Is the worst over for hospitality stocks?

With operations resuming, hospitality stocks have put lockdown blues behind them

Published 3 years ago on Dec 18, 2020 2 minutes Read

Rashesh Shah
AVP - Research Analyst, ICICI Securities

With unlocking of the economy, the hotel business is gradually picking up as demand revival is visible in the domestic leisure segment. Hotels in key leisure destinations such as Goa, Kerala and Coorg are seeing healthy improvement. Wedding season demand booking for October-March period is also witnessing good pick-up. Hotel reopening in key areas of Delhi and Maharashtra has led to quarter-on-quarter improvement in topline of players such as Indian Hotels. While recovery in the sector is solely dependent on the vaccine, companies are wasting no time in optimising costs by deferring renovation, reducing repairs, renegotiating contracts, introducing automation and taking salary cuts. These measures are helping reduce total operating expenditure by 40-50% year-on-year, leading to positive Ebidta. In FY22, we expect tourism to witness a sharp recovery. With strong balance sheet and strategic property locations across key destinations, EIH is best positioned to ride the domestic tourism growth story. We also believe the current pandemic environment will make strong players like Indian Hotels even stronger once normalcy resumes. Given the company’s strong parentage and brand visibility along with meaningful cost optimisation measures, concerns with respect to liquidity are now negated.

Shobit Singhal
Analyst, Anand Rathi Institutional Equities

Even though the unlocking process in India is underway, hospitality stocks such as Lemon Tree and Indian Hotels have already factored in the recovery. Branded hotels saw wedding bookings for November till January but capacity size is hindering revenue. Hotels at leisure destinations are seeing 55-60% occupancy currently. They are expected to continue doing well till next year, due to pent up demand. However, on an overall company basis there is only 40-45% occupancy. IT companies have enforced work from home and we do not expect occupancy in IT areas such as Pune, Bangalore, Chennai and Hyderabad to pick up before June next year. Occupancy in business cities such as Mumbai and Delhi will cross ~40% in FY21 with average room rate (ARR) drop of 25-30%, whereas occupancy in IT sector-driven cities will be 35-37% with ARR drop of 35-40%. Room rates at hotels such as Taj, Oberoi and Lemon Tree have been lowered by 15-20%. ARR will pick up only when occupancy crosses +65%, which can only happen after a year or so. Unless the recovery is way above our expectation, we do not see great value in hospitality stocks at the current level.