Home Market Hotel companies may draw investors with earnings looking up

Hotel companies may draw investors with earnings looking up


ET Intelligence Group: Hotel stocks have not been able to earn meaningful returns over the past year. That, however, may change given the early signs of a turnaround in the form of rising occupancy and higher room rates, which may bring these stocks back on the investors radar.

The occupancy rate and average room rates (ARR) are rising once again after stagnation in Q3 and Q4 of FY18. Occupancy rates improved by 65-70 per cent year-on-year in Q1 of the current financial year from levels of 58-65 per cent over the past three years. ARR improved by 5-7 per cent.

According to analysts estimates, this raised the revenue per available room by Rs 6,152-6,200. As a result, majority of the hotel companies recorded double-digit revenue growth in Q1.

In addition, demand looks upbeat. According to the research firm STR Global, demand for hotels grew by 4.8 per cent in the past six months year-onyear, faster than the 3 per cent growth in the room supply.

Rajiv Bharati, hotels analyst at IndiaNivesh Institutional Equities said, “Now, price hike is a key factor for earnings growth of hotels. Hotels across sizes are reaping good business as demand cycle is improving. Today, we are seeing sustainable, well-negotiated and almost guaranteed business from the corporate sector, which is ensuring high revenue growth for hotels.”

ICICI Securities expects a boost to room rates due to higher domestic travel spends and tourism initiatives by the government. “We expect occupancy levels to improve further due to rise in spending by domestic travellers. In addition, with improved tourism measures by the government, we expect the sector to see a better growth trajectory and healthy pricing in the next 3-4 years, “ it said in a report.

The premium hotels category will also benefit from the change in the Goods and Services Tax (GST) regime where tax will be charged on actual rates rather than the tariff rate range set by the GST Council.

It is estimated that every 1 per cent rise in room rates translates into 5 per cent rise in operating profit before depreciation (EBITDA. To capture this early phase of improving demand cycle, it makes sense for investors to look at hotel companies that are focused on Mumbai and Delhi as these two cities capture the improving demand situation better. These are Indian Hotels, EIH, and Asian Hotels (West).

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