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Hotels: Hot streak continues! - Views on News from Equitymaster
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  • Jun 23, 2006

    Hotels: Hot streak continues!

    In keeping with the Foreign Institutional Investors (FIIs) flows, the BSE-Sensex rose from 3,000 points in May 2003 to its peak on May 10, 2006, up 420 per cent! Come May 12, 2006, the bearish sentiment triggered by a combination of factors, ranging from high inflation, rising global interest rates leading to FII outflows, higher crude oil prices and slower economic growth showed no signs of abating, as Indian equities succumbed to cues of weakness across major global markets. For the first time in calendar 2006, the BSE Sensex fell below the so-called support level of 9,000 levels (albeit with no support!). Though the markets have recovered to touch the 10,000 mark, the nervousness among participants is still prevailing.

    Like all other sectors, hotel stocks too faced the brunt of the negative sentiment. Almost all stocks from the sector fell from the highs of 2006. The correction in these stocks has, in general, been in line with that of the benchmark index, the BSE Sensex. This can be seen in the chart below, with all the stocks in question - Indian Hotels, Taj GVK, EIH and Oriental Hotels - having lost more or less in line with the Sensex.

    However, despite this fall, we continue to be bullish on the hotel industry prospects from a long-term perspective. For long-term investors, this seems to be a good opportunity to enter the markets and buy stocks at more reasonable valuations, as the fundamentals are still intact.

    Foreign tourists still come knocking at India's door: India, as a favoured destination for foreign tourists, continues to roll. The inflow of the tourists for the period January 2006 to April 2006 has grown by 14.4% as compared to the corresponding period last year. The foreign exchange earnings are also up 16.3% YoY. The last year was a golden era for the hospitality industry with 3.9 m tourists visiting the country. This year we expect around 4.4 m tourists to visit India.

    Upmove continues: Ten cities in India continue to play the role of perfect host this year. After ending FY06 at a phenomenal 41% YoY growth, both in terms of revenue per available room (RevPar) and average room rates (ARRs) across 10 key Indian cities, the hospitality industry's performance in April 2006 shows that growth is here to stay. During April 2006, RevPar in the premium segment in premier cities rose by 34% YoY. The RevPar growth was driven primarily by ARRs, which increased from Rs 5,592 in April 2005 to Rs 7,563 in April 2006, a growth of 35% YoY (Source: Cris Infac). Occupancy rates across these cities are also on the rise. Riding on a wave of unprecedented room rate realisations, even summer occupancies continue to run high, lessening the effect of seasonality on the hotels.

    Visible expansion plans: Most of the hotel chains are expanding their room inventory. Indian Hotels along with its group companies is adding 2,000 rooms in the next couple of years. Hotel Leela has also drafted a blue print for expansion by increasing its room inventory by 50% at an estimated cost of Rs 14 bn. EIH's Mumbai property is also going to start operations by end of 2007. The foreign brands are not far behind. While Shangri-La is targeting 8 to 10 hotels by 2010, Dawnay Day, with an initial US$ 200 m investment, is planning to add 30 three- to four-star hotels in the next three to five years.

    As we have indicated above, we are buoyant on the prospects of the Indian hospitality industry, both from the international and domestic tourism perspective. On the back of constrained supply, at least in the medium term, we expect occupancy levels and ARRs to remain robust across hotel properties. However, investors need to give adequate consideration to event risks (like economic slowdown and terrorist strikes) that might constrain this growth.



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