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  • Sep 19, 2022 - Hotel Stocks are Booming. Here are 5 You Should Track Closely...

Hotel Stocks are Booming. Here are 5 You Should Track Closely...

Sep 19, 2022

Hotel Stocks are Booming. Here are 5 You Should Track Closely

The travel and tourism industry was among the most affected sector during the Covid-19 pandemic.

The sector, which was already facing questions with regards to its capital-intensive nature and bad industry economics, was severely impacted.

Stocks fell up to 70% in little under two months (March 2020 - May 2020) as experts wrote the sector off citing numerous concerns.

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But little did the experts know that the sector was up for a strong revival in the coming months.

As recent as September 2021, the travel and tourism industry started to see signs of a revival as the government lifted curbs and people stepped out of their homes.

Investing in the beaten down hotel sector was like a gold rush. Those who caught on the trend of revenge travel made hay while the sun was still shining.

Also, the hotel sector had tailwinds in its favour. For instance, with the rise of middle class and e-travel platforms, the domestic hotel industry did see a boom the past decade. Investors who capitalized on this theme were bang on the money.

At present, the prospects of the industry look strong. The results are there for you to see as reported in the quarterly performance of top hotel companies in India.

Improved performance raises outlook for the Indian hotel industry

The festive season has not started yet, and hotel companies are reporting improved performance after a long wait.

In their Q1 results of this financial year, majority of hotel companies reported improvement in revenues and profits due to surge in demand as the occupancy rate exceeded pre-Covid levels.

Hotel companies were also able to raise prices as the re-opening of economy allowed corporate travel, exhibition, and conferences. A report from The Economic Times states that bookings for weddings and corporate events have grown over 15% year-on-year (YoY) for the second half of the current financial year.

What this means is hotel companies will see even more demand for rooms.

In financial year 2021-22, the domestic hotel industry recorded an occupancy rate of 50%. For financial year 2022-23, this rate is expected to climb to 69-70%.

According to a report from global research firm Jefferies, based on a survey conducted by hospitality consulting firm Hotelivate, the demand growth is expected to outpace supply in the near to medium term.

The top beneficiaries

The big companies in the sector have an advantage over their smaller peers when it comes to the hotel sector. That's because established players have larger room inventories.

Plus people want to be assured of a certain level of hygiene when they travel...so there's a natural tendency to upgrade.

Here are the top dedicated hotel stocks in India which have been the biggest beneficiaries of the sectoral revival.

Those who invested in these companies at the start of this year would not complain as most of them have delivered substantial gains amid the market volatility.

#1 Indian Hotels

You guessed it right. The biggest beneficiary of the unlocking theme is none other than the largest listed hotel company in India - Indian Hotels.

So far in 2022, shares of the Indian Hotels have delivered returns of 80%.

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Strong earnings and aggressive expansion plans have helped the Tata group company become one of the favourite stocks of 2022.

In the June 2022 quarter, Indian Hotels reported a consolidated net profit of Rs 1.7 bn as compared to a loss of Rs 2.8 bn in the year ago quarter. The improved performance showed was amid a surge in demand as the occupancy and rates exceeded pre-Covid levels.

The annual results also showed that losses were narrowed amid surge in revenues.

Financial Snapshot of Indian Hotels

Rs m, consolidated FY18 FY19 FY20 FY21 FY22
Revenue 41,036 45,120 44,631 15,752 30,562
Growth (%) 2% 10% -1% -65% 94%
Operating Profit 7,416 9,167 11,000 -1,970 5,599
Operating Margin (%) 18% 20% 25% -13% 18%
Net Profit 1,009 2,868 3,544 (7,201) (2,477)
Total Debt 24,274 23,260 26,021 36,328 19,848
Debt to Equity (x) 0.58 0.53 0.60 1.00 0.28
Data Source: Ace Equity

We had first highlighted the growth plans of Indian Hotels in one of our editorials: 4 Tata group stocks with big growth plans ahead.

This is what we wrote:

  • Taking the vision forward, IHCL unveiled Ahvaan 2025 with plans to build a profitable cohort of 300 hotels leveraging its strong brand equity aligned with high growth segments.

