HDFC Securities research report on Review of five hotel stocks to buy
Research report can be downloaded as attachment.
Indian Hotels Co Ltd – Well-poised, growth to rebound
Lemon Tree Hotels Ltd – Best amongst the pack
EIH Ltd – Luxury Play
EIH Associated Hotels Ltd – Good, but lacks trigger
TajGVK Hotels & Resorts Ltd – Play on Hyderabad market
Notable trends are evolving in the Indian Hospitality sector that are likely to provide attractive opportunities for long term investors. These include (a) robust demand with occupancies at ~64-66% in FY16-18 vs. 59% over FY09-15. Demand in the near term is projected to outpace supply thereby improving occupancies to 68-70%. This is expected to drive healthy ARR growth over FY19-21.
Hotels being a high operating leverage business, margins are thus expected to improve significantly. (b) Improvising customer mix with rising proportion of individual consumers and SMEs vs. large corporate with higher bargaining power. (c) Consolidation of inventory among branded asset owners through management contracts (asset light). This too improves pricing. (d) Balance sheet strengthening through sale of non-core assets, sale and lease back, equity issue etc.
We believe that the industry leaders like Indian Hotels (IHCL) in luxury segment (five star and above) and Lemon Tree (LTHL) in mid-market segment (2-star to 4-star) with their superior execution capabilities are best placed. Initiate BUY on Indian Hotels with TP of Rs 150 @ 20x Sep-20E EV/EBITDA in-line with its historical average and Lemon Tree with TP of Rs 86 @ 30x Sep-20E EV/EBITDA owing to its superior growth.
Key risks to our thesis include (a) increase in competition as the industry revives (b) reluctance from hoteliers to raise rates (c) downgrading by customers and (d) higher ARR and tax incidences may divert domestic leisure and MICE demand overseas. Poor infrastructure may accentuate this as travel numbers are burgeoning, but airport/highway capacities are coming under pressure.
Cyclical upswing – levers lining up: Indian hospitality industry is at the cusp of an up-cycle that has just begun. Demand-supply imbalance starting from global financial crisis and economic slowdown led to reluctance to raise rates commensurate with adequate ROCE.
This trend has, however begun to change. With the changing dynamics and improved occupancies, ARRs are expected to improve significantly in the medium term (next 2-3 years).
Consumption shift from B2B to B2C: Traditionally, large corporate (50%) has been one of the major demand drivers with strong bargaining powers followed by SMEs (35%) and Individuals (15%) for branded hotels. However, contribution from the millennials has been on rise.
This is owing to greater affordability, changing attitudes, improved connectivity and increasing number of short stay vacations. This shift in consumer mix is positive.
Shift in business to asset light approach: The hotel business has three major parts (a) development (b) owning and (c) managing and branding of hotels. Managing and branding of hotels is an asset light model providing highest ROCE followed by developing the hotels as it involves high risks including the gestation period.
As dominant players showcased capability to run hotel chains with success, room keys are increasingly getting concentrated amongst them. This is positive as it increases brand visibility, pricing power and is attracting more keys and faster stabilization.
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