Shares of many hotel companies have rallied in recent months. What are the reasons for this? Can investors find good investment ideas in this sector?
- Related Research: We had published a report on Mahindra Holidays in Mar 2013. The share is up 109% in 5 years, or 22% annualized. To read the report, click on LINK.
- The Sector can be tracked on moneycontrol on LINK
- Tourism in India accounts for 9.6% of GDP and is the 3rd largest forex earner. It is a high potential, sunrise sector with a multiplier effect on transportation, hotels and exports.
- Over the last decade, India’s hotel industry witnessed excess supply of hotel rooms which led to low occupancies, flat/falling Average Room Rates (ARR) and average financial performance of hotels operating across different business segments. See Fig 1 and 2.
- The hotel sector in India experienced flat to negative growth in occupancies over FY08-13 primarily due to a substantial growth in supply and a decline in demand. During FY12-15, as many as 43,800 rooms were added creating nearly 70% new capacity; and simultaneously the economy and hotel demand grew so occupancy growth was flat. Several hotel firms were loss making in this period.
Fig 1 – Average Room Rates of Indian Hotels and Fig 2 – Occupancy Rates. Source: HVS 2017 Hotels report
- The chart below (Fig 3) reflects the occupancy scenario over the years and the growth projections. We can see that the demand growth is rising, while supply growth has slowed. Improved occupancies are expected to create a base for higher room rates. The higher occupancy and higher ARR’s will improve the earnings of firms from the industry.
- Fig 3 Sources are 1) Lemon Tree Hotels RHP 2) HVS 2017 report 3) STR and Horwath HTL India Reports
Fig 3 – Hotel Industry Demand-Supply and Occupancy
We have done this exercise of key players to better understand their performance.
- From the exhibit, we can see that a lot of the companies trade at high P/E ratios. This is generally due to depressed earnings earlier and a recent move from loss to profits. However, a few companies are even now loss making.
- The 3 year sales and PAT growth for most of the companies was dismal. Returns too are low.
- The industry was also affected due to liquor ban on operators near highways. This has however been sorted out and is applicable for non-urban locations.
- The implementation of GST was neutral for the industry. However tax rates may fall now.
The hotel industry is clearly witnessing a revival. The hotels witnessing higher occupancy rates and improved pricing power with conservative management will be profitable investments.
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