Double tax relief expands room for growth of hotel firms; stocks rise

While lower GST would push occupancy and thereby aid room rates, lower corporate tax rate should add to earnings

Apart from the gains from the reduced corporate tax rates announced last Friday, the hotel sector is blessed with lower goods and services tax rates. With a 2.8 per cent rise in the BSE Sensex, the stocks of most of the hotel players gained 7-20 per cent on Monday. And, analysts see more gains ahead for hotel companies. 

The GST Council slashed GST for hotel accommodation with tariffs of up to Rs 7,500 per night to 12 per cent from 18 per cent, and on room tariff of above Rs 7,500 to 18 per cent from 28 per cent. There will be no GST on room tariffs of below Rs 1,000.

According to Archana Gude, analyst at IDBI Capital, “With lower GST rates, room rates will now become cheaper. This would push occupancy level and so the overall average room rates of hotels.” 

The expected uptick in the occupancy rate augers well in terms of pricing for the hotel sector, which is already seeing a favourable demand-supply scenario. While demand for hotel rooms is rising by 5-6 per cent, room inventory is increasing by less than 4 per cent, according to analysts’ estimates. 

Though there is scepticism over any immediate jump in occupancy, given the overall consumption demand pressure, lowering GST just before the start of the peak season should help hotels fare better, say analysts. October-March is a seasonally strong period for the hotel sector due to holidays and festive seasons. Further demand for the organised hotel sector, though not immediately, would come from a likely market share gain away from the unorganised players because of lower GST rates.

With the new GST rates, the tax gap between luxury and mid-segment hotels has narrowed, and this should help customers shift to higher-scale rooms/hotels, boosting their operating profitability.

Besides, “lower corporate tax rate is expected to improve corporate travellers,” says Sanjay Sethi, MD & CEO of Chalet Hotels. Analysts at Motilal Oswal echoed the view. The corporate segment has a large share of the hotel’s revenue pie.

Further, as is the case with many other sectors/companies, the gap between the existing corporation tax rate for hotels and the revised rate itself has warranted upgrades in earnings estimates. According to FY19 numbers, most of the listed hotel majors face effective tax rates of over 33 per cent, as against the new rate of 25.17 per cent.

Overall, the improved growth potential for hotels should help improve investor sentiment.