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2Q fared well despite seasonality, ARR inches higher

In this report, we present the current demand scenario in key cities and insights based on the 2QFY23 results and management commentaries of major hospitality players – Indian Hotels (IH), Lemon Tree Hotels (LEMONTRE), Chalet Hotels (CHALET), EIH, Oberoi Realty (OBER), Brigade Enterprises (BRGD), and ITC.

* As per HVS Anarock, demand remained strong during the quarter with Occupancy rate (OR) at ~62% in 2QFY23 (in line with 2QFY20), with Average Room Rent (ARR) higher by 13% from that in 2QFY20.

* Compared to pre-pandemic levels, the hospitality basket reported higher flow through (incremental EBITDA to incremental revenue) in 2QFY23 from that in 2QFY20, with LEMONTRE leading the pack (103%), followed by EIH and BRGD.

* OR is expected to improve further from the pre-pandemic levels, on the back of strong demand drivers such as wedding season, G20 summit meetings, and resumption in foreign inbound travel. ARR is expected continue inching higher, thereby boosting Revenue per available room (RevPAR).

Demand remains strong v/s pre-pandemic

* As per HVS Anarock, in 2QFY23, industry ARR has been able to sustain over the pre-pandemic levels (INR5,867 in 2QFY23 from INR5,206 in 2QFY20) while the OR remained largely in line (62.2%), indicating a normalcy in demand scenario. Seasonality was a factor, with OR dipping in Jul’22 (63%) and Aug’22 (60%) sequentially from June’22 (65%) levels, followed by a recovery in Sep’22 (63%).

* For Sep’22, OR/ARR/RevPAR was up 50bp/20%/21% from pre-pandemic levels to 63%/INR6,000//INR3,780, respectively.

* Since Aug’22, domestic air traffic has been improving 4% MoM in India, sequentially inching higher in Oct’22, growing by 10% from that in Sep’22. Also, as per RBI, FASTag collection per day in Oct’22 has seen a 1.5% increase to INR1,435m from INR1,415m in Sep’22, indicating travelers opting hotels within drivable destinations.

* Primary demand drivers for the period include corporate travel, relocation business, and small meetings, as well as staycation and visiting friends and relatives (VFR) segment, which have increased in the recent months.

* As per HVS Anarock, Mumbai and New Delhi remain the top markets with occupancy rate crossing 75% in Sep’22.

LEMONTRE and EIH lead the pack with highest EBITDA flow through v/s 2QFY20

* The 2QFY23 aggregate revenue for the hospitality basket grew 78% YoY and 21% v/s 2QFY20 (down 2% QoQ) to INR27.4b. LEMONTRE performance led the pack, growing by 29% from that in 2QFY20, followed by ITC (26%) and IH standalone (25%), on the back normalcy in the hotel industry, coupled with higher ARR.

* EBITDA for the basket came in at INR7.5b in 2QFY23, higher by 75% v/s 2QFY20 (lower 16% QoQ). EIH registered the highest EBITDA growth at 4.3x v/s 2QFY20, followed by LEMONTRE/IH at 93%/83%. Sequentially, EBITDA margins across the hotels witnessed contraction, aggregating 470bp, majorly due to the seasonality factor. Another reason for the dip was due to hotels ramping up their manpower to cater to the strong demand anticipated in 2HFY23.

* EIH’s EBITDA grew 4.3x in 2QFY23 v/s 2QFY20 to INR847m, while LEMONTRE delivered an EBITDA growth of 93% to INR936m in the quarter. IH/ITC/BRGD/OBER/CHALET grew 83%/77%/35%/10%/4%, respectively, in 2QFY23 v/s 2QFY20.

* Adjusted net profit of the hospitality basket stood at INR1.9b in 2QFY23 v/s INR2.8b/INR1.1b in 1QFY23/2QFY20.

* Compared to pre-pandemic levels, LEMONTRE and EIH reported the highest flow through in 2QFY23 at ~100%, each followed by BRGD at 80% and ITC at 62%. IH/OBER/CHALET reported a flow through of 59%/36%/28% in the quarter.

Operational highlights: Higher ARR led to improved performance

* Despite 2Q being the weakest quarter, hotels registered a better than expected operating performance. Only a few players recorded a decline in RevPAR with OBER registering the maximum decline at 5%. IH domestic network RevPAR improved the most by 10% QoQ, followed by LEMONTRE by 4%.

* Across players (except CHALET), RevPAR grew from the pre-pandemic levels, due to higher ARR, while occupancy was a mixed bag. EIH RevPAR recorded the highest growth at 31% v/s 2QFY20, followed by IH standalone/domestic network at 29%/21%.

* RevPAR for IH domestic network/standalone operations was led by ARR growth of 31%/27% in 2QFY23, coupled with 300bp/200bp contraction/expansion, respectively, in occupancy v/s 2QFY20.

* EIH’s domestic network hotel (including management contract) RevPAR was up 31% to INR8,027 in 2QFY23 v/s 2QFY20, led by a 600bp improvement in occupancy to 70%; ARR improved 20% in the quarter v/s 1QFY20.

* LEMONTRE’s RevPAR grew 5% in 2QFY23 v/s 2QFY20, led by a 19% improvement in ARR to INR4,917; while OR was down 860bp for the same period.

* CHALET’s RevPAR was down 3% in 2QFY23 v/s 2QFY20 with ARR flat at INR7,930. OR declined significantly by 320bp v/s 2QFY20 in 2QFY23, majorly led by ongoing renovation in Powai hotel and one of the banquet halls of a major hotel being shut for ~40 days on 2QFY23.

