The third quarter of the financial year, with its many festivals and weddings, is usually a strong one for the hotels industry. And this year didn’t disappoint – the hotels in focus reported robust growth in revenue and net profit in Q3FY23. Rising leisure travel, revenge tourism and improving corporate travel and events helped drive growth during the quarter.

It looks like pent-up demand from Q1FY23 has not yet fizzled out. In fact, Puneet Chhatwal, CEO of Indian Hotels Co, believes that the continuous rise in travel can no longer be attributed to pent-up demand, as nine months have gone by since the last wave of Covid ended. According to him, “There is a permanent shift in customer behaviour. They are now combining business with leisure, or taking extended weekends by driving to a destination and working from there.”

Companies are positive about the industry’s growth prospects in the near-to-midterm. They believe events like the ICC Men’s Cricket World Cup and the G20 Summit scheduled in India will provide a fillip to inbound travel and overall demand. Hotels also believe the demand-supply mismatch will enable them to command higher room rates even as occupancies increase.

All hotel stocks outperform the Nifty 50 Index

Riding on healthy quarterly results in Q2FY23 and Q3FY23, most of the companies in focus have comfortably outperformed the Nifty 50 Index over the past six months. Whereas, EIH declined 0.4% in the same period. Due to the volatility in the markets, Nifty 50 fell 1.2%. Indian Hotels and Chalet Hotels beat the index by the biggest margins.

The hotels industry has risen 9.5% over the past six months on the back of industry tailwinds. Among the four hotel chains in focus, only Indian Hotels managed to outperform the overall industry. 

Hotel stocks trade at expensive valuations

According to Trendlyne’s durability, valuation and momentum scores, only Indian Hotels and EIH have good durability scores, indicating strong financial health.

All the four hotels have medium momentum scores, suggesting average to low bullishness in the market.

However, all the stocks have weak valuation scores, which indicates that they are trading at relatively expensive levels.  

Revenues up on rising demand and room rates, Indian Hotels sees biggest bump 

A combination of robust demand and increasing room rates amid favourable demand-supply dynamics has boosted revenue growth across the board. On a YoY basis, all the companies in focus have posted revenue growth, with Chalet Hotels leading the pack with a 76.5% YoY increase in revenue.

Compared to the pre-covid quarter of Q3FY20, all hotels posted higher revenues. Indian Hotels’ revenue has increased by the biggest margin. Companies were able to post higher revenues despite relatively lower occupancy rates, due to a sharp increase in room tariffs.

For the near and medium term, these hotel chains expect strong momentum in revenue growth to continue, largely led by robust domestic demand and occupancy rates normalising to pre-pandemic levels amid elevated average room rates (ARR).

Operational efficiencies, cost management help margins and profitability

All the companies in focus saw a massive jump in profits on a YoY basis, when compared to Q3FY20. The improvement in profitability comes on the back of increasing rates along with cost reduction measures and operational efficiencies.  

Lemon Tree Hotels and Chalet Hotels were back in the black on a YoY basis in Q3FY23. Whereas, Indian Hotels and EIH witnessed a multi-fold jump in their net profits, rising 403.5% and 275.6% YoY respectively.

Comparing net profit growth to Q3FY20, Lemon Tree Hotels leads the pack with its profit surging 227.9%. Chalet Hotels comes in second with a 207.2% rise, but this is due to a one-off reversal of provisions worth Rs 60.5 crore.

On a YoY basis, Chalet Hotels’ EBITDA margin has improved the most with an expansion of 23.1 percentage points, led by its hospitality segment’s revenue growing 87% YoY. Compared to Q3FY20, Lemon Tree Hotels’ EBITDA margin expanded the most; it rose by 12.7 percentage points.  

Overall, all the companies in focus have been able to beat their Q3FY20 profit levels with robust expansion in margins led by cost management initiatives. With these initiatives in place, the four firms were able to decrease employee costs, utility costs and other operating costs as a percentage of revenue on a YoY basis and against Q3FY20.

