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Leveraging favorable demand-supply dynamics

The hotel industry maintained its healthy performance in 3QFY24, mainly aided by an increase in the average room rate (ARR) and an improvement in occupancy (OR). In this report, we present the current demand scenario and key insights based on 3QFY24 results and management commentaries of our hotels basket, which includes major hotel players such as Indian Hotels (IH), Lemon Tree Hotels (LEMONTRE), Chalet Hotels (CHALET), EIH, Oberoi Realty (OBER), Brigade Enterprises (BRGD), The Phoenix Mills (PHNX), and ITC.

* During 3QFY24, ARR for our hotels basket (excluding ITC), grew ~13% YoY to INR12,981, while OR (excluding ITC) increased by 220bp YoY to 73.2%. Accordingly, the basket reported a strong financial performance as revenue/EBITDA grew ~21%/32% YoY. CHALET led the pack in terms of revenue growth (29% YoY), while BRGD reported the highest EBITDA growth of ~2.1x YoY.

* All the companies registered ARR growth (up ~7-19% YoY), with EIH/IH standalone leading the pack with 19%/17% YoY growth. Similarly, almost all the companies (except LEMONTRE) saw OR improvement, with CHALET/BRGD witnessing the highest gain (up 630bp/500bp YoY). LEMONTRE’s OR dropped ~170bp YoY due to the opening of Aurika Mumbai (669 rooms).

* The industry is likely to sustain the healthy traction in 4QFY24 as well, with some of the major hotel companies indicating the continuation of a healthy demand scenario seen in Jan/Feb’24.

* We believe that growth in FY25 will be driven by favorable demand-supply dynamics in the industry and several demand catalysts, including the opening of new convention centers in NCR and Mumbai, spiritual and religious tourism, increase in weddings (MICE), improved connectivity, and an expected rebound in foreign tourist arrivals. Accordingly, ARR and OR should continue to increase, which will boost revenue per available room (RevPAR).

Healthy ARR growth drives performance; outlook remains optimistic

* The hotel industry witnessed another quarter of healthy performance in 3QFY24. ARR for our hotels basket (excluding ITC) grew ~13% YoY to INR12,981, while OR (excluding ITC) rose 220bp YoY to 73.2%.

* The healthy traction witnessed in 3QFY24 is likely to continue in 4QFY24 as well, with some of the major hotel companies indicating the continuation of a healthy demand scenario seen in Jan/Feb’24.

* The increasing domestic air passenger traffic and foreign tourist arrivals supported industry growth in 3QFY24. Domestic air passenger traffic grew 9% YoY to 39.1m in 3QFY24 and 4.5% YoY to ~12.54m in Jan’24. Foreign tourist arrivals grew 23%/20% YoY to ~0.81m/0.92m in Oct/Nov’23 (however, it was still ~14%/16% below preCovid levels of Oct/Nov’19).

* The industry also witnessed a significant boost from the wedding season. As per a survey of the Confederation of All India Traders (CAIT), the period of 23rd Nov’23 to 15th Dec’23 witnessed ~35 lakhs weddings, which generated revenue of ~INR4.25t for all the related sectors. Further, the survey expects ~INR5.5t worth of business from ~42 lakhs wedding to be held between 15th Jan’24 and 15th July’24.

* We believe that growth in FY25 will be supported by favorable demand-supply dynamics in the industry (tend to be even more favorable for the luxury segment which accounts for just 7% of the proposed supply) and several demand catalysts, including the opening of new convention centers in NCR and Mumbai, spiritual and religious tourism, improved connectivity, and an expected rebound in foreign tourist arrivals.

* Accordingly, growth momentum in OR and ARR should continue, leading to a strong performance for the majority of hotel companies in FY25.

CHALET recorded highest revenue and profitability growth in the pack

* In 3QFY24, aggregate revenue for our hotels basket grew 21% YoY to INR45.3b, primarily led by higher ARR. CHALET led the pack with 29% YoY growth, followed by EIH (26%) and LEMONTRE (24%).

* EBITDA for the basket came in at INR17.8b, up 32% YoY. BRGD registered the highest EBITDA growth of 2.1x YoY to INR446m, followed by EIH/ITC at 55%/41% to INR3.2b/INR3.15b.

* Adjusted net profit of our basket (excluding OBER/BRGD/PHNX/ITC; as segmentwise net profitability is not available) grew 30% YoY to INR8b. CHALET witnessed the highest net profit growth of ~69% YoY to INR706m, followed by EIH (up 63% YoY to INR2.4b).

Operational highlights: Higher ARR, better occupancy drive RevPAR

* All industry participants witnessed healthy YoY growth in RevPAR (up ~8-25%), led by an increase in ARR (up ~7-19%) and better OR. Almost all the companies saw improvements in both these parameters (except for LEMONTRE, whose OR dropped ~170bp YoY due to the opening of Aurika Mumbai).

* Among the pack, IH standalone achieved the highest RevPAR growth of 25% YoY, followed by EIH (23%) and PHNX (19%).

* RevPAR growth of 14%/25% YoY for IH’s domestic network/standalone operations was led by ARR growth of 12%/17% and a 160bp/470bp rise in OR to 69.6%/76.8%.

* LEMONTRE’s RevPAR grew 8% YoY to INR4,173, led by 10% growth in ARR to INR6,333. OR declined 170bp YoY to 65.9% due to the opening of Aurika, Mumbai Sky City (launched in Oct’23), and relatively poor OR in key cities, such as Pune and Bangaluru.

* CHALET’s RevPAR jumped 18% YoY to INR7,826 in 3QFY24, led by 8% growth in ARR to INR10,974. The company saw a ~630bp YoY increase in OR to ~71.3%.

* RevPAR for EIH’s domestic network hotels (including management contracts) rose 23% YoY to INR15,788, led by 19% growth in ARR. OR increased by 200bp YoY to 79% in 3QFY24.

* RevPAR of OBER/BRGD/PHNX grew 12%/15%/19% YoY to INR11,112/INR4,747/ INR12,449, with ARR growing 7%/7%/16% YoY. OR grew by 200bp/500bp/230bp YoY to 82%/73%/82.7%.

Key management commentaries: Outlook remains strong

Industry-wide views: 1) Demand is likely to surge at a CAGR of 8-10%, while the supply CAGR will be ~5-6% for the next five years. New supply in key markets (such as metro cities) is minimal. 2) New convention centers in Mumbai and New Delhi are playing a big role in demand. One event in Bharat Madapam/Jio Convention Center lead to full occupancy for all the nearby hotels. 3) Foreign tourist arrivals for JanNov’23 were ~17% above the Jan-Nov’22 level, but they still remained below the pre-Covid level.

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