H2FY24 to be one of the best periods for hotels in 10 years, says JM Financial

Going forward, it continues to believe that occupancies and ARR (average room rate) can grow further – these may not necessarily be achieved in a consistently upward and linear fashion though, as there could be short-term disruptions to an otherwise strong narrative, viz. high base of FY24E, General Elections in May’24, possible risk of IPL moving out of India, unfavourable mix due to higher share of corporate travels – possibly getting nearer to pre-Covid levels.

For its coverage universe, the brokerage estimates ARRs growing at a lower rate of 6-8 percent in FY25E (vs 10 percent in FY24E) and assumes an expansion in EBITDA margins by 100-150 bps on account of positive operating leverage.

For Indian Hotels, which has lagged its peers, JM expects a catch-up in the coming months as it stands to benefit in the strong period ahead with a diversified presence across customer segments and locations. It has a target price of ₹450 for the stock, indicating an upside of 9 percent.

Tailwinds

The hotel industry continues to be under-invested: Over the last 6 years, the cumulative investment in the hospitality industry was $1 bn, at an annual average of $172 mn, informed JM. If we leave out CY19, wherein the sector saw investments worth $762 mn, the average annual investment value comes down to $50 mn. Investment volumes have been muted as the demand environment was unfavourable for a large part of the ten years between CY10 and CY20. Starting CY19, the industry was on the path to a slow recovery but this was disrupted by the Covid-19 outbreak in Mar’20 which lasted for almost 2 years till Jan’22, noted JM.

Strong pick-up in room additions in FY23: The brokerage also pointed out that 2022 witnessed a record number of branded hotel signings (19,860 keys) largely following the new hotel openings that also recorded a new high (9,961 keys). The supply of chain-affiliated hotel rooms grew by 10.3 percent from 149,722 rooms in FY22 to 165,172 in FY23. The growth in room supply in FY23 has been significantly higher than the last 10-year CAGR of room supply which is at 5 percent which implies that there is increased interest in new capital expenditure for hotel projects, said the brokerage.

ARRs expected to grow in FY25E, albeit at a slower pace: The brokerage expects the hotel sector to grow in the mid-to-high single digits in FY25E. Growth in a seasonally weak H1FY25E would be affected further by the General Elections. However, it expects growth to recover in H2FY25E, as the demand-supply inequilibrium will pull occupancies towards 70-72 percent resulting in double-digit ARR growth in the second half of FY25E (adjusted for the extremely high rates at the ODI World Cup match venues).

Near-term outlook

In Q3/Q4FY24, the domestic hotel industry is on track to record decadal-high numbers on the back of strong domestic tourist demand and major global events, forecasted JM. ARR is expected to grow by 15-20 percent YoY in FY24E. However, the high base of FY24E should result in a moderation of growth in FY25E, it noted.

Furthermore, in Q1FY20, when the last general elections took place, occupancy and RevPAR (revenue per average room) declined by 0.4 percent and 2.9 percent YoY respectively and JM believes a similar situation will play out at the start of FY25E. This would lead to a temporary disruption in growth. As corporate sector demand (especially rates negotiated through RFPs) comes back into the revenue mix, it would result in a downward pressure on the room rates, it added.

For its coverage universe, JM expects ARRs to grow at 6-8 percent in FY25E and expansion in EBITDA margins by 100-150 bps on account of positive operating leverage.

Potential risks: Despite the positive outlook, JM has also highlighted the below risks for the sector in the medium term:

• A slowdown in global growth will negatively impact India’s GDP growth. Any such slowdown will have a second-order impact on domestic tourism and hotel room demand, said the brokerage.
• Rollback of EBITDA margin expansion: Margin pressures seem to be coming back slowly as the industry reported a sequential decline in margins. However, this decline could be attributed to seasonality as Q1 tends to be weaker than Q4 and also due to annual wage revisions, it further stated.
• Competitive intensity in the asset-light model has increased as all Tier-1 hotel companies have started focusing on asset-light expansions. As more and more brand owners compete for a highly constrained supply pipeline for management/franchise contracts, the economics may slowly turn unfavorable for the brand owners, noted the brokerage.
• External shocks such as the COVID-19 pandemic or any geopolitical factors (Russia- Ukraine war) can significantly hamper foreign tourist demand, it added.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.

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Updated: 20 Oct 2023, 03:13 PM IST