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Hotel stocks were up in trade on Wednesday on a strong demand outlook for the sector.

Indian Hotels is up 5.45 per cent at Rs 414 on BSE. EIH is up 4.4 per cent at Rs 242 on BSE. Chalet Hotels is up 2.3 per cent at Rs 535.Lemon Tree Hotels is up 4.2 per cent at Rs 107.

The demand outlook for chain-affiliated hotels looks strong on the back of buoyant domestic demand, significantly higher foreign tourist arrivals due to one time events (G-20 Summit and the Cricket World Cup) and the forthcoming wedding season, JM Financial Institutional Securities said in a report.

“We re-iterate our positive stance on the sector, as we believe demand concerns beyond FY24E are slightly overdone. Hotel room demand will largely be led by domestic tourism and is expected to outgrow room supply in the medium term,” the report said.

"Consequently, we believe that the peak occupancies and ARRs for the hotel industry are some time away. As per Hotelivate research, the total branded room supply across major Indian cities is 152,945 as on Mar’22 and the upcoming supply is 59,238 rooms over FY22-27E with an active development ratio of 72 per cent (42,531 rooms)."

Majority of the supply under active development, c. 60 per cent, has either already hit the market or will come in FY24E.

As a result supply growth is likely to be muted from FY25E onwards, the report said.

"While short term triggers such as the G20 Summit and the Cricket World Cup will result in a temporary spike in occupancies and ARR, we believe that demand is here to stay beyond these events on the back of resilient domestic tourism, likely revival of foreign tourism and a recovery in business travel."

The visibility for hotel demand remains strong as the Indian GDP is forecasted to grow at 6.3 per cent/ 6.4 per cent in FY24 / FY25 respectively, and room demand tends to grow at 1.3x of GDP.

The report said the hotel industry faces cyclicality as it transverses through peaks and troughs of a business cycle largely due to the demandsupply imbalance. Usually a cycle lasts for 5-6 years and it can be safely said that we are in the second year of an upcycle as pan-India occupancy is below the peak levels of 72 per cent-75 per cent.

As with any other sector, peak supply is linked to development lead time of properties as it catches up to demand in 3 years, which is typically the average duration of the expansion phase.

“We re-iterate that even from a timing perspective, the industry is still in early-cycle expansion phase. Hence, we expect peak occupancies and ARRs to be achieved in the next 18-24 months,” the report said.