Strong prospects, valuations to drive gains for hotel companies' stocks

The hospitality industry has around 212,000 rooms, with an industry size of about Rs 82,000 crore. The industry could grow at an annual rate of 10.5 per cent for the next three financial years, despite a quiet Q1FY25.

The demand will be driven by domestic travellers, who will contribute roughly 50 per cent of the growth, while foreign tourists will account for 30 per cent. The meeting and conference circuit will generate the remaining 20 per cent.

Occupancy may improve by up to 5 per cent, with the average room rate growing at 7-8 per cent over three years.

Notably, foreign tourist arrivals remain below the pre-Covid levels (10.56 million in 2019 vs 9.24 million in FY24) and the pickup will accelerate ARR growth.

Apart from the long-term narrative, a strong Q2FY25 seems likely.

Key players will witness RevPAR (Revenue/per available room) growth of 9-11 per cent year-on-year (Y-o-Y) in Q2FY25, driven by the rising ARR (+7-9 per cent Y-o-Y).  

HVS Anarock claims industry RevPAR was flat

(Y-o-Y) in Q1FY25 as a small rise in ARR (2 per cent Y-o-Y) was offset by a dip in occupancy (minus 170 basis points Y-o-Y). General elections, heat waves, and fewer wedding days (only 5 muhurats in Q1FY25), hampered demand.

In Q2, the pent-up demand and improved convention traction plus a stronger wedding season (44 muhurats between July 2024 to March 2025 should drive growth while the demand-supply dynamics favour growth.

Most players are expanding inventories of owned and managed rooms. Healthy earnings growth is projected with increasing ARR and improved occupancy.

Industry RevPAR was flat at Rs 4,335 in Q1FY25, as increase in ARR (up 2 per cent Y-o-Y to Rs 7,067) was offset by a dip in occupancy (down 170 basis points Y-o-Y to 61.3 per cent).

The foreign tourist arrivals grew 6 per cent Y-o-Y in Q1FY25, and is likely to pick up.

The demand-supply dynamics is favourable with the demand growth of branded rooms at 10.6 per cent and a supply growth of 8 per cent over FY24-27. 

Indian Hotels has the strongest inventory pipeline of 14,516 rooms.

It expects to add 6,636 rooms over FY24-26, including over 5,578 rooms under management contracts.

This is across geographies and brands. Lemon Tree is likely to double the inventory under management contract to over 8,300 rooms by FY27 from 4,366 rooms (June 2024).

A significant portion of the incremental inventory is in Tier-II and leisure locations. EIH is looking to add 50 more properties – owned as well as managed by FY30, with ongoing projects (seven upcoming properties, including three owned).

The Park will add 2,450 rooms over FY25-30 (its portfolio is 2,395 rooms as of June 2024), mostly in key leisure locations with 215 more rooms in FY25. Other key asset owners, such as Chalet, Samhi and Juniper, are projected to add 585 rooms, 165 rooms and 116 rooms respectively over FY24-26.

Players are also focusing on renovating existing assets to generate higher RevPAR. Lemon Tree is renovating 4,400 of its 5,900 owned rooms by the end of FY26. Indian Hotels and EIH have also indicated renovation of key assets.

Given strong free cash flow (FCF) generation, the FCF to Ebitda ratio has improved. Pre-Covid, this ratio was in the range of 30-40 per cent but it has now risen to 50-60 per cent.

This ratio is expected to improve further to 70 per cent over the next three years. 

Similar trends are true for the sector's return on invested capital, which was in the high single digits pre-Covid and has now hit 15 per cent. Given the metrics, hotels are moderately valued with EV/Ebitda ratios of 21 times for expected FY26 earnings.