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17-12-2024 11:34 AM | Source: Motilal Oswal Financial Services
Hotels Sector Update : Poised for healthy growth in seasonally strong 3Q By Motilal Oswal Financial Services Ltd

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The Indian hotel industry is poised for a strong 3QFY25 after a relatively softer 1H, which was affected by temporary headwinds. The sector is likely to witness an uptick in 3Q, led by healthy traction in MICE (meetings, incentives, conferences, and exhibitions) activities, which will be supported by a strong wedding season (33% higher muhurats YoY in 3Q). As per our recent channel checks, key hospitality players are likely to witness RevPAR growth of ~10-12% YoY in 3Q, primarily driven by growth in ARR (up 8-10% YoY).

* As per HVS Anarock, Oct’24 was relatively muted (RevPAR up 3% YoY) due to the onset of the festive season. However, this has set the stage for an uninterrupted Nov’24, where key hospitality players (within the upper upscale and luxury category) expect ~15-17% RevPAR growth, led by a strong wedding season and a surge in MICE activities. Dec’24 is also expected to witness healthy performance on YoY basis.

* Mumbai and Delhi NCR are likely to witness RevPAR growth in low double digits in 3Q, supported by strong traction from convention centers. Key metro cities in the southern region (Bangalore and Hyderabad) are likely to witness RevPAR growth in high-teens, aided by a pick-up in business activities in the IT sector.

* We expect the overall demand to pick up in 3Q, supported by industry tailwinds and favorable demand-supply dynamics leading to higher ARR and improved occupancy. This, coupled with incremental contributions from inventory addition and the absence of significant renovations (most players halt/postpone renovations in the seasonally strong period), will lead to healthy earnings growth for most of the hospitality companies in 3QFY25.

 

Strong 3Q ahead; outlook remains optimistic

* As per HVS Anarock, the hospitality industry entered 3Q on an offbeat note, as Oct’24 witnessed RevPAR growth of ~3% YoY. The industry witnessed a decline in occupancy (down ~200bp YoY) along with moderate ARR growth (up 6% YoY) on account of a shift in festivals (early Diwali as compared to last year).

* But again, it set the stage for an uninterrupted Nov’24, which is likely to see a blockbuster performance thanks to higher wedding Muhurats (~16 in 3QFY25 vs. ~12 in 3QFY24; Refer exhibit 5) and healthy traction in MICE activities (sports events, concerts, business expos, cultural events, etc.; Refer exhibit 6).

* A widespread frenzy for high-scale concerts (such as Diljit India tour in Nov/Dec’24 and Coldplay’s India tour in Jan’25) are significantly shooting up room rates and occupancies in those regions. This, coupled with increasing propensity to spend on weddings (average wedding budget of ~INR3.7m; Source: WedMeGood), is leading to a blue-sky scenario for hospitality players.

* As per our channel checks, most of the hospitality companies expect RevPAR growth of ~15-17% in Nov’24 for luxury and upper upscale hotels.

* The traction is likely to continue in Dec’24. However, demand tends to taper in the last few days of the year end and will be a key monitorable. Nevertheless, most of the companies expect better demand in Dec’24 on YoY basis.

* Accordingly, we expect the key hospitality players (especially in the luxury and upper upscale category) to report ~10-12% RevPAR growth in 3Q, driven by ~8- 10% ARR growth and 100bp to 200bp improvement in occupancy.

* The healthy growth momentum is likely to continue throughout 2H, supported by continued traction in MICE activities and expected improvement in foreign tourist arrivals (FTA).

 

Key metro cities to continue outperformance led by pick-up in MICE

* Mumbai and Delhi NCR are likely to witness healthy performance, driven by strong traction for convention centers (Jio convention center in Mumbai and Yashobhoomi/Bharat Mandapam in Delhi NCR), with majority of the hotels witnessing higher RevPAR, aided by multiple events held at such centers.

* Mumbai is likely to witness higher MICE traction from multiple concerts and leisure events, while some of the large-scale business expos should support Delhi MICE tourism (Refer exhibit 6).

* Overall, these two cities are expected to record RevPAR growth in low double digits in 3Q, despite the higher base of previous year (Cricket ODI World Cup in Oct/Nov’23).

* Further, as per our channel checks, key metro cities in southern India (Bengaluru and Hyderabad) are also witnessing a recovery, with better occupancy and an increase in rates, led by higher MICE and pickup in business activities in the IT industry. We expect these cities to witness RevPAR growth in high-teens in 3QFY25.

 

Decent performance by hospitality basket despite soft 1H

* As per HVS Anarock, in 1HFY25, industry RevPAR grew 3% YoY to INR4,379, as the moderate ARR growth (up ~4% YoY to INR7,100) was dragged by a marginal dip in occupancy (down 30bp YoY to 61.7%).

* 1Q was weighed down by heatwaves and elections. However, 2Q saw a recovery, led by improved MICE activities.

* Air traffic growth remained stable (number of domestic air passengers grew 6% YoY to 79.6m in 1HFY25), highlighting the strong demand for domestic travel. FTAs continue to show signs of recovery, with an estimated ~10m visitors expected in CY24, up from ~9.2m in CY23.

* In 1HFY25, aggregate revenue/EBITDA for the hospitality basket (includes IH, LEMONTRE, EIH, CHALET, SAMHI, JUNIPER, PARK OBER, BRGD, PHNX and ITC) grew 16%/18% YoY to INR89.9b/INR28.5b. Higher growth for a few hotel companies was led by the addition of rooms, acquisitions and consolidations (TajSATS consolidating into IH).

* Adj. PAT (excluding OBER, BRGD, PHNX and ITC – as segmental PAT not available) grew 34% YoY to INR7.9b (Refer exhibit 7 and 8).

* Samhi continued to outperform its peers, with the highest revenue/EBITDA growth in 1HFY25 (up by 26%/81% YoY to ~INR5.1b/INR1.7b), driven by the acquisition of ACIC’s portfolio, coupled with healthy RevPAR growth and occupancy growth.

 

Valuation and view: Improvement in ARRs and Occupancy; Incremental inventory to drive growth ahead.

* OR and ARR are expected to continue trending higher in 3QFY25, backed by favorable demand-supply dynamics and healthy traction in MICE activities, which will be supported by a strong wedding season.

* Long-term structural demand drivers, such as buoyant economic activities, new convention centers, improved connectivity and infrastructure, recovery in FTA and rising trends of spiritual tourism/wildlife tourism, should continue to drive growth for the industry.

* We anticipate hotel companies to post healthy growth in 2HFY25/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: INR950) and LEMONTRE (TP: INR190).

 

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