Hotel stocks have more room for an upside; buy selectively: Analysts

The move to demerge the hotel business into a separate entity by ITC has brought back focus on hotel stocks, which have already seen a good run thus far in fiscal 2023-24 (FY24).

Analysts believe there could be more gains in store over the next one year for the stocks in this sector, but suggest investors put in money on a correction only from a long-term perspective.

Hotel stocks, according to A K Prabhakar, head of research at IDBI Capital, have seen a good run as travel picked up post Covid in India. Not only have the room rents increased, the occupancy, too, has surged.

“On their part, hotels have become cost efficient and trimmed excesses, especially the employee costs.

"All this is being seen positively by the markets. That said, most stocks factor in the positives at the current levels. Lemon Tree, Chalet Hotels, Indian Hotels, Mahindra Holidays and Resorts are some stocks I like in this space. One can buy on a dip from a two-three year’s perspective,” Prabhakar said.

At the bourses meanwhile, Howard Hotels has doubled investor’s money with a rise of nearly 117 per cent thus far in FY24.

Kamat Hotels, Benares Hotels, Taj GVK Hotels & Resorts, Asian Hotels, Mahindra Holidays & Resorts, EIH Ltd and Chalet Hotels have outperformed the markets with a rise of up to 82 per cent.

The S&P BSE Sensex, S&P BSE Midcap and the S&P BSE Smallcap indices have gained around 12 per cent, 23 per cent and 27 per cent respectively during this period, ACE Equity data shows.

For FY24, analysts believe demand drivers such as the G20 Summit coupled with sports events such as the Men’s Cricket ODI World Cup in October-November 2023 to be held in India, may drive revenue per available room (RevPAR) growth for hotels.

According to the India Hospitality Industry Overview 2022 by HVS Anarock, industry level occupancies which recovered to 60 per cent in CY22 are estimated to reach 66 per cent in calendar year 2023 (CY23), 68 per cent in CY24 and 70 per cent in CY25.

Meanwhile, the industry average room rate (ARR) that stood at Rs 6,100 in CY22 is estimated to reach Rs 7,106 in CY23, Rs 7,639 in CY24 and Rs 7,983 in CY25.

“In RevPAR terms, this implies that compared to CY22 industry RevPAR of Rs 3,600, RevPAR may rise to Rs 4,690 in CY23, Rs 5,194 in CY24 and Rs 5,588 in CY25, or a 15.8 per cent CAGR in industry RevPAR over CY22-25.

"As per various industry estimates, with incremental room supply CAGR expected to range between 5-6 per cent over CY22-26, the medium-term demand supply dynamics remain healthy for the Indian hotel sector,” wrote Adhidev Chattopadhyay of ICICI Securities in a recent note.

Region-wise, while leisure destinations such as Goa and Rajasthan may see Q2FY23 RevPAR remaining flat or declining marginally YoY, among business hotels, Mumbai and New Delhi/Gurugram continue to see the strongest demand with the cities of Bengaluru and Hyderabad are playing catch up, Chattopadhyay said.

Given the favourable demand-supply dynamics over the long term, ICICI Securities maintains an ‘add’ rating on Indian Hotels Company Limited (IHCL), and ‘buy’ rating on Lemon Tree Hotels (LTH).