    Ahvaan 2025 is designed to accelerate these growth plans by scaling its diversified brand portfolio across its traditional and new businesses.

    The target is to reach a 35% EBITDA share contribution from new businesses and management fees by the financial year 2025-2026.

    To keep up with the momentum, the company has already embarked on its growth trajectory by opening 40 hotels in the past five years labelling it as one of the fastest growing hospitality chains in India.

    The company intends to adopt an asset light model of operations which involves balancing a 50-50 portfolio of owned hotels versus management contract hotels.

The company has not disappointed and lived up to the hype. It has adopted a rapid expansion path and has targeted a portfolio of 300 hotels by 2025.

Further, Indian Hotels is expanding to new destinations such as North-East India besides key global markets that have substantial customer crossover with India.

As the Tata group bets on new growth sectors, Indian Hotels is a big beneficiary and should be on the top of your watchlist.

#2 Lemon Tree Hotels

The next hotel company which has a decent balance sheet is Lemon Tree Hotels.

Shares of Lemon Tree Hotels have gained 75% so far in 2022.

Lemon Tree is largest mid-priced and the third largest hotel chain in India overall. It operates in the upscale segment and in the mid-priced sector, consisting of the upper-midscale, midscale, and economy segments.

Financial Snapshot of Lemon Tree Hotels

Rs m, consolidated FY18 FY19 FY20 FY21 FY22
Revenue 4,843 5,495 6,694 2,517 4,022
Growth (%) 18% 13% 22% -62% 60%
Operating Profit 1,487 1,833 2,543 833 1,397
Operating Margin (%) 31% 33% 38% 33% 35%
Net Profit 142 564 (131) (1,865) (1,374)
Total Debt 10,110 11,956 15,547 16,853 16,987
Debt to Equity (x) 1.63 1.72 1.58 1.84 2.04
Data Source: Ace Equity

As can be seen from the table above, Lemon Tree Hotels has a lot of debt on its books.

In the next five years, the company's management has committed to reduce debt and become a debt free company.

On the capacity addition, the company plans to add 738 rooms in Mumbai and Shimla in the next two years with an investment of Rs 10.1 bn.

Going forward, as the demand for corporate travel and other such events remains intact, Lemon Tree stands to be a big beneficiary with most of its hotels located at business destinations.

#3 Chalet Hotels

Next on the list is Chalet Hotels, involved in hospitality and real estate development.

So far in 2022, share price of Chalet Hotels has gained 55%.

Recently, the company got a boost as it was declared the successful bidder to develop hotels at the Terminal three of Indira Gandhi International Airport (IGIA).

This will be the company's ninth hospitality property in India and first in northern India. The hotel will have 350-400 rooms positioned in the 5-star deluxe space.

On the financial front, Chalet Hotels delivered its best ever Q1 results. Revenues rose to Rs 2,530 m as compared to Rs 674 m in the same quarter a year ago.

Net profit for the quarter came in at Rs 286 m as compared to a net loss of Rs 418 m reported in the year ago period.

The robust performance was on the back of strong recovery in business travel and IPL season.

However, the company remains a loss-making entity and has a lot of debt, when the full year financials are taken into considered.

Financial Highlights of Chalet Hotels

Rs m, consolidated FY18 FY19 FY20 FY21 FY22
Revenue 7,955 9,872 9,808 2,856 5,078
Growth (%) 8% 24% -1% -71% 78%
Operating Profit 3,005 3,668 3,708 290 1,204
Operating Margin (%) 38% 37% 38% 10% 24%
Net Profit (929) (76) 1,027 (1,390) (814)
Total Debt 27,253 15,460 19,015 20,583 25,340
Debt to Equity (x) 5.5 1.09 1.23 1.46 1.89
Data Source: Ace Equity

Going forward, Chalet Hotels stands to benefit from its tie-up with well-known international hospitality group and a wide advertising network.

#4 EIH

Next on the list is a luxury hotel chain EIH, (formerly East India Hotels), which has gained 48% in 2022 so far.

