what is happening in the hospitality industry
The hospitality industry is an important part of the growing consumption story in India. The industry has gone through many ups and downs. During COVID-19, it faced massive headwinds due to strict lockdowns. But the industry has recovered well. In this blog, let’s take a deep dive and analyze the space in more detail.
To understand the industry, we first have to understand the key variables. In this space, key metrics to track are the total number of rooms, occupancy rate, and change in room price.
Occupancy levels within the Indian hospitality sector experienced a significant rebound, surging to 66% in FY2023 compared to 50% in FY2022 and a mere 35% in FY2021. This upward trend has correspondingly impacted room rates, which increased from Rs 4,630/day in FY2021 to Rs 4,951/day in FY2022 to Rs 6,869/day in FY2023. Events like the Cricket World Cup should also boost the average room rate in this quarter.
One of the key reasons that led to an increase in the average occupancy rate is the slow growth of room inventory. Hotel inventory has grown at a modest CAGR of 5.5% in the past eight years up to FY2023. On the other hand, demand has grown faster. This demand-supply dynamics has affected the finances of the companies positively.
In this industry, there are multiple listed players in India. While many of them are large in size, there are some small recently-listed players as well. The below image taken from our sector analysis tool lists the players operating in this space.
As you can see, most of the stocks have performed well in the past 12 months. 16 of the 22 NSE-listed names have generated >10% return in the last year. From the big names, EIH Hotels and Indian Hotels are the top performers with more than 30% yearly returns.
Now let’s analyze some of these companies based on some Key factors.
IHCL has the largest portfolio with 22,465 keys. It owns 13,093 keys, while the rest are operated under the management contract model. Lemon Tree manages 5,759 owned/leased keys (including the newly commissioned 669 keys at Aurika Mumbai) and has an additional 3,670 keys under management contracts. Chalet possesses an operational portfolio of 2,890 keys, with an upcoming development pipeline of 870 keys. SAMHI, after acquiring the ACIC portfolio (962 keys), now manages 4,801 keys. Unlike IHCL and Lemon Tree, Chalet and SAMHI own their entire portfolio under the ownership/lease model.
Analysts expect significant growth from IHCL, Chalet Hotels, Lemon Tree, and SAMHI, with anticipated EBITDA CAGRs of 25%, 35%, 33%, and 27%, respectively, from FY2023 to FY2026E. Here's a snapshot of their current and future plans:
IHCL (Indian Hotels):
Pipeline of 11,062 keys across 82 hotels.
Comprising 2,908 owned keys (26 hotels) and 8,154 keys (56 hotels) under management contracts, set to be commissioned by FY2028E.
Lemon Tree:
Recently commissioned Aurika in Mumbai (669 keys) in October 2023.
One owned hotel (69 keys) in Shimla is yet to be commissioned.
Chalet Hotels:
Turning more aggressive on capacity additions with a pipeline of 870 keys.
Existing base of 2,890 keys (2,554 keys as of March 2023).
SAMHI Hotels:
Currently managing 4,801 keys. The recent acquisition of 962 keys (ACIC portfolio) and an additional pipeline of 617 keys.
These players have actively expanded their portfolios through organic, inorganic, and management contract routes in the FY2017-20 period. Lemon Tree added 4,308 keys, IHCL added 2,714 keys, SAMHI added 2,019 keys, and Chalet added 226 keys during this period.
In Lemon Tree's business model, 70% of its revenue comes from room rentals, focusing on the mid-market segment. This specialization limits its offerings in terms of food and beverage (F&B) and banquet services. On the other hand, Chalet's hospitality revenues are expected to decrease to 69% by FY2026E. This shift is due to a more substantial contribution from annuity earnings and the residential segment.
In contrast, IHCL has a diverse revenue stream with 51% expected to come from non-room rentals by FY2026E. This is because IHCL places a strong emphasis on non-room revenues. Their varied offerings in F&B and banquet facilities contribute significantly to this, along with additional services like airline catering and exclusive clubs such as the Chambers, ensuring a robust mix of non-room revenues.
This is an important metric to track as high debt can lead to increased fixed costs. And this in turn can affect the finances during weak times.
As of March 2020, Chalet shouldered a net debt of Rs16.5 billion, which escalated to Rs24.4 billion by March 2023 and further rose to Rs25 billion by September 2023. This increase is primarily attributed to recent acquisitions and ongoing expansion projects. Projections indicate that Chalet's debt levels will likely remain elevated over the next three years.
In contrast, IHCL exhibited a different financial trajectory. With a net debt of Rs19 billion as of March 2020, IHCL transitioned to a net cash position in FY2023, facilitated by equity infusion during the pandemic. This positive financial trend is anticipated to persist.
Lemon Tree's financial standing reflected an outstanding net debt of Rs19 billion in March 2020, which saw a slight decrease to Rs17 billion by March 2023.
SAMHI, with a net debt of Rs28 billion, underwent a reduction to Rs18 billion after a recent equity issuance. A further gradual reduction in net debt is expected as earnings improve.
As per Kotak estimates, there will be a 9% annual growth in demand for India's hospitality sector from FY2023 to FY2028. This growth will be fueled by increasing income levels, a rising contribution from the service sector, and improved infrastructure. Despite a dip in foreign tourist arrivals due to COVID-19, domestic demand has remained robust, especially with increased spending on leisure and weddings in the past two years.
This demand is expected to be sustained by both foreign and domestic tourists, alongside resilient business demand. Notably, the Indian government aims to propel the tourism sector to a USD 1 trillion market by 2047, growing at a 15% CAGR. Room nights sold have consistently grown at a 9% CAGR from FY2015 to FY2023, pushing occupancy levels towards 65%, excluding the Covid-affected years (FY2021 and FY2022).
We feel that this industry will continue to grow at a modest rate. Higher discretionary income along with changes in the spending habits of the younger population will benefit this industry in years to come.
In the short term, the Cricket World Cup along with the festive season might lead to higher topline and bottomline for hotels. However, due to the sharp rally in the past 12 months, none of the high-quality names are showing valuation comfort. We feel that better business performance is priced in at the moment.
But businesses can change and with many hotels being very aggressive in adding the rooms, it will be very interesting to see which company will come out on top and reward its investors!
The Indian hospitality industry has rebounded impressively, with a significant rise in occupancy rates and room rates. The sector is poised for a 9% annual demand growth from FY2023 to FY2028, driven by increased income levels and improved infrastructure. Key players, such as IHCL, Lemon Tree, Chalet, and SAMHI, are expected to experience substantial EBITDA CAGR, showcasing positive growth trends. While short-term prospects are buoyed by events like the Cricket World Cup, careful consideration of valuations is crucial given the recent rally in many hotel stocks. Overall, the industry's future growth hinges on factors like changing consumer spending habits and intense competition among hotels.
Source: Companies, KIE
