The hotel industry in Q2FY24 delivered a  performance similar to its first-quarter, as market conditions and demand dynamics stayed unchanged. Although the July-September quarter is traditionally the weakest for the industry, it maintained its momentum. 

Changing consumer habits are creating new winners and losers in this industry. Travellers are increasingly combining business with leisure trips and favouring branded hotels over unorganised alternatives, benefiting firms like Indian Hotels Co (IHCL), EIH, Chalet Hotels and Lemon Tree Hotels (LTH). 

The industry is also seeing a demand-supply mismatch in its favour, especially in the non-luxury segment. This is also keeping prices up in the luxury and upper-scale segments. 

Puneet Chhatwal, CEO and MD of IHCL, said, “Hotel demand is expected to grow at a CAGR of 8% to 10%, while the supply growth is projected to grow at just 5% to 6% annually. Most new hotel developments are occurring in tier 2 and tier 3 cities in the non-luxury segment.”

All these companies expect new additions in luxury and upscale segments, in which they operate, to be slower than growth in the industry’s overall supply. This bodes well for the firms as occupancy and demand are likely to remain high for the next four to five years. 

Hotel industry’s price uptrend slows, valuations remain high

Hotel stocks appear to be running out of steam despite healthy market conditions and a positive outlook. The industry has underperformed the Nifty 50 over the past three months.

Chalet Hotels and Lemon Tree Hotels outperform the hotel industry

Chalet Hotels and Lemon Tree Hotels outperformed their industry, while all the four firms followed the industry trend and underperformed the Nifty 50. 

All hotel stocks post good durability and momentum scores

All the companies have high durability and momentum scores, indicating strong financial health and market bullishness. IHCL however, has a weak valuation score compared to Chalet Hotels, EIH, and LTH.

High room rates drive revenue and profit growth

All the hotel chains in focus have seen double-digit revenue growth on a YoY basis, helped by robust travel demand and high room rates. The current imbalance between demand and supply has further improved their bottom lines – one hotel insider recently noted that occupancy rates have been so high, it’s limited their ability to renovate and “spruce things up, since the hotels are always full.” 

Among its peers, EIH, which operates brands such as Oberoi and Trident, leads in YoY revenue and net profit growth. The company has benefited from the strong performance of the luxury category, where it operates exclusively.

EIH leads in YoY revenue and profit growth

Kallol Kundu, the CFO of EIH, pointed out the industry’s revenue per available room (RevPAR) increase. In FY23, the industry's RevPAR went up by 13% compared to FY20, but the luxury segments’ RevPAR rose by  23% in the same period. 

Kundu adds that “EIH's RevPAR has consistently grown faster than the industry's average.” He expects the firm to maintain this lead in the coming quarters.  

The management of these companies expect revenue and profit growth to pick up in the traditionally strong quarters of H2FY24, as inbound international travel rebounds to pre-Covid levels.

Trendlyne Forecaster estimates healthy revenue growth in FY24

Trendlyne Forecaster estimates healthy annual revenue growth for the four hotels under review in FY24. LTH is projected  to lead the growth, followed by Chalet Hotels.

Forecaster estimates strong revenue growth in FY24

Surprisingly, Forecaster sees EIH’s annual revenue growth to be slower than its competitors, despite its superior quarterly revenue growth in Q1 and Q2FY24. This implies that the street expects the other three companies to see robust revenue growth in H2FY24.

Most hotel firms see EBITDA margin expansion

All the hotel giants, barring LTH, have seen their EBITDA margins expand. This improvement was led by higher room rates, increasing occupancy levels, and cost optimisations. Chalet Hotels leads the pack with its margins expanding by 6 percentage points YoY.

Barring Lemon Tree, EBITDA margins rise for all other hotels

LTH’s margins, however, were impacted by higher renovation and pre-operative expenses at its flagship hotel – Aurika, Mumbai Skycity. In October, the hotel operated at about 15% occupancy, with 100 out of 669 rooms available. However, it expects Aurika to turn EBITDA positive in Q3FY24 as 200 new rooms become operational. The company’s margin was also impacted by higher employee costs due to new hires and larger bonus payments.   

Occupancy rates increase despite higher room rates 

According to HVS Anarock, the overall occupancy rate in the hotel industry for Q2FY24 fell by 120 bps YoY to 61% due to a high base. However, companies such as IHCL, Chalet Hotels and LTH bucked the trend. For instance, Lemon Tree saw a 6 percentage point YoY increase in occupancy rate. 

Lemon Tree Hotels sees big uptick in occupancy rates

EIH’s occupancy rate dipped due to a sharp decline in its Shimla operations, which were severely impacted by adverse environmental factors in Q2. 

Despite these mixed results, all four companies expect occupancy rates to increase in H2FY24 and in FY25-26, as they anticipate a shift in consumer preference for branded hotels over unorganised market players.   

All four firms outperform the industry in RevPAR growth

All the companies barring LTH have reported double-digit growth in average room rates (ARR), with EIH leading the pack. The industry’s ARR growth came in at 15% YoY, according to HVS Anarock. Companies such as EIH and Chalet Hotels, which exclusively focus on the luxury segment, beat the industry, benefiting from premiumisation trends. 

EIH and Chalet Hotels lead the pack in ARR growth

On the other hand, LTH’s ARR growth was tepid as its portfolio has fewer premium hotels and caters to a more price-sensitive consumer base. The management deliberately kept its room rates lower to attract more consumers. 

In terms of RevPAR, all four firms achieved double-digit growth, surpassing the industry’s overall RevPAR growth of 13% YoY. 

All hotels see double-digit growth in RevPAR on a YoY basis

Looking ahead, these companies expect further acceleration in RevPAR and ARRs in H2FY24, driven by the wedding season and meetings, incentives, conferences and exhibitions (MICE) tourism. According to ICICI Securities, hotel room rates in Q3FY24 are expected to be 10% higher than in Q3FY23. 

Growth outlook positive amid sustained demand-supply gap 

As the hotel industry rides an upward cycle, leading hotel chains are focusing on making the most of it by increasing their room count and renovating existing rooms. As they see the supply shortage lasting for several years, these firms will continue to charge premium rates without having to sacrifice occupancies. 

Although sector-specific trends look good, company-specific factors will determine how each of them capitalise on the industry tailwinds in the coming quarters.

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.