Flagship company of the Oberoi group, EIH is primarily engaged in owning and managing premium luxury hotels and cruisers under the luxury Oberoi, Trident, and Maidens brands.

The group has been in the luxury hospitality business for more than six decades in India. Over time, it also expanded into Indonesia, Mauritius, Egypt, and UAE.

Early signs of revival can be seen for EIH as the company turned around in the June 2022 quarter. The company reported a profit of Rs 660 m as compared to a loss of Rs 1.1 bn in the same quarter last year.

For the full year, the company saw a 100% growth in revenues, aided by demand recovery.

Financial Snapshot of EIH

Rs m, consolidated FY18 FY19 FY20 FY21 FY22
Revenue 15,984 18,108 15,963 4,935 9,853
Growth (%) 5% 13% -12% -69% 100%
Operating Profit 4,049 4,747 3,687 -2,298 574
Operating Margin (%) 25% 26% 23% -47% 6%
Net Profit 1,792 1,315 1,488 (3,697) (975)
Total Debt 5,019 5,501 4,761 3,412 3,340
Debt to Equity (x) 0.17 0.18 0.15 0.11 0.11
Data Source: Ace Equity

EIH fares well on debt metrics with its debt-to-equity ratio staying below 0.3% for the past decade.

Another group company is EIH Associated Hotels, which also showed signs of revival by turning profitable in the June 2022 quarter.

According to media reports, luxury hotel companies like EIH among others are set to benefit from the G20 Summit 2023 that India will host in Kashmir.

#5 Mahindra Holidays & Resorts

Last on our list we have a Mahindra group company - Mahindra Holidays & Resorts.

Mahindra Holidays offers family holidays primarily through vacation ownership memberships. Started in 1996, the company's flagship brand 'Club Mahindra' has over 250,000 members.

The company is the largest operator of leisure hotels in Finland and the largest vacation ownership company in Europe through its subsidy Holiday Club Res.

The company has a different business model than traditional hotel companies.

So far in 2022, shares of Mahindra Holidays have gained 51%.

In its latest quarterly results, the company reported a consolidated net profit of Rs 298 m as against a loss of Rs 214 m in the same quarter a year ago.

The improved performance is on the back of higher revenues which rose to Rs 6 bn as against Rs 3.7 bn in the same quarter last year.

Financial Snapshot of Mahindra Holidays

Rs m, consolidated FY18 FY19 FY20 FY21 FY22
Revenue 23,169 22,390 23,719 17,300 20,133
Growth (%) 2% -3% 6% -27% 16%
Operating Profit 4,030 2,394 4,336 3,641 4,860
Operating Margin (%) 17% 11% 18% 21% 24%
Net Profit 1,324 604 (1,321) (131) 675
Total Debt 8,099 8,304 8,616 9,393 9,340
Debt to Equity (x) 1.16 1.6 1.14 1.24 1.13
Data Source: Ace Equity

The company laid out plans in its annual report where it highlighted to add 1,000 rooms in the next two to three years.

The annual report also mentions expanded the company's footprint in destinations such as Bali (Indonesia), Bentota (Sri Lanka), and Pattaya (Thailand).

In conclusion

With demand expected to be strong in the upcoming festive season and occupancies also improving, the hotel industry is a sector to watch out for in the coming months.

Plus there's expectations of corporate action as inventory that is stalled or locked up, comes up for sale in time to come.

Then there is ITC's plan for its Hotels division, which could ultimately be listed separately. That could be a big even for the hotel sector.

All the top companies have laid out their growth plans. Many speak of becoming debt free by 2025 and also add a lot of rooms.

At present, they have a lot of debt on their books. Most of them have a debt-to-equity ratio above one, which is a red flag.

Yet, stock prices have run up in anticipation.

If the companies do manage to become debt free and stay on track for their ambitious growth plans, who knows...these stocks could become the multibagger stocks for 2025.

On that optimistic note, we recommend you watch the below video where India's #1 trader Vijay Bhambwani talks about how to pick the best hotel stocks.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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