Hotel stocks to find suite spot in medium term despite Q1FY25 chill

Room with a view: Lemon Tree Hotels, Samhi Hotels top picks on brokerage rankings menu

The top listed hotel companies reported robust revenue performance in the January–March quarter (Q4) of 2023-24 (FY24). Boosted by high single-digit growth in room numbers and a similar increase in revenue per available room (RevPAR), the hotel sector achieved 20 per cent top-line growth for Q4FY24.

However, growth in the April–June quarter (Q1) of 2024-25 (FY25) is expected to moderate due to general elections and adverse weather conditions. Despite near-term concerns, most brokerages remain optimistic about the sector’s prospects.

In the near term, the market will gauge demand trends from Q4 performance as well as the ongoing quarter (Q1). Commenting on Q4FY24 performance, Sharekhan Research reported that the average room rate (ARR) grew in the mid-single to low double digits (4 per cent to 13 per cent), while occupancies improved by 200 basis points (bps) to 440 bps year-on-year (Y-o-Y).

Lemon Tree Hotels was an exception, showing a 160-bp Y-o-Y decline in occupancy due to the launch of its Mumbai hotel property, Aurika. Although ARR in Q4FY24 rose by high single digits, it was lower than the preceding quarter. This metric could further moderate in the current quarter.

According to HVS Anarock, pan-Indian ARR grew by 5-7 per cent Y-o-Y in April this year, while occupancy stood at 61–63 per cent, down 2 percentage points sequentially.

Sumit Kumar, a research analyst at JM Financial, pointed out that room rate growth was impacted in May due to general elections and extreme weather conditions across the country. Besides demand trends, the market will also focus on profit metrics.

In Q4FY24, operating profit margins for the sector fell below estimates, dragged down by Samhi Hotels and Lemon Tree Hotels due to renovation costs and higher corporate expenses.

JM Financial Research stated, “With the industry having recovered strongly over the past two years, companies are now likely facing cost pressures due to higher wages and commissions/incentives paid to employees and partners.”

Despite the moderation in growth trends, most brokerages remain bullish given the favourable demand-supply dynamics.

Horwath HTL, the world’s largest hospitality consulting firm, estimates demand for branded rooms in India to increase by 10.6 per cent annually from FY24 through 2026-27 (FY27), while the supply of branded rooms is expected to grow by 8 per cent annually over the same period.

Supply growth is even lower in the luxury and upper upscale segments, with a 5-7 per cent annual growth from 2022-23 through FY27, leading to better pricing power for premium players.

Motilal Oswal’s research team, led by Sumant Kumar, states, “The current favourable scenario is expected to continue over the next couple of years, leading to improved occupancy and rising ARR, significantly benefiting key players who are well-positioned to capitalise on this opportunity.”

The brokerage highlights the varied strategies of key players for growth. Brand owners like Indian Hotels Company, Lemon Tree, EIH, and The Park are focusing on hotel management and revenue diversification, along with adding some owned hotels, while asset owners (Chalet Hotels, Samhi, and Juniper Hotels) are concentrating on leveraging growth by adding more owned keys (rooms).

The brokerage expects earnings growth to remain intact for FY25/2025-26 due to an increase in ARR driven by a favourable demand-supply scenario, corporate rate hikes, room upgrades through renovations, and healthy operating leverage. It has reiterated its ‘buy’ rating on Indian Hotels and Lemon Tree.

JM Financial Research also maintains a positive outlook on the sector. It predicts that sustained domestic tourism, a revival in foreign tourist arrivals, the upward trend in MICE (meetings, incentives, conferences, and exhibitions), and corporate travel will drive double-digit RevPAR growth in FY25. It expects hotel room rates to grow by high single digits in FY25, with a 250–300-bp improvement in occupancy levels. Its preferred picks in the space are Samhi, Chalet, and Lemon Tree.

Sharekhan Research anticipates that hotel companies will post strong performance over the next three to four years as room demand is expected to outstrip supply. Within the listed hotel space, the brokerage prefers Indian Hotels, Lemon Tree, and Samhi due to their focused strategies on room additions and debt reduction in the coming year.