Hotel industry market cap tripled since 2019; Jefferies sees momentum continuing


In a recent note, analysts at Jefferies said that they expect the hotel industry will conclude FY24 on a high note, with continued momentum in Revenue per Available Room (RevPAR) expected to extend into FY25.

As per the brokerage, the key drivers propelling this growth include supportive macroeconomic conditions, with hotel demand surpassing supply growth. Additionally, the industry’s focus on pricing strategies, premiumization, and the enduring appeal of the travel theme are expected to serve as significant drivers for both earnings and valuation. As the hotel sector continues to capitalise on these favourable trends, investors are poised to benefit from the sector’s sustained growth trajectory, it added.

Read here: Ambuja, Bharti, SBI, L&T, Zomato among top 11 picks by Jefferies for 5 years

The brokerage has listed key trends that will keep the hotel industry rising this year:

Hotel sector market cap has tripled since 2019: The brokerage noted that the hotel industry market capitalisation has more than tripled in the past three years vs Dec 2019 levels, led by: 1) strong operating performance and earnings surprises drove growth in the stock prices of the listed incumbents; 2) valuation re-rating of the sector on strong tourism theme; 3) listings of Samhi, Park, and Juniper in the past six months.

Travel theme driving investor interest: As per Jefferies, the strong travel theme playing out in India has focused attention on the hospitality space for the right reasons. The surge in domestic tourism post-COVID, infrastructure creation by the government, the resurgence of corporate travel, mega hospitality events, and the emergence of the brand “India” have led to a surge in travel demand. Furthermore, in the past two budgets, the government has been vocal about channelling investment and rolling out initiatives to make India a global tourist hub, it stated.

Strong performances, led by luxury segment: Jefferies also pointed out that based on a recent Horwath HTL industry report, hotel industry ADRs (average daily rates) are over 30 percent higher in CY23, at 7,500 vs sub- 5700 pre-COVID (CY19). ADRs suggest a broad-based rise, with all cities above Dec-19 ADRs and most cities having room prices running at 30-50 percent above this level, it informed. Occupancy CY23 broadly matches CY19 levels. Relative to 2019 and 2008 highs, pricing is strongest in the Luxury segment, it added.

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Indian consumer seeks luxury and experience: A premiumisation trend is visible among Indian consumers, reflecting a younger demographic, higher discretionary income, the influence of social media, and the appeal of brand narratives, sustainability, and a desire for personalised experiences, further highlighted the brokerage. This is also reflected in travel/ hotel demand, which was reinvigorated post-pandemic, with the Luxury segment sustaining the highest growth in ARRs (average room rates), even as international tourism has also picked up, it noted.

“The luxury and premiumisation of the Indian consumer may be at nascent stage, but the scale-up is visible across products and services, incl phones, real estate ticket sizes, car sales, jewellery, and beauty and personal care — and likely to remain a key trend, including in hotels, in our view,” it said.

Cyclical recovery is likely here to stay: The brokerage remains positive on the cyclical recovery of the hotel sector as demand growth momentum should continue to outpace supply additions growth, supporting Industry pricing/profitability. Demand momentum should be supported by a healthy macro, which drives business demand, continuing leisure travel demand, and growth in the MICE (Meetings, Incentives, Conferences and Exhibitions) & F&B (food and beverages) segments. It likes hotel operators’ discipline to improve RevPAR, providing visibility on profitability; the discipline may also reflect new listings in the space.

Read here: L&T, Power Grid, NTPC see further re-rating prospects – Jefferies

Earnings momentum to remain strong

The brokerage also observed that hotel companies’ performance and management commentary have consistently overshot Street expectations in the past 12-18 months, driving steady upgrades in earnings. It believes earnings momentum to remain strong for hotel peers in FY25/FY26, though taper vs FY23/FY24 performance.

Valuations should get support from the travel theme and it continues to like the space. New listings in the space provide opportunities to play more brands with asset-heavy models as well, it said. For IHCL, the brokerage builds a 7-9 percent growth in ARR for FY25-FY26 and models an 18 percent EBITDA CAGR in FY23-FY26E.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 19 Mar 2024, 02:42 PM IST


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