Hotel stocks hit record highs, driven by strong growth expectations

- A 5x returns upgrade: Hotel stocks trump Nifty 50 - Luxury margins boost: 100-150-bp hike likely

Stocks of leading hotel companies have been hitting their all-time highs this month, driven by expectations of a strong performance in the October-December quarter (Q3) of 2024-25 (FY25) and continued growth in 2025-26 (FY26), supported by a higher base. After a slow first quarter in FY25, the sector, led by branded hotels, is benefiting from rising demand and limited supply, resulting in healthy occupancy rates and increasing average room rates. The positive operational metrics and outlook have improved sentiment for the sector. The average returns of the top five players by market capitalisation are 5x those of the benchmark National Stock Exchange Nifty 50 over the past year.

 

In the near term, analysts will focus on the performance in the seasonally strong Q3FY25 and the guidance for FY25. Analysts at Motilal Oswal Research, led by Sumant Kumar, expect the sector to see growth in Q3, driven by strong activity in MICE (meetings, incentives, conferences, and exhibitions), supported by a strong wedding season (33 per cent more auspicious dates year-on-year/Y-o-Y in Q3).

 

The brokerage expects key hospitality players to see revenue per available room (RevPAR) growth of 10-12 per cent Y-o-Y in Q3, primarily due to increases in average room rates, which are projected to rise by 8-10 per cent Y-o-Y. This follows a recovery, as RevPAR increased in the low single digits during the first half (H1) of FY25, with modest gains in average room rates offset by a slight dip in occupancy.

 

The early part of FY25 was impacted by a heatwave and elections. However, domestic air passenger traffic, which grew 6 per cent Y-o-Y, provided stability during H1. Foreign tourist arrivals reached 9.2 million in calendar year (CY) 2023, and this number is expected to exceed 10 million in CY 2024. 

 

Nuvama Research reports that November was a positive month for business hotels after weaker-than-usual traffic in October due to festival holidays and extended weekends. Analysts Rajiv Bharati and Ashish Vanwari of the brokerage believe that the resurgence of corporate travel, along with the festival season and corporate/social MICE events, will drive strong performance in the second half. While the sector dynamics remain favourable, it has downgraded Indian Hotels Company (IHCL) to ‘reduce’, as its valuations exceed historical averages.

 

A strong recovery is expected to help the hotel sector post growth of 13-14 per cent in FY25, following a 17 per cent increase in 2023-24. With demand outstripping supply, CRISIL Ratings expects growth to be 11-12 per cent in FY26, maintaining the trend of steady growth over the past few years. Although higher demand is expected to lead to increased room supply, most of this will come through the asset-light management contract model.

 

While most peers are focusing on a capital-light growth strategy, Nirmal Bang Research believes that Chalet Hotels, an asset owner, should continue to benefit from the industry upcycle over the medium term. The brokerage has a ‘buy’ rating, noting that the company’s valuations reflect favourable sector trends and superior financial performance compared to the previous upcycle.

 

Kotak Institutional Research believes that branded hospitality companies like IHCL and Lemon Tree Hotels deserve higher earnings multiples, given their superior return profiles and faster-expected growth in managed keys (management contracts). This is reflected in their current trading multiples.

 

Sharekhan Research is positive on Samhi Hotels, noting that the addition of 525 upscale rooms in key markets like Hyderabad and Bengaluru will expand its portfolio to 5,640 rooms within two to three years. The company’s use of internal accruals and a higher share of variable leased assets should improve returns and provide capital-efficient growth. The stock is currently trading at an attractive valuation of 11x its enterprise value to operating profit on FY25 estimates.

 

For the broader sector, improved operating leverage and cost optimisation measures could lead to margin increases of 100-150 basis points in FY25, with these gains potentially sustaining in the next financial year. CRISIL Ratings also notes that strong cash flows, asset-light expansion, and sizeable equity raising will help keep debt levels in check, improving credit profiles.

 

In addition to the near-term outlook, Motilal Oswal Research identifies several long-term structural demand drivers for the industry. These include robust economic activity, new convention centres, improved connectivity and infrastructure, recovery in free trade agreements, and growing trends in spiritual and wildlife tourism. The brokerage maintains a ‘buy’ rating on IHCL and Lemon Tree.