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Although Q2FY23 is expected to be seasonally weak for the tourism sector due to monsoons, we expect a decent performance from the hotel sector with revenue for the quarter expected to be up ~17% from pre-Covid levels. Consistently strong leisure demand, a sharp rebound in corporate travel along with much needed reset of room rates (as seen in Q1FY23) are expected to act as a key driving force for growth in revenues. However, monsoon led weakness is expected to lead to 6.3% drop in revenues QoQ. As per latest DGCA data, domestic air traffic is expected to decline 8% QoQ to 2.99 crore (~85% of pre-Covid levels).

Foreign inbound travel has so far remained subdued till now but is expected to pick up from H2FY23. Also, a higher base of Q1 (which benefited from wedding season, vacations and IPL matches) would drive revenues lower sequentially. Hence, from Q2FY23E perspective, we expect occupancy levels to come down from ~75% to 67% QoQ, mainly led by softness in the leisure segment (due to seasonality) while average room rates are likely to stay firm at | 8437/room (up 1.5% QoQ) for the premium segment. Overall, we expect revenue of our coverage universe to increase ~64.3% YoY, down 6.3% QoQ to | 1687.1 crore. Although Q2 is expected to be a little softer, we expect FY23E to stay strong for the sector supported by full resumption of the economy and also opening-up of international borders to foreign tourists. In terms of rooms supply, we expect launch of new hotel projects to get delayed due to higher land and input costs, auguring well for existing branded players. Further, hotel players are now leaner in terms of costs that are sustainable in nature. This would aid in healthy margin expansion.

Reduced fixed overheads to aid 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 long 18 months of pandemic phase, hotel players have structurally realigned their cost base to become leaner in terms of cost. Hence, we expect over ~11% reduction in operating costs from pre-Covid levels in Q2FY23E, which would help companies to improve margins. During the quarter, we expect our coverage universe to report EBITDA margin of 27.7% vs. loss reported last year and 9.2% OPM reported last quarter, which was impacted by the Covid delta wave.

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

In our coverage universe, Indian Hotels and EIH both are 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. Lemon Tree Hotels, being on a capex mode, is highly levered vs. peers. However, it also has strong institutional backing for liquidity support.

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