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As per our channel checks and commentary from listed hotel companies, hotels continue to follow a strategy of keeping rates higher and sacrifice a bit of occupancy in preparation for a strong “wave” of demand in H2FY23. This comes on the back of a blowout quarter in Q1FY23 (Apr-Jun’22), driven by strong pent-up demand and while there were concerns over the initial demand surge fizzling out from Q2FY23, the Jul-Sep’22 (Q2FY23) period has seen ARRs being 8% higher than Jul-Sep’19 (pre-Covid) levels, with RevPAR being 6% higher over the same period. As per HVS Anarock, Oct-Nov’22 industry RevPAR is 2% higher than Oct-Nov’19 levels, with ARRs being 9% higher while occupancies are 500bps lower for the same period.

While Dec’22 has been another strong month for the industry, rising Covid cases globally threaten to spoil the party from Jan’23. However, with the hotel industry having already borne the brunt of three Covid waves over FY21-22 with demand bouncing back stronger and quicker each time, we expect the hotel industry to ride the wave yet again and emerge stronger from any potential Covid led demand disruption. In terms of incremental demand-supply, while incremental room supply CAGR is currently estimated at 5-6% over FY22-26E, the actual supply addition may be in the range of 2-3% over this period with demand expected to grow 15% in FY23E and at 10% CAGR over FY23-26E. We reiterate our ADD rating on Indian Hotels Co. Ltd. (IHCL) and BUY rating on Lemon Tree Hotels (LTH).

* Consistent improvement in industry ARRs and RevPAR seen in H1FY23: As per HVS Anarock, industry occupancies fell below 50% in Jan’22 owing to Omicron impact before recovering to ~55% in Feb’22 and 61% in Mar’22. This momentum carried forward into Apr’22 with occupancies reaching ~65% (same as Apr’19) of pre-Covid levels and Apr’22 RevPAR at Rs3,803 or 103% of Apr’19 levels. May’22 industry RevPAR of Rs3,744 was 10% higher than May’19 (pre-Covid levels) while Jun’22 industry RevPAR of Rs3,803 was 12% higher than Jun’19 levels. For Q2FY23, Sep’22 industry RevPAR was 105% of Sep’19 levels, Aug’22 industry RevPAR was 109% of Aug’19 levels while Jul’22 industry RevPAR was 105% of Jul’19 levels.

* Nov’22 industry RevPAR 2% below pre-Covid levels: In Oct’22, while industry ARRs were again 11% higher than Oct’19 levels at Rs6,700, overall occupancy was lower by 300bps at 57% in Oct’22 compared to Oct’19 levels resulting in Oct’22 industry RevPAR of Rs3,820 or 105% of Oct’19 levels. In Nov’22, while industry ARRs were again 8% higher than Nov’19 levels at Rs7,300, overall occupancy was lower by 700bps at 69% in Nov’22 compared to Nov’19 levels resulting in Nov’22 industry RevPAR of Rs5,040 or 98% of Nov’19 levels. In Nov’22, Mumbai and Pune continued to clock the highest occupancies of over 80% while Goa clocked its highest ever ARR of over Rs11,000 which is 31% higher than Nov’19 levels.

* Dec’22 demand trends strong, possible Covid impact from Jan’23 key monitorable: As per our channel checks, Dec’22 room demand continues to remain buoyant primarily driven by leisure, MICE and weddings with in-bound business travel yet to fully kick into top gear. However, rising Covid cases globally threaten to upset the proverbial applecart for the hotel industry with Government advisories on international and domestic travel and mask mandates acting as deterrents. However, with the hotel industry having already borne the brunt of three Covid waves over FY21- 22, we believe that hotel operators have been already following a “hope for the best, plan for the worst” scenario and have focused on reducing fixed costs along with long term demand-supply dynamics remaining favourable for the Indian hotel industry.

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