Brokerage Nomura expects that the Indian hospitality sector's average daily rate growth cycle will continue with demand for luxury hotels will rise. In this context, the brokerage in its recent note has initiated 'Neutral' coverage on Leela Palaces and Chalet Hotels, while maintaining 'Buy' rating on these stocks.
Nomura has set a target price of Rs 510 on Leela Palaces, marking an upside 17% from the previous closing price. For Chalet Hotels, the brokerage has set a target price of Rs 860, an upside of 6.5%
The note cited Hotelive data, which said the supply in key business cities and the luxury segment are expected to grow at 6-7%, due to high barriers to entry. Meanwhile, the demand for luxury hotel is likely to grow at a high single digit or low double digit percentage.
This growth will be led by demand from affluent Indians and HNIs, corporate demand for hospitality in GCC-focussed cities such as Hyderabad, Bengaluru and Pune, resilient foreign and strong domestic tourism, and rupee depreciation, which acts a a tailwind for average daily growth rate.
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In comparison to global markets, hotels in India are untapped, while they provide better yields. The note shared an analysis of cities across Asia Pacific indicating that hotel penetration in key metro cities in India is significantly low. In terms of hotel density, factors such as population, air traffic and grade A office stock hotel room drive demand in country. Nomura flagged demand-supply gaps, even in metro cities such as Delhi NCR, Mumbai, and Bengaluru.
Meanwhile, the return on capital empoyed (ROCE) for various hotel segments indicates that while luxury assets maximize eamings per key, budget hotels combine strong operating margins with low capital intensity, resulting in higher ROCE.
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