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Holiday season, MICE and increased air travel drive strong demand

Higher occupancy levels and rising average room rate (ARR) continue to hold the fort for the hotels sector. Continuing robust demand in leisure and business travel driven by the holiday season, healthy economic growth, sporting events, marriages and higher foreign tourist arrivals were key demand drivers in Q3. We expect occupancy growth of 300-500bp and ARR growth of 8-12% for our coverage universe in Q3FY24E. We expect an aggregate topline growth of 19%, EBITDA growth of 18% and PAT growth of 9% for our coverage universe.

Leisure demand: ARR growth of 8-9% YoY, occupancy of 2-4%

Leisure destinations continue to witness higher occupancy levels although we have seen churn within major tourist destinations. For eg, the region around Shimla and pockets of Goa saw lower occupancy as travelers chose other leisure destinations. Passenger growth in domestic air travel was 10% during October-November. Foreign tourist arrival (FTA) grew 20% YoY to 0.8mn in October. YTD growth was at 55% YoY to 7.2mn. FTA in October is still down 14% from October 2019. We expect ARR growth of 8-9% YoY and occupancy growth of 2-4% for leisure destinations in Q3FY24E.

Business demand: occupancy growth of 2-4%, ARR of 12-20%

Strong economic growth (the RBI expects Q3FY24 GDP growth of 6.5%) as well as the meeting incentives, conferences, and events (MICE) business have driven demand for business destinations. The 2023 Cricket World Cup led to a 15-35% increase in ARR for hotels in cities hosting the matches. Demand for banquets is expected to be robust, driven by sporting events as well as the wedding season. The Confederation of All India Traders (CIAT) expects ~3.5-4.0mn weddings during 23 November-15 December 2023 vs 3.2-3.5mn YoY. We expect occupancy growth of 2-4% and ARR growth of 12-20% for business destinations in Q3FY4E.

Events in Q4FY24: momentum to continue

The next big events scheduled are the Startup Summit at Mumbai on 20th January and the IPL across pan-India from 23rd March- 29th May.

New hotel signings up 21% YoY

As per global consulting firm HVS Anarock, new branded hotel signings were up 21% YoY to 219 hotels until October 2023, leading to increase in rooms by 31% to 19,314. Out of this, we estimate 12 major hotel brands have signed agreements to open ~7,500 rooms in Top 25 destinations and another ~3,700 rooms in other destinations in India.

Outlook: business travel to drive demand

In a seasonally strong Q4FY24, MICE and business travel is expected to drive occupancy and ARR growth. Despite global concerns, the macroeconomic environment for India remains robust, which is expected to sustain demand for the hotel industry. Indian Hotels and Chalet Hotels are our top picks.