Lemon Tree, EIH: Good time to check into hotel stocks, say analysts
Domestic travel industry has been one of the worst sufferers of Covid-19, as…
Domestic travel industry has been one of the worst sufferers of Covid-19, as the pandemic and the ensuing lockdown hit their coffers hard. However, the economic activity picking up over the past few months, travellers – both leisure and business – are slowly returning. With an improvement in macro indicators in terms of business as well as COVID recovery rate, the hospitality sector is also expected to witness a revival in demand, though at a slower pace.
“There has been a sharp surge in demand, our on-ground checks reveal. That apart, the room costs have surged as more and more people are now willing to travel. On their part, hotels are in no mood of giving discounts / offers on room rent. This is something unheard of in the last few years. All this augurs well for the hotel sector. Among the lot, those with less debt and focus on domestic market should do well given the current overseas travel restrictions,” says A K Prabhakar, head of research at IDBI Capital.
At the bourses, most hotel stocks have gained ground from their respective March 2020 low. ITDC, Lemon Tree Hotels, Indian Hotels, EIH and Taj GVK have rallied 56 per cent to 163 per cent since then.
Data source: Capitaline; Compiled by BS Research
India’s hospitality industry, according to a recent report by realty consultants JLL, witnessed a decline of 54.9 per cent in Revenue Per Available Room (RevPAR) during January to December (CY 2020) as compared to CY 2019. But, things are slowing normalising.
“We are already seeing signs of domestic business travel pick up in 2021. We expect that occupancies in business hotels will ramp up from March/April 2021 onwards as companies gradually lift travel embargo. Furthermore, domestic leisure travel will continue to drive occupancies across the country. Food & beverage (F&B) demand will continue to grow as eating out will increase, albeit cautiously,” said Jaideep Dang, Managing Director, Hotels and Hospitality Group, South Asia, JLL.
Among regions, Goa emerged as the RevPAR leader in absolute terms, despite a decline of 33.3 per cent in December 2020 quarter (Q4’2020) compared to Q4’2019, the JLL report said. Bengaluru saw the sharpest decline of 77 per cent in RevPAR in Q4’2020 compared to the same period in 2019. However, the city has witnessed a month-on-month growth in performance during Q4’2020, JLL notes.
“The revival of the sector has primarily been driven by leisure ‘revenge travel’ during weekends, festive season, weddings and F&B demand. However, the sector would likely see a full recovery in demand only post full resumption of international flights as foreign tourist arrivals, especially from US, UK in October – March remains a top contributor to the revenues of premium segment hotel rooms,” explains Rashesh Shah, an analyst tracking the sector at ICICI Securities.
As per ANAROCK Property Consultants, over 26,340 rooms were added in the organized or branded hotels segment during 2017-19, at a CAGR of 3 per cent. As of May 2020, supply was forecast to increase at an average of 2.8 per cent (adding approximately 44,000 rooms) during the 2020 – 2024 period.
“EIH is best placed on the balance-sheet front. The Rs 350 crore fund raise thorough rights issue would improve debt/equity mix to 0.1x from 0.2x. While Indian Hotels has a strong promoter backing, its debt/equity is 0.7x, which combined with capex requirement could lead to further rise in debt-equity to 0.9x, if Covid persists for a longer period. Lemon Tree, being on a capex mode, is highly levered versus peers. However, it also has strong institutional backing for liquidity support,” Shah of ICICI Securities says.
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