Forecaster estimates healthy revenue growth in FY23

Trendlyne’s Forecaster estimates a robust surge in the annual revenue of the hotels in focus. Chalet Hotels is expected to lead the pack in revenue growth, with a surge of 113.6% YoY in FY23. Lemon Tree Hotels comes in second with its revenue expected to expand by 110.8%. Indian Hotels and EIH’s revenues are anticipated to grow by 85.3% and 61.5% YoY respectively.

Revenue growth will be driven by the continued traction in domestic demand along with a recovery in foreign demand despite elevated room rates. Hotels are expected to benefit from both improving occupancy rates and higher average room rates (ARRs) due to the favourable demand-supply scenario. ICICI Securities anticipates industry demand to grow at a CAGR of 10% over FY23-26 and supply to increase at a CAGR of less than 5% during the same time period.    

Average room rates rise as demand continues to gain traction

Organised hotel chains have been consistently hiking room rates for the past few quarters now, as they are optimistic about the demand momentum remaining steady for the coming quarters. Another factor leading to the increase in room rates across the industry is the demand-supply mismatch. According to HDFC Securities, demand is likely to outpace supply for the next two-three years, thus allowing hotels to push prices further, while occupancy rates recover.

All the companies in focus witnessed double-digit ARR growth compared to their pre-pandemic levels. Indian Hotels’ ARR grew 29.6% in Q3FY23 compared to its Q3FY20 levels, the highest among its peers.  

With high-interest rates and elevated commodity prices, it is unlikely for hotels to take up more construction projects. Until the macroeconomic conditions become more favourable, the demand-supply gap is likely to persist. For now, companies are focusing on renovating their current assets to increase room rates further.

Occupancy rates see gradual improvement but still behind pre-covid levels

Occupancy rates have improved YoY for all four hotels but are still behind pre-covid levels. Only EIH’s occupancy rates beat its pre-covid levels. The other three companies lag as they have been focusing on improving their revenue per available room (RevPAR) through higher room rates for the past few quarters.

Indian Hotels Co’s occupancy rate fell only by 50 bps against the levels in Q3FY20 and Lemon Tree’s dipped by 3.7 percentage points.

Chalet Hotels’ occupancy rate is behind its pre-pandemic levels by 10 percentage points. The company’s management attributes this to lower corporate travel during October and the last two weeks of December due to long holidays.

Increasing room rates drive jump in per room revenues 

The consistent rise in room rates across the Hotels industry has led to industry RevPAR beating pre-covid levels since Q1FY23. Among the four hotel chains in focus, only Chalet Hotels’ RevPAR is below its Q3FY20 levels. Its management believes lower occupancies offset higher ARRs, leading to a decline of 3.2% in RevPAR compared to its pre-pandemic levels.

Indian Hotels leads the pack in RevPAR growth, compared to Q3FY20, with an increase of 28.7%. The company’s management cites robust growth in key locations like Mumbai, Goa, Bengaluru and Delhi for this. EIH comes in second with a growth rate of 28.2%. Lemon Tree hotels has had a 17.1% growth, held back by the subdued performance of its Keys brand.

With a favourable demand-supply scenario still at play and travel nearly back to normal, the hotels in focus anticipate RevPAR to continue to grow on the back of rising room rates and occupancies.

Hotels to benefit from an upswing in industry cyclicity

With strong economic and industry tailwinds, hotels are expecting robust growth in Q4FY23 and FY24 as well. Patanjali Keswani, Managing Director of Lemon Trees, expects the company’s EBITDA margin in Q4FY23 to be well over its Q3FY23 levels. He anticipates the firm’s revenue in FY24 over FY23 to grow by 20% and net profit to surge by 40-50%.

The companies in focus expect inbound travel or foreign travel in India to reach pre-covid levels in Q4FY24. The management of EIH is particularly upbeat about foreign travel normalising, as the hotel generally has a larger share of foreign guests as compared to its peers in India.

The business environment for the industry is favourable due to the uptrend in demand and lagging supply. This allows organised hotel chains to command premium rates in the medium term. Unless another black swan event like Covid derails the upswing, hotels will benefit from the upcycle in the industry.

This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation.