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 Good times ahead; reiterate positive outlook

FY23 began on a strong note for the hotel sector in terms of growth and margin expansion. With the full re-opening, corporate demand and MICE segment also joined the growth bandwagon in Q1FY23 while leisure continued to perform well. This, in turn, helped hotel players to raise room tariffs without disturbing demand. In Q1FY23, average room rates were reported to be even higher by 20-25% vs. preCovid levels. This led to sharp revenue growth of over 24% vs. pre-Covid levels. Hence, the change in strategy from occupancy led growth during pre-Covid era to ARR led growth was clearly visible in the current quarter. Further, major hotel players utilised the long 18-24 months of the pandemic phase to structurally realign their cost base and become leaner in terms of costs. The reported EBITDA margin of 30.3% for Q1FY23 is one of the highest ever reported so far in the past 10 years. In terms of seasonality of the hotel business, Q1 and Q2 (April-September) are the weak season for the hotel sector while Q3 and Q4 combined together (October-March) generate over 60% of total revenue. However, looking at the strong performance in the seasonally weak quarter, H2FY23 (i.e. peak season) is now looking more promising. This season will also have an advantage of influx of foreign tourists who generally visit India for long haul vacation. So far, they have not participated meaningfully in the current business performance. Hence, given this strong tailwind, we expect room tariffs to inch up further and support strong occupancy as well. Overall, we expect “Occupancy + ARR led” growth during H2 that would also support further margin expansion, in our view.

Reduced fixed overheads to aid in healthy margin expansion

A majority of costs of the hotel industry are fixed (i.e. ~70% of total costs), with power/lighting and employee costs taking the major share. Due to 18-month long pandemic phase, hotel players structurally realigned their cost base to become leaner in terms of cost. Hence, we expect over 12-15% reduction in operating costs from pre-Covid levels, which would help companies to scale up margins compared to pre-Covid levels.

Strong promoter/institutional backing to help branded players gain further market share

In our coverage universe, Indian Hotels and EIH are both best placed on the b/s front. The fund raising of | 4000 crore and | 350 crore by IHCL and EIH, respectively, has strengthened their b/s further. This would help them to further gain market share. Though Lemon Tree Hotels has high leverage vs. peers, it has strong potential to grow faster compared to other large players supported by strong institutional backing for liquidity support.

Our preference in tourism space

Given the strong growth momentum expected in all segments of tourism (i.e. premium & midscale hotels including air travel, etc), we prefer leaders across these segments. Our top picks include 1) Indian Hotels – Having a large presence in luxury and mid-scale hotel segment across India and international destinations, 2) EIH – Premium luxury hotel player having a strong presence in key gateway cities like Delhi and Mumbai (~67% revenue share), which will now benefit from influx of foreign tourist arrivals, 3) Lemon Tree Hotels – Branded quality player in the mid-scale segment having high growth potential. It is also expanding its presence in the select premium segment in the domestic market, 4) Easy Trip Planners – Best proxy to play air travel recovery given its low cost and negative working capital characteristics along with strong balance-sheet. The company is also expanding into non-air segment like online bus and hotel booking that are high margin businesses.

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