the FTAs were down by 4 per cent year-on-year in the September month, it was down by just 0.9 per cent year-on-year in October and by a mere 0.6 per cent in November. This has helped reduce the year-to-date (January to November) decline in FTAs to 6.3 per cent, as against the decline of 7.7 per cent in the first nine months.

Hotel companies, too, recorded a sequential growth in occupancy levels during the September 2009 quarter. In a recent report, analysts at India Infoline say that on a sequential basis, occupancy levels at major business locations were up between 100-900 basis points in the September quarter. They say the uptrend has continued in the months of October and November as well, with occupancies ranging 65-77 per cent. As the global economies revive, the FTAs and occupancy levels should also improve further.

Although average room rents haven’t increased, they are showing some signs of stabilising. Rents are expected to rise only in 2010-11 after occupancy rates move up to higher levels (and sustain there), supported by an increase in FTAs. Should this happen, it would give hotel companies some pricing power and better margins. Indian Hotels, EIH and Hotel Leela are estimated to gain from higher volumes (led by new properties) from 2010-11.

Meanwhile, stocks of bigger hotels are currently quoting at a PE of around 30 times their estimated 2010-11 earnings (Hotel Leela at 19 times), which is not cheap and suggests that the near-term positives are already factored in.