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Hotels Sector Analysis Report 

[Key Points | Financial Year '20 | Prospects | Sector Do's and dont's]

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  • The hotel industry in India can be segmented into four categories - independent/unbranded hotels, alternate accommodations, new-age hotel chains, and branded/traditional hotel chains.
  • The independent/unbranded segment comprises more than 70% of the total available hotel rooms whereas the branded/traditional hotel segment, which dominates the organized sector, accounts for about 5% of the total hotel rooms.
  • India accounts for the highest number of domestic leisure travelers in the world. Business travelers are gradually increasing in number, owing to the rapid growth of the IT sector in India and the emergence of several global companies.
  • The hotel industry in India is highly dependent on the tourism sector for business, and hence, government initiatives play a crucial role in aiding the expansion of the industry.
  • The government has made serious efforts to boost investments in the hospitality industry. In the hotel and tourism sector, 100% FDI is allowed through the automatic route.
  • A five-year tax holiday has also been offered for 2, 3 and 4-star category hotels located around UNESCO World Heritage sites (except Delhi and Mumbai).
  • An investment-linked deduction under Section 35 AD of the Income Tax Act is in place for establishing new hotels under 2-star category and above across India, thus permitting a 100% deduction in respect of the whole or any expenditure of capital nature.
  • In 2019, the Government reduced GST on hotel rooms with tariffs of Rs 1,001 (US$ 14.3) to Rs 7,500 (US$ 107.3) per night to 12% and those above Rs 7,501 (US$ 107.3) to 18% to increase India's competitiveness as a tourism destination.
  • The Ministry has setup Hospitality Development & Promotion Board to monitor and facilitate hotel project clearances/approvals.
  • Electronic tourist authorizations, known as e-Tourist Visa, launched by the Government of India has resulted in increase in number of Tourist visas issued in the country. The facility was extended to citizens of 169 countries as of December 2019. During 2019, a total of 2.9 million tourists arrived on e-Tourist visa registering a growth of 23.6%.

How to Research the Hotels Sector (Key Points)

  • Supply
  • The hotel sector (branded category) in the major markets is expected to fall short of meeting the long term demands of a growing economy
  • Demand
  • Largely depends on business travelers but tourist traffic has been on the rise. Demand for hotel rooms normally spurts in the peak season between November and March. There is also an increasing demand due to medical tourism. However, the demand could be muted in FY20-FY21 due to cut in the corporate budgets, limited travelling and social distancing amid pandemic.
  • Barriers to entry
  • Economic risks, high capital costs, competition in the industry, poor infrastructure facilities and scarcity of land.
  • Bargaining power of suppliers
  • Limited due to higher competition, especially in metros.
  • Bargaining power of customers
  • Higher in metros due to increasing room supply.
  • Competition
  • Intense in metros, slowly picking up in tier-2 and tier-3 cities. Competition has picked up due to the entry of foreign hotel chains.
  • Threat of Substitutes
  • Low, but could increase in the future as there is increasing competition from startups/hotel aggregators due to the higher penetration of the internet.

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Financial Year '20

  • In FY20, Bleisure travel, a combination of business and leisure, was at an all-time high. With the quest for a better work-life balance growing stronger among Indians, most new-age corporate travelers continued to make the most of their business trips by extending their stay in hotels.
  • The hotels sector saw a rise in staycations, as working professionals looked to escape city life near their homes.
  • Millennials spent more on experiences like food, adventure etc., the hospitality sector saw a widening base of customers who prioritized wallet friendly travel and accommodation.
  • FY20 also witnessed an estimated 11 million Foreign Tourist Arrivals (FTAs) to the country, a growth of 3.2% over FY19 due to easy access to e-visas and government schemes. As of total foreign visitors, over 2.5 million arrived on an e-tourist visa - a growth of 24%, thereby increasing revenue for the hotel industry
  • Cashless transactions and a booming fintech industry set the tone for a rise in digital payments for the hotels sector.
  • Towards the end of the year, the onset of the Covid-19 pandemic, impacted the industry in an unprecedented manner, more so as the industry is highly people-centric in nature, and service delivery involves close interactions between service providers and guests.
  • The industry was further impacted by the government's response to contain the virus, including social distancing, travel advisories, suspension of visas, prohibition against mass gatherings, cancellation of sporting and cultural events, stoppage of interstate transport, railways, etc.
  • Touch-free experiences became the new norm with hygiene and safety gaining top priority. Some hotels introduced new-age technologies across all segments to elevate and assure a safe and hygienic guest experience. Chalet Hotels promoted the usage of mobile check-in, mobile chat and mobile check out via the usage of the Marriott Bonvoy app to promote contactless service.
  • F&B, which generally provides sustainable revenues to the Indian hospitality industry, saw revenues mainly from online food ordering, events for smaller corporate groups, and catering at residences, etc.
  • The hotel and tourism sector received cumulative FDI inflow of US$ 15.28 billion between April 2000 and March 2020.

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Prospects

  • The potential for development of hotels in rural India is high as most of the population resides in rural areas. This can benefit the local community economically and socially and facilitate interaction between tourists and locals for a mutually enriching experience.
  • There is a shortage in the budget hotels and the mid-market hotels segment as travelers look for safe and affordable accommodation.

    Several niche offerings such as medical tourism and eco-tourism are expected to create more demand for the hotel sector.

