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In the midst of an upcycle!

The hotel industry is continuing its healthy performance, led by favorable demand-supply dynamics, which are expected to continue in the foreseeable future. All the major players are harnessing their strength to tap into the ongoing uptrend in the hotel industry. In this report, we highlight the industry tailwinds and unique positioning of key players.

* Long-term growth story intact:

We expect the uptrend in the hotel industry to continue as demand for branded rooms (~10.6% CAGR over FY24-27) is expected to outpace supply (~8% CAGR), led by multiple industry tailwinds. The gap is even wider for top-8 cities and the leisure market. Further, supply growth is even lower in the luxury/upper upscale segments (~5/7% CAGR over FY23-27), leading to better pricing power for premium players.

* Interestingly, all the key players are positioned differently to tap into this opportunity. The brand owners (Indian Hotels, Lemon Tree, EIH and The Park) are much more focused on management hotels and revenue diversification, along with the addition of some owned hotels. Meanwhile, the asset owners (Chalet, Samhi and Juniper) are strongly focused on leveraging the growth by adding more owned keys.

* Outlook:

Key listed hotel companies witnessed healthy performance in 4Q, with EIH outperforming peers. Going ahead, we expect 1QFY25 to be relatively muted on account of elections and severe heatwaves in North India. However, we believe that the medium- to long-term outlook remains optimistic.

Favorable demand-supply dynamics at play

* The hospitality industry is currently in the midst of an uptrend, led by favorable demand-supply dynamics. Horwath HTL, the world’s largest hospitality consulting firm, estimates demand for branded rooms in India to witness a ~10.6% CAGR over FY24-27, while supply of branded rooms is expected to clock an ~8% CAGR over the same period.

* Furthermore, this gap is even wider in the top 8 cities. The majority of this incremental supply is coming from outside these top destinations. Thus, supply growth in the key cities (which account for majority of revenue in our hospitality basket) is expected to be just ~5% CAGR, while demand growth is expected to be much higher at ~9%.

* For the key leisure market, demand is expected to witness a ~13% CAGR over FY24-27 vs. supply CAGR of 10%.

* Further, supply growth in the luxury/upper upscale segments is much lower at ~5%/7% CAGR over FY23-27 vs. ~11% CAGR for the economy/midscale segment, leading to better pricing power for premium players.

* Thus, the current favorable scenario is expected to continue over the next couple of years, leading to improved occupancy and rising ARR, significantly benefiting the key players, which are well positioned to tap this opportunity.

Multiple levers driving growth

* The Indian hotel industry is expected to continue its growth momentum, led by key drivers such as:

* Infrastructure development: Improvement in connectivity with new airports (total number of airports in India is expected to reach ~220-250 by CY30 from 149 in CY23) and national highways across India (world’s largest highway building program with about 55,000 to 85,000 km of national highways to be constructed over the next seven years)

* Increase in business travel: Higher traction in business travel is driven by a buoyant economic environment, coupled with the launch of new convention centers. For instance, the launch of Jio convention center in Mumbai and Bharat Mandapam/Yashobhoomi convention centers in Delhi has significantly improved occupancies of hotels in those cities.

* Leisure demand on the rise: The increase in foreign tourist arrivals (expected to reach ~28m by CY30 from ~9m in CY23), an increasing share of middle-income households to overall population (~142m households to enter middle-income category over CY18-30E) and a clearly visible trend of premiumization should boost demand for leisure destinations.

* Growing theme-based tourism: The advent of spiritual/religious tourism (16% CAGR expected by CY30), weddings in India, and growing wildlife tourism will add new destinations and provide an impetus to growth.

* These trends are expected to provide a long and sustainable uptrend for the hospitality industry in India.

Key hospitality players tapping growth opportunities in their own styles

* In order to tap into the growing demand, Indian hospitality players are accelerating their execution plans. Each player is positioned differently from the other and expects to race ahead by harnessing its strength.

* The brand owners (Indian Hotels, Lemon Tree, EIH and The Park) are much more focused on management hotels, revenue diversification, and the addition of some owned hotels.

* Meanwhile, the asset owners (Chalet, Samhi and Juniper) are strongly focused on leveraging the growth by adding more assets (owned/leased hotels).

Indian Hotels (IH):

* New brand for Tier II/Tier III: IH will introduce the reimagined brand, ‘Gateway,’ in FY25 to capture growth opportunities in emerging micro markets in metros and Tier II and Tier III cities. This brand will be scaled to over 100 hotels by CY30.

* Diversifying revenue base:

The new and reimagined portfolio of IH (consisting of TajSATS – Air catering, Ginger – Lean luxe, Ama’s - Homestay, Qmin – QSR & delivery, and Chambers - Club) witnessed 35% YoY growth in FY24, accounting for 12% of IH Enterprise revenue. Going ahead, IH expects this business to grow annually by ~30%.

Lemon Tree (LEMONTRE):

* Management hotels: LEMONTRE focuses on adding hotels under management contracts (accounts for ~98% of total pipeline of ~4,156 rooms), with the majority of inventory coming from outside top key cities.

* Renovation: LEMONTRE is increasing its spending on renovations across its brands (renovation opex as a percentage of sales was 2% in 4QFY24 vs. 0.6% in 4QFY23). This will help the company increase ARR after the renovation. The company is expected to recover the amount invested through incremental EBITDA in the next two years.

EIH:

* Upcoming owned/leased hotels: EIH will open Rajgard (65 keys) and Vindya Villas (21 keys) hotels in FY25. It has already started work on Tirupati (~125 keys) and Vizag (~125 keys) hotels. Goa hotel (~90 keys) is in the planning stage and construction will start in the next 8-12 months.

