The view for investors in shares of hotel companies in India is exciting right now. Average room rates (ARR) and occupancies are expected to be strong in the ongoing September quarter (Q2FY24) and the next one thanks to events such as G20 summit and ICC Cricket Men’s World Cup.
This bodes well for all hotel companies, including The Indian Hotels Co. Ltd (IHCL). On Thursday, IHCL’s shares hit a new 52-week high of ₹436.45 apiece, and have gained 34% so far in 2023, sharply outperforming the nearly 9% rise in the Nifty 50 index. Recall that the stock had already seen a strong rally in 2022.
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In the June quarter (Q1FY24), IHCL’s occupancy and ARR for its domestic business stood at 67.1% and ₹9,128, respectively. ICICI Securities’ channel checks for the industry’s forward hotel rates for October to November 2023 compared to same period last year, indicate that hotels continue to follow a strategy of keeping rates at least 10% higher than previous year levels. Further, foreign tourist arrivals are still below the pre-pandemic levels. As foreign arrivals start to improve, it may propel IHCL’s earnings growth.
In general, vacationing trends are going through a structural shift. “The focus is now more on experience—consumers are willing to switch brands and pay related premium. Vacations are more frequent through a mix of short (weekend getaways, road trips) and long trips,” points out a report by Elara Securities (India).
While these factors augur well, there is also worry about the hotel industry’s growth prospects beyond the near term. On a high base of FY24, earnings growth could look muted in FY25. Analysts at Jefferies India expect IHCL’s consolidated revenue to rise by 19% in FY24 and at a relatively slower pace of 9.7% in FY25.
Here, it helps that the demand supply dynamics are expected to be favourable. “According to various industry estimates, with incremental room supply CAGR expected to range between 5-6% over CY22-26, medium-term demand supply dynamics remain healthy for the Indian hotel sector,” said ICICI Securities. IHCL noted that hotel demand grew by 8% in Q1 versus FY20 while room supply increased by only 6.7%.IHCL’s room pipeline is on a solid footing and stood at 11,203 as on 30 June. It opened five new hotels last quarter and aims to open over 20 hotels in FY24.
Coming to margins, IHCL is not too far from its target of clocking a consolidated Ebitda margin (including other income) of 33% by FY26. Ebitda is earnings before interest, tax, depreciation, and amortization. In FY23 and Q1FY24, this measure was 32.7% and 30.3%, respectively.
To be sure, how IHCL’s return ratios pan out is critical. “Management believes that 13% overall return on capital employed in FY23 was reasonable, given 20% of their balance sheet is not generating any returns (legacy asset with unresolved issues to this date) and this is slated to rise,” said a Jefferies India report on 6 September.
All said, the cyclical nature of the industry is one key concern for investors in hotel stocks, and IHCL is not an exception here. However, the company is making efforts at diversification of its revenues. “Our asset light businesses have doubled in top line from pre-covid times and we remain focused on scaling up the new brands, Taj SATS,” said the management in its Q1 earnings call.
For now, the sharp run up in IHCL’s stock suggests that investors are factoring in the near-term prospects to a good extent. A hit on discretionary spending is a key risk ahead.