The landscape for investors eyeing Indian hotel companies has never looked more enticing. With the anticipation of strong average room rates (ARR) and occupancies in the ongoing September quarter (Q2FY24) and beyond, thanks to events like the G20 Summit and ICC Cricket Men’s World Cup, hotel stocks are emerging as a hot investment option. Let us explore the current state of India’s hotel industry, focusing on The Indian Hotels Co. Ltd (IHCL), and explore the factors contributing to this exciting investment opportunity.
A Rally in Progress
To gauge the enthusiasm surrounding hotel stocks, one need only look at the recent performance of IHCL. IHCL’s shares have soared to a 52-week high of ₹436 apiece. In 2023, the stock witnessed an impressive 34% gain, significantly outperforming the Nifty 50 index, which saw only a modest 9% rise. It’s worth noting that IHCL had already embarked on a strong rally in 2022.
Solid Q1FY24 Performance
In the June quarter (Q1FY24), IHCL reported domestic occupancy at 67% and an ARR of ₹9,130, underscoring the sector’s strength. Forward-looking indicators, such as ICICI Securities’ channel checks, suggest that hotels maintain rates at least 10% higher than the previous year, especially from October to November 2023. Moreover, foreign tourist arrivals are on the path to recovery, providing an additional boost to IHCL’s earnings potential.
Altering Vacation Trends
A structural shift is underway in vacationing trends, emphasizing the importance of experiences. An increasing number of consumers are ready to switch to their preferred brands and shell out extra cash for vacation experiences that go beyond the norm. This shift encompasses a mix of short getaways (like weekend trips and road journeys) and more extended vacations, as highlighted in a report by Elara Securities (India).
Challenges on the Horizon
While the short-term outlook appears bright, concerns loom about the hotel industry’s growth prospects beyond the near term. The high base of FY24 could result in muted earnings growth in FY25, according to analysts at Jefferies India, who project a 19% rise in consolidated revenue for FY24, slowing to 10% in FY25.
Favorable Demand-Supply Dynamics
Despite these challenges, the demand-supply dynamics favour the Indian hotel sector. Industry estimates indicate a 5-6% CAGR in incremental room supply from CY22-26. IHCL has a robust room pipeline, boasting 11,200 rooms as of June 30. The company also opened five new hotels in the last quarter and plans to launch over 20 hotels in FY24.
Margins and Return Ratios
IHCL is steadily progressing toward achieving a consolidated EBITDA margin (including other income) of 33% by FY26. While EBITDA stood at 33% in FY23 and 30% in Q1FY24, the company’s management remains optimistic about further improvements.
Return ratios are critical, and IHCL’s management believes the 13% overall return on capital employed in FY23 was reasonable. They anticipate improvements, especially since a significant portion of their balance sheet is poised to generate better returns.
The Cyclical Nature of the Industry
One notable concern for investors in hotel stocks is the industry’s cyclical nature. However, IHCL is actively diversifying its revenue streams. Since the pre-COVID era, the company has seen a doubling of top-line revenue from its asset-light businesses. They are also focusing on scaling up new brands, like Taj SATS.
The Indian hotel industry is in the spotlight, driven by upcoming events such as the G20 Summit, ICC Men’s Cricket World Cup, and the wedding season. Despite potential challenges, the outlook for hotel stocks remains robust, bolstered by the recovery in international tourist arrivals and solid financial performances. With favourable demand-supply dynamics, IHCL’s strategic expansion plans, and a focus on diversifying revenue streams, hotel stocks remain an exciting investment opportunity. However, investors should remain mindful of the industry’s cyclical nature and potential risks related to discretionary spending.
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