The hotel industry kicked off FY24 with a strong performance in the April-June quarter, riding on high demand that has continued into the new financial year. As supply trails demand, the market dynamics are allowing hotels to raise room rates.

Given the demand-supply mismatch, the hotel up-cycle is expected to last for a while. Puneet Chhatwal, the MD and CEO of Indian Hotels Co (IHCL), said, “The hospitality upcycle continues with hotel demand growth outpacing supply. We believe this trend will persist for a few more years.”

Despite strong demand, occupancies fell YoY across the industry as rates climbed. Only IHCL and Lemon Tree Hotels (LTH) bucked the industry trend. An increase in room rates drove revenue and profit growth. 

All eyes are on the seasonally stronger H2FY24, as occupancies are expected to rise due to the wedding season and as inbound international travel recovers to pre-covid levels. Also, events such as the ICC Men’s Cricket World Cup and Miss World competition will boost overall demand.

Hotel stocks continue to outperform the Nifty 50

The hotel industry rides high on industry tailwinds, as it outperforms the Nifty 50 index over the past three months.

Only Indian Hotels Co underperfroms the Nifty 50 index

In this upswing, barring IHCL, all the other hotel stocks beat the Nifty 50, with only Chalet Hotels and LTH beating the industry over the same period.

All hotel stocks have good durability scores

According to Trendlyne’s durability, valuation and momentum scores, all the companies in focus have high durability and momentum scores. This indicates strong financial health and high bullishness in the market. However, IHCL and LTH have weak valuation scores, indicating that they are trading at relatively expensive levels. Whereas, Chalet Hotels and EIH have medium-to-low valuation scores. 

Higher room rates drive revenue and net profit growth

Every hotel chain in focus saw healthy double-digit top-line growth on a YoY basis, led by rising average room rates (ARR) and revenue per available room (RevPAR) across the industry.

Higher room rates drive revenue and profit growth

EIH led the pack in revenue growth, rising by 26.3% YoY, followed by Chalet Hotels. All these companies witnessed healthy growth in net profits as well in Q1. Chalet Hotels’ net profit jumped 211.2% YoY to Rs 88.7 crore, the highest among its peers, due to a one-time deferred tax credit of Rs 52.3 crore. LTH came in second, with its bottom line growing by 69.1% YoY.

Trendlyne’s Forecaster estimates healthy revenue growth in FY24

Trendlyne’s Forecaster estimates healthy annual revenue growth for the four hotels. Chalet Hotels is anticipated to grow the most, followed by Lemon Tree Hotels.

Forecaster estimates strong revenue growth in FY24

In addition to revenue growth, these hotel chains are also focusing on increasing room count and market penetration in India. This long-term vision is based on expectations of rising disposable incomes across the country.

Indian Hotels and Lemon Tree Hotels pick the asset-light model for expansion 

To meet rising demand in the travel sector,  IHCL and Lemon Tree are expanding their presence through the asset-light model (this involves managing and franchising properties or hotels rather than owning them). Through this model, hotels can expand faster as they do not have to construct new properties. This also helps them maintain healthier balance sheets.

For instance, IHCL signed 11 new hotels and opened five hotels in Q1FY24. Lemon Tree increased its managed/franchised room count by 8% YoY to 3,401 rooms in Q1, while  its owned room count remained the same at 5,091. Prabhudas Lilladher expects the share of managed rooms to rise to 57% of inventory in FY26, up from 38% in FY23.

In contrast, EIH and Chalet Hotels prefer expansion through ownership during the upcycle. Chalet Hotels plans to increase its operational hotel portfolio to 3,770 rooms in FY26 from 2,802 rooms in Q1FY24.

Vikramjit Singh Oberoi, the MD and CEO of EIH, justifies this strategy by stating, “the returns from owned hotels are substantially higher”. However, this depends on selecting the right locations, and achieving target rates and occupancies.

Higher employee costs and renovation expenses impact EBITDA margins

In Q1FY24, only EIH and Lemon Tree Hotels’ EBITDA margins grew, whereas IHC and Chalet Hotels’ declined. Across the board, margins were impacted by higher employee expenses and costs related to renovations and expansions.

Only EIH and Lemon Tree Hotels’ EBITDA margins rise YoY

EIH’s margin expanded by 590 bps YoY, led by cost management initiatives and operational synergies. LTH’s margin grew by 1.4 percentage points YoY.

Meanwhile, Chalet Hotels saw the biggest drop in margins, falling by 5 percentage points YoY. This was mostly due to a one-time expense of Rs 10.7 crore relating to the reversal of a tax credit received between July 2017 and FY23. An additional cost of Rs 5.7 crore related to the pre-opening expenses of West-in 2 in Hyderabad also impacted margins. IHCL’s margin fell also on the back of higher employee expenses.

IHCL and Lemon Tree’s occupancies rise despite industry-wide fall

According to ICICI Securities, data from HVS Anarock shows that occupancy rates fell by 200 bps YoY across the industry in Q1FY24. Among the four hotels, EIH and Chalet Hotels followed this downtrend. But IHC and Lemon Tree Hotels witnessed their occupancy rates grow on a YoY basis.

Occupancy rates decline for EIH and Chalet Hotels

Lemon Tree’s occupancy rate increased by 5.1 percentage points to 70.2% and the company stated that its occupancy in July crossed 70%. IHCL’s occupancy rate also grew by 190 bps YoY. The management expects its occupancy to further increase in FY24.

On the other hand, EIH’s occupancy dropped by 200 bps YoY, in line with the industry average. However, Chalet Hotels’ occupancy rates fell by 8 percentage points YoY to 70%. The management attributes this fall to a high base in Q1FY23, when the IPL (Indian Premier League) took place in Mumbai, and occupancies in three of its hotels shot up. The share of crew business also declined, as the company has gradually shifted its focus away from the low-margin business. 

Premium room rates drive RevPAR 

According to HVS Anarock, industry RevPAR and ARR rose by 14% YoY and 17% YoY respectively during Q1FY24. Chalet Hotels’ ARR expanded by 38.6% YoY, the most among its peers, followed by EIH.

EIH and Chalet Hotels see double-digit growth in ARR

However, LTH and IHCL’s ARR grew in the single digits, which was lower than the industry’s growth rate. But this relatively modest hike in room rates seems to have positively influenced occupancy rates for both hotel chains.

Despite varying ARR numbers, all the four hotels saw healthy RevPAR growth. Only IHCL’s growth was below the industry average. 

Chalet Hotels leads in RevPAR growth on a YoY basis

ICICI Securities expects hotels to maintain their room rates 8-10% higher than last year’s levels in FY24. The brokerage believes that this strategy of keeping room rates higher will bode well in the medium term due to strong industry tailwinds such as the strong demand for travel.

Long-term outlook favourable, demand-supply gap to persist

Hotels are preparing to make the most of the ongoing upcycle, which is expected to last for a few years. The industry anticipates rising demand from both domestic and international travellers. Given these favourable market dynamics, hoteliers will be able to charge premium rates without sacrificing occupancies, especially during high-demand seasons.

Patanjali Keswani, the Chairman and MD of Lemon Tree Hotels, expects the supply to catch up with demand in four to five years. He added, “The next 4-5 years are going to be a golden period for the industry and you'll find every hotel company doing very well.”