The hospitality sector, which was badly hit during the pandemic, is set for a strong recovery, with the number of Covid cases declining and after the lifting of mobility restrictions. The resumption of scheduled commercial international flights and the expected boost to business travel as companies increasingly conduct offline meetings and conferences are factors that helped drive demand.
This optimism is reflected in hotel stocks. A case in point is The Indian Hotels Company Limited, whose shares touched a 52-week high on the NSE on Wednesday.
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Due to the postponement of many such plans due to the Omicron coronavirus edition, the demand for holidays and weddings has also come to a halt. Analysts at ICICI Securities said in a report on April 6, “As per India Hospitality Industry Overview 2021 by HVS Anarock, industry level occupancy is expected to touch pre-Covid levels of 66% in CY22E/FY23E and reach 70% in CY24E. have hope.” The lack of significant supply growth over the past two years, coupled with strong demand, means high pricing power. Accordingly, the average room rate is estimated to reach pre-Covid levels in FY23E.
Especially for Indian hotels, it also helps that the company has 2,000 crore through a qualified institutional placement issue that closed on March 25. This indicates a net-debt-free balance sheet. The restrictions imposed to contain the spread of coronavirus in the last two years had an adverse impact on the cash flows of Indian hotels, leading to an increase in the consolidated net debt to equity ratio from 0.4x in FY15 to 0.9x in H1FY22. Thus, the free cash flow generated here can be used to cope with disruptions from potential COVID waves or to scale up operations.
ICICI Securities expects Ebitda margin to increase from 22% in FY23E to 29% in FY20 on account of reduction in fixed cost and staff-to-room ratio. Still, there is some margin pressure. “Wage inflation is likely to curb sharp growth in margins. Several employees were laid off over the past two years as COVID affected operations in the region. As demand improves, the workforce has to increase, which means bringing back employees and training them will incur additional costs,” said Vikas Ahuja, analyst, Antique Stock Broking. A resurgence in Covid cases and a resurgence of demand may dampen sentiments to expected levels Given that Indian Hotels stock is trading near higher levels, a sharp jump in the near term may be limited.
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