* RevPAR of OBER/BRGD/PHNX grew 18% each in 2QFY23 v/s 2QFY20, with OR improving 470bp/500bp/540bp and AR coming in higher by 11%/9%/10% v/s 2QFY20 levels.

Key management commentaries: Short to midterm outlook remains strong

* Industry-wide views: a) HVS Anarock and STR Global expect All-India RevPAR/Occupancy/ARR to increase 13%/120bp/11% to INR5,085/70%/INR7,260 in 3QFY23 v/s 3QFY20 b) India being the host for the upcoming G20 summit, the inbound travel of delegations would boost demand. c) Industry supply growth will be ~3.5-5% over the three to four years. The replacement cost has also gone up. The demand grows at 1.6-1.7x of GDP growth (i.e., 12-13%) for branded hotels d) Rates are constantly increasing globally due to supply constraints and India is expected to follow the trend e) Wedding business is performing strongly with rates as well as number of events going up.

* IH: i) Growth in LFL (like-for-like) domestic business with ARR/Occupancy/RevPAR of 31%/2%/34% over pre-Covid levels (2QFY20), ii) RevPAR growth in Mumbai/Bengaluru/Delhi & NCR was higher by 28%/20%/20% in 2QFY23 v/s 2QFY20, iii) Higher employee cost was attributed to increments, coupled with onetime wage settlements taken place during the pandemic (reflecting now), iv) Manpower per room for Taj/Vivanta/Ginger stood at 1.88x/ 1.2x/0.43x in Sep’22 v/s 2.17x/1.48x/0.48x in Apr’22, v) RevPAR in UK/US is ~92%/~96% of pre-Covid levels, which is expected to reach 100% of the pre-pandemic level in 3QFY23, vi) IH is witnessing more than ~10% rate hikes in ongoing corporate negotiations, vii) IH opened nine hotels in 1HFY23 and nine more are expected in 2HFY23, viii) IH is expected to incur capex of ~4-5% of annual revenues going ahead. ix) IH is innovating with new concepts with legacy brands such as Chambers along with launching new concepts such as Loya (innovative F&B Concept) launched in Taj Palace, Delhi. x) Domestic travelling is at ~85% of the total business

* LEMONTRE: i) Occupancy in Mumbai/Pune improved 2,690bp/200bp to 77%/69% in 2QFY23, while it was lower by 650bp/1,330bp/280bp/1,190bp/1,550bp for Delhi/Gurugram/Hyderabad/Bengaluru/RoI, respectively and stood at 79%/65%/81%/68%/52% from pre-covid levels (2QFY20) ii) LEMONTRE is targeting 115-145% of 1H revenue in 2HFY23, iii) It has maintained its FY23 revenue guidance of over 100% YoY growth and an EBITDA margin of ~50%, iv) LEMONTRE expects the 15pp reduction in total expense from 2QFY20 levels to be permanent in nature, v) payroll cost is higher on a QoQ basis, as hotels have ramped up to prepare for 2HFY23 which typically has higher occupancies’, vi) The contribution of the retail segment toward room nights sold is up 5pp to 45% in 2QFY23 v/s 2QFY20, while its revenue share is 7pp up to 48% in the quarter v/s 2QFY20, vii) Based on the current pipeline, by FY25, the total operational inventory is expected be 10,908 rooms and 115 hotels, viii) LEMONTRE same store hotels RevPAR grew 14% v/s 2QFY20, while the industry grew 7% for the same period.

* CHALET: i) Sep’22 has seen rebound in terms of occupancy while ARR for the month jumped to ~INR9,070 sequentially. ii) Payroll/utilities cost stood at 14%/7% of revenue in 2QFY23 against 15%/7% for FY20. Staff to room ratio stood at 0.9 in Sept’22 against 1.18 in Dec’19, iii) The company has INR10.3b of capital work-inprogress as on Sept’22. These projects are expected to improve revenues of the company going forward, iv) The management expects improvement in business, on the back of good demand expected in the month of Nov’22 and Dec’22 and rebound in foreign tourism v) The company is now in the middle of the RFP negotiation period for corporates and it expectsto close it about 25% to 30% higher on an overall basis.

* EIH: i) RevPar for 2QFY23 stood at INR9,196 (EIH-owned hotels) surpassing precovid levels(2QFY20) of INR6,715 (up 37%), ii) Payroll/power cost declined 11%/3% from pre-covid levels, iii) EIH is in active discussions with 11 hotels and expects much more in the upcoming quarters, iv) EIH is opening a ~150,000 sqft. Club (managed) in Nov’22 and Restaurant (leased) in Mar’23 in Mumbai, v) as on Sep’22, Net debt has come down to INR2.2b from INR2.7b as on Mar’22 and is further expected to reduce going ahead.

Valuation and view: Resilient ARRs and strong occupancies to continue to drive growth

* OR is expected to improve further from pre-pandemic levels, on the back of strong demand drivers such as wedding season, G20 summit meetings, and resumption in foreign inbound travel. ARR is expected to continue inching higher, thereby boosting hotels RevPAR.

* We anticipate the robust growth across hotels to sustain in FY23/FY24 based on: a) an increase in ARR across hotels on the back of improved occupancies, b) operating leverage coupled with cost rationalization across hotels to maintain higher margins v/s pre-pandemic levels, and c) strong demand drivers in place driving occupancies.

* We reiterate our BUY rating on IH with a target price of INR365 for Sep’24.

* We reiterate our BUY rating on LEMONTRE with a target price of INR110 for FY24.

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