  • Hospitality majors can enter into partnerships to improve their reach and market share by launching loyalty programs aimed at integrating and rewarding customers of both hotels.
  • Growth in low cost airlines is expected to lower tourism cost and increase domestic spending on hotels. Low cost flights are expected to connect underserved regions in the country and promote domestic tourism.
  • National Mission on Pilgrimage Rejuvenation & Spiritual Augmentation implemented by the Ministry for enhancing the facilities and infrastructure provided at pilgrimage centers across the country also bodes well for the sector. Under Budget 2020-21, the Government has allocated Rs 2 billion (US$ 29.7 million) for the development of tourist circuits at sites of pilgrimages.
  • The government has also allotted Rs 12 billion (US$ 171.7 million) for the development of tourist circuits under Swadesh Darshan for entire North East.

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FAQs on the Hotels Sector

When is a good time to invest in the hotel sector?

The hotel industry is highly cyclical in nature, linked to economic growth. The pandemic and its impact on the sector reflect the fragility of the industry to external developments.

There is a further element of demand and supply that could affect the viability of running a hotel at a particular place. Unlike commodities or fast-moving consumer goods that could be moved around for consumption at any place, the demand for hotel is based on location.

Considering these factors, the decision to invest in the hotel sector should be based on a combination of top down (starting from macroeconomic perspective) and bottom up approach (focusing on company and stock specific fundamentals and valuations).

Where can I find a list of hotel stocks?

The details of listed hotel companies can be found on the NSE and BSE website. However, the overload of financial information on these websites can be overwhelming.

For a more direct and concise view of this information, you can check out our list of hotel stocks.

Which hotel stocks were the top performers over the last 5 years?

Taj GVK, East India Hotels and Advani Hotels were the top hotel performers over the last 5 years in terms of sales and profit growth.

The growth of East India Hotels (EIH) can be attributed to the vast experience of its promoters, the strong 'Oberoi' brand name and its established market presence in the Indian hospitality sector whereas the growth of Taj GVK can be attributed to its considerable operational flexibility with Indian Hotels Company (IHCL) as the hotel operator and also having access to the established premium brands of the latter.

To know which other companies performed well over the last 5 years, check out our entire list of top performers.

What kind of dividend yields do hotel stocks offer?

There is no consistent trend of dividends across the industry, with different companies having different dividend policies.

That said, you can check out our list of top hotel stocks offering high dividend yields here.

Which are the hotel stocks with the highest returns on capital employed (RoCE)?

RoCE is an important tool to assess a company's potential to be a quality investment by determining how well the management is able to allocate capital for future growth. A RoCE of above 15% is considered decent for companies that are in an expansionary phase.

Advani Hotels, Mahindra Holidays and Oriental Hotels are the top hotel stocks right now on the Return on Capital Employed (RoCE) parameter.

To know which other hotel stocks offer great return on capital employed, you can check out the top hotel stocks offering the best RoCE here.

Which are the best hotel stocks to invest in currently?

Investing in stocks requires careful analysis of financial and qualitative data to find out a company's true worth. These parameters include management quality, debt to equity ratio, profitability and return ratios. However, an easier way to find out about a company's performance is to look at its financial ratios.

Two commonly used financial ratios used in the valuation of stocks are -

  • Price to Earnings Ratio (P/E) - It compares the company's stock price with its earnings per share. The higher the P/E ratio, the more expensive the stock.

    To find stocks with favorable P/E Ratios, check out our list of hotel stocks according to their P/E Ratios

  • Price to Book Value Ratio (P/BV) - It compares a firm's market capitalization to its book value. A high P/BV indicates markets believe the company's assets to be undervalued and vice versa.

    To find stocks with favorable P/BV Ratios, check out our list of hotel stocks according to their P/BV Ratios

Resources on the Hotels sector

Views on News

TAJ GVK 2019-20 Annual Report Analysis (Annual Result Update)

Dec 11, 2020 | Updated on Dec 11, 2020

Here's an analysis of the annual report of TAJ GVK for 2019-20. It includes a full income statement, balance sheet and cash flow analysis of TAJ GVK. Also includes updates on the valuation of TAJ GVK.

THE INDIAN HOTELS 2019-20 Annual Report Analysis (Annual Result Update)

Dec 1, 2020 | Updated on Dec 1, 2020

Here's an analysis of the annual report of THE INDIAN HOTELS for 2019-20. It includes a full income statement, balance sheet and cash flow analysis of THE INDIAN HOTELS. Also includes updates on the valuation of THE INDIAN HOTELS.

MAHINDRA HOLIDAYS Announces Quarterly Results (1QFY21); Net Profit Up 47.4% (Quarterly Result Update)

Aug 24, 2020 | Updated on Aug 24, 2020

For the quarter ended June 2020, MAHINDRA HOLIDAYS has posted a net profit of Rs 268 m (up 47.4% YoY). Sales on the other hand came in at Rs 2 bn (down 29.4% YoY). Read on for a complete analysis of MAHINDRA HOLIDAYS's quarterly results.

THE INDIAN HOTELS Announces Quarterly Results (4QFY20); Net Profit Down 42.9% (Quarterly Result Update)

Jun 11, 2020 | Updated on Jun 11, 2020

For the quarter ended March 2020, THE INDIAN HOTELS has posted a net profit of Rs 668 m (down 42.9% YoY). Sales on the other hand came in at Rs 11 bn (down 14.6% YoY). Read on for a complete analysis of THE INDIAN HOTELS's quarterly results.

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