YES Sec picks top hotel stocks as it sees higher room rates in metro cities

Hotel prices in India's metro cities are likely to remain firm due to limited supply additions, even as higher room availability in tier-2 markets may cap rate growth, YES Securities said.

YES Securities on hotel stocks: The average room rate (ARR) of hotels, located in top metro cities, may continue to rise over the next five years, while it may stagnate, or decrease, in tier-2 cities, shows a study by YES Securities.

 

The analysis is based on the average demand and supply growth projections over financial year 2024-25 to 2029-30 (FY25-30), which reveals that metros and top 20 destinations are expected to witness a relatively lower supply growth, while mid-premium and economy segments are expected to see higher supply addition during the period.

 

According to the brokerage, the key reason behind a lag in supply can be attributed to sluggish active development pipeline, which stands at 78 per cent as of FY25.

 

 

Over FY16-25, active development has remained in the range of 64-79 per cent compared to the proposed supply pipeline. Hence, actual supply is likely to be even lower.

 

“Based on active development, overall supply is expected to grow at 7.7 per cent CAGR over FY25-30E, with top 20 markets supply growth at ~5.7 per cent CAGR, and metro markets supply growth at ~4.6 per cent CAGR,” YES Securities said.

 

Nonetheless, as India’s hospitality sector remains in a structural upcycle, supported by strong demand momentum, constrained supply additions, and sustained pricing power, YES Securities expects the favourable demand–supply equation to underpin healthy revenue growth and margin expansion for listed hotel companies over the medium term.

YES Securities' top hotel stock picks

The brokerage has ‘Buy’ ratings on Lemon Tree Hotels (share price target: ₹190), Chalet Hotels (target: ₹1,150), PARK Hotels (target: ₹235), and SAMHI Hotels (target: ₹300).

 

YES Securities has ‘Neutral’ ratings on Indian Hotels Company (share price target: ₹795), and EIH (target: ₹380).

YES Securities on Indian hospitality sector outlook

 

YES Securities, in its recent report, highlighted that room demand across key micro-markets has continued to grow at a faster pace than new supply over the past few years. This imbalance is, especially, evident in metro cities and major leisure destinations, where new hotel additions have remained muted due to high land costs, longer gestation periods, and cautious capital allocation following the Covid-19 disruption.

 

Occupancy levels, the brokerage noted, are now close to or above pre-pandemic peaks across most categories, including business, leisure, and MICE (meetings, incentives, conferences and exhibitions) travel. With demand remaining robust, hotels have been able to push average room rates (ARRs) meaningfully higher without sacrificing occupancies, driving strong growth in revenue per available room (RevPAR).

 

The branded room nights demand has grown at 7.6 per cent CAGR over the past 10 years, while demand has grown at around 21.4 per cent CAGR over FY22-25, led by a structural shift in discretionary spending and consumer preferences.

 

“Demand trend is expected to remain robust over FY25-30E with growth expected at 10.4 per cent CAGR, higher than supply growth at 8-9 per cent CAGR. Hence, industry should continue to see gradual improvement in ARR and Occupancy over the medium-term, driven by demand-supply mismatch,” it said.

Supply to trail demand in top-20, metro cities

 

YES Securities flagged that the pace of new room additions over the next three to four years is expected to trail demand growth, especially in top-tier cities. It forecasts the overall supply to grow at ~9.6 per cent CAGR over FY25-30E, with top 20 markets likely registering supply growth at ~6.9 per cent CAGR.

 

Supply growth for metro markets, it added, is expected to be even lower at 5.4 per cent. Keys addition in Metro/Tier-1 markets may also be skewed with higher addition in Bangalore (8.7 per cent CAGR), Hyderabad (6.1 per cent CAGR) and Kolkata (5.9 per cent CAGR), while markets such as New Delhi (2.5 per cent CAGR), Pune (3.2 per cent), Chennai (4.4 per cent CAGR) and Mumbai (5.4 per cent CAGR) are likely to witness lower keys addition till FY30E.

Luxury hotel prices may rise

 

That apart,  YES Securities said the luxury segment is also expected to witness muted supply growth at an industry level with around 5.6 per cent CAGR over FY25-30E, leading to only 5 per cent contribution in overall upcoming supply.

 

About 72 per cent of the luxury keys are getting added into top 20 markets with ~46 per cent of luxury supply in Metro cities.

 

“Given strong demand growth witnessed in this segment over past few years, ARR and Occupancy

expansion should continue. As a result, players with strong presence in luxury segment can outperform the industry growth over medium-term,” it said.

Amritsar, Lucknow, Dehradun may see decline in hotel prices

According to YES Securities report, mid-premium and economy segments are expected to see higher supply addition over FY25-30E, with Up-upscale and upscale segments expected to register ~10 per cent supply CAGR, Up-Midscale (~11 per cent CAGR), and Midscale and Economy segments (~9 per cent supply CAGR).

 

A large proportion of supply in these segments, it said, is into top destinations such as Amritsar (14 per cent CAGR), Chandigarh (10 per cent CAGR), Dehradun (16 per cent CAGR), Lucknow (19 per cent CAGR), Navi Mumbai (14 per cent CAGR), Noida (13.5 per cent CAGR), Udaipur (12 per cent CAGR).

 

“Supply growth outside key markets is even higher and is expected to grow at ~14.2 per cent CAGR over FY25-30E. Hence, some of these markets are likely to witness short-term over-supply, leading to heightened competitive intensity and as a result, muted RevPAR growth,” it said.

   

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