* Air Catering & Lounge business: EIH majorly caters to international airlines and expects to witness healthy growth in air catering business amid growth in outbound tourism. Within the lounge business, it has only one lounge in Mumbai as of now. Both of these businesses are witnessing strong growth and margin expansion (EBITDA margin of ~38% in 4QFY24 vs. 22% in 4QFY23).

The Park:

* Tapping the leisure market: The Park is expanding company’s presence through management contract in high growth market such as Indore, Manali, Mussoorie and Udaipur (opened eight new hotels in FY24). Going ahead, it expects to add ~228 more keys under management contract in FY25 in key leisure locations. Apart from this, the company is also adding ~830 owned rooms across Pune, Kolkata, Jaipur, Vishakhapatnam and Mumbai. Company expects to increase inventory to 4,780 keys in next few years (with 53% mix of managed keys)

* Flurys - Confectionary shop brand of The Park, continues to witness strong growth with revenues of INR480m (up 25% YoY) in FY24. Company plans to expand Flurys from the existing 82 outlets to 120 outlets in FY25 and maintain industry leading margin of ~18%.

Chalet:

* Metro-heavy pipeline: Chalet will add ~865 additional owned keys over the next three years. The majority of its inventory is coming in key metros, with 130 keys in Bengaluru by FY25, 390 keys in Delhi by FY26 and 280 keys in Mumbai by FY27.

* Diversified portfolio of commercial assets: Chalet has operational commercial assets of ~2.4 million square feet (msf) with 0.9msf in the pipeline. (CIGNUS Powai Tower II). Chalet focuses on maximizing development potential and creating an additional diversified revenue stream. This enables it to counter cyclicality of the business.

Juniper:

* MICE and F&B: Juniper has added a new repurposed banquet of ~50k sq. ft., which will be operational at Grand Hyatt Mumbai from Jul’24. Further, it has recently operationalized a new F&B outlet ‘SARVATT’ at Ahmedabad.

* Organic and inorganic growth runway to continue: The company has repurposed commercial space at Hyatt Regency Ahmedabad to 59 additional rooms in Oct’23. Further, the refurbishment of rooms at Grand Hyatt Mumbai will be completed by Sep’24. The management is actively looking for inorganic growth opportunities.

Samhi:

* Focusing on micro markets:

Samhi believes all the core markets will benefit from India’s growth story. However, it focuses on Hyderabad and Bangalore due to much higher upside potential in these markets. The company expects Hyderabad and Bangalore to deliver mid-teen RevPAR growth going ahead.

* Inventory addition:

Samhi has recently acquired ACIC portfolio of ~962 rooms, which will be fully integrated soon. Going ahead, it is adding ~302 more keys by 3QFY25 (including 54 in Bengaluru, 111 in Kolkata and 137 in Noida). These incremental keys have revenue potential of ~INR250-300m.

Healthy performance of hospitality basket continues; EIH outperform peers

* As per HVS Anarock, in 4QFY24, industry RevPAR grew 11% YoY to INR5,780, led by healthy growth in ARR (up ~8% YoY to INR8,500) and occupancy (up 170bp YoY to 68%).

* In 4QFY24, aggregate revenue/EBITDA for the hospitality basket (includes IH, LEMONTRE, EIH, CHALET, SAMHI, JUNIPER, PARK OBER, BRGD, PHNX and ITC) grew 19%/26% YoY to INR53b/INR20.5b.

* In term of operating performance, EIH registered the highest EBITDA growth among peers (49% YoY growth to INR3b), followed by ITC/CHALET (31%/24% YoY growth to INR3.6b/INR1.8b).

* All industry participants witnessed healthy YoY growth in RevPAR (up ~7-17%), led by increasing ARR (except for BRGD and PHNX) and better occupancy (except for LEMONTRE, PARK and OBER).

* Similarly, for FY24, aggregate revenue/EBITDA for the hospitality basket grew 20%/25% YoY to INR182b/INR65b.

* EIH registered the highest EBITDA growth of 55% YoY to INR9.3b, followed by BRGD/PHNX at 43%/31% to INR1.7b/INR2.4b in FY24.

* All industry participants witnessed healthy YoY growth in RevPAR (up ~11-20%), led by increasing ARR and better occupancy (except for EIH and OBER).

Elections, heat waves weigh down 1QFY25; outlook remains optimistic

* Most of the hotel companies have witnessed a relatively muted demand in Apr/May’24 on account of elections and severe heat waves in North India. However, most of them expect a rebound from Jun’24.

* Overall, 1QFY25 is expected to be a relatively muted quarter with single-digit to low double-digit RevPAR growth on a YoY basis. However, the medium- to longterm outlook remains strong.

Valuation and view: Improvement in ARR and occupancy, incremental inventory to drive growth ahead

* Occupancy and ARR are expected to continue to trend higher in FY25, backed by favorable demand-supply dynamics. The industry is witnessing strong demand drivers, such as buoyant economic activities, new convention centers, improved connectivity, recovery in FTA, and rising trends such as spiritual/wildlife tourism.

* We anticipate earnings growth for hotel companies to remain intact in FY25/FY26, aided by: 1) an increase in ARR across hotels, due to a favorable demand-supply scenario, corporate rate hikes and room upgrades through renovations; and 2) heathy operating leverage.

* We reiterate our BUY rating on IH (TP of INR680) and LEMONTRE (TP of INR175) for FY25.

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