Why Jefferies Is Betting On India Hotels Sector

The operating margin of the Indian hotel industry neared its highest level in the fourth quarter of fiscal 2023 due to strong growth in average room rates and cost control, according to Jefferies.

With levers for demand growth intact and industry supply likely to lag demand growth, the occupancy and margin outlook continue to be positive, the brokerage said in a June 8 note.

Jefferies maintains a 'buy' rating for Indian Hotels Co., as seasonality in occupancy and an increase in the average room rate in the first half of FY24 would reflect healthy growth.

ARR Uptick Continued

With continuing focus on improving the average room rate by the industry and occupancy also improving, all the major players recorded robust growth in the fourth quarter of FY23, Jefferies said. Companies again expect demand to exceed supply for FY24, and players expect further improvement in room rates, it said.

There could be some seasonal decline in H1, but with a reduced negative impact compared to previous years, the note said. A further increase in occupancy in FY24 and the likely return of foreign travellers are key drivers for average room rate growth.

Occupancy Improves Across Segments

For all the companies, the majority of the locations and segments have seen improvements in occupancy, Jefferies said.

Companies also indicated improvement in corporate travel, the meeting, incentives, conferences, and exhibitions segment, weddings, and social events, which boosted occupancy. However, the foreign room nights segment has yet to return to pre-Covid levels.

The G20, World Cup Cricket, and the return of foreign tourist arrivals are incremental demand drivers for FY24, companies have said, according to the note.

Margins Boosted ARR Improvement And Ongoing Cost Control

"All major players reported year-on-year (+15–37 pps) and vs. 4QFY20 (+11–19 pps) growth in Ebitda margin, driven by strong ARR/RevPARs, an increase in the management fee component, and control over costs," Jefferies said.

Management indicated that costs are unlikely to go up from the current levels as productivity increases.

Key Pipeline For Major Players

Indian Hotels Company Ltd.

• Signed 36 contracts last year and opened 16 hotels; the company has a pipeline of 73 hotels by the end of FY23.

• The company is planning to open at least 20 hotels in FY24.

Chalet Hotels Ltd.

• 88 rooms in Pune and 168 rooms in Hyderabad are ready and will commence operations soon.

• For the next five years, it has planned capex of Rs 750 crore for hotels, which includes DIAL, Dukes, Airoli, and the addition of 140 keys in Bengaluru.

EIH Ltd.

• 11 hotels are under active discussion for expansion, and the company will share the details once it progresses on the pipeline.

Lemon Tree Ltd.

• Launched a five-year roadmap, targeting to reach 20k+ rooms and 300+ hotels by CY28.

• Including hotels under pipeline (70%+ asset-light portfolio) among several other key targets/initiatives.

Maintains 'Buy' On Indian Hotels Company

"Post the result, we had upgraded IHCL's FY24/FY25 Ebitda estimates by 7% each, to reflect strong visibility on ARR/room additions," the brokerage said.

Seasonality in occupancy and average room rate will play out in 1H FY24, which could still reflect healthy growth on a year-on-year basis and will also give investors confidence in the strength of underlying trends.