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2HFY24E would be one of the strongest periods for hotel companies in the last 10 years, on the back of events like the Cricket World Cup, Miss World 2023 pageant finale and a robust wedding season. Going forward, we continue to believe that occupancies and ARR can grow further – these may not necessarily be achieved in a consistently upward and linear fashion though, as there could be short term disruptions to an otherwise strong narrative, viz. high base of FY24E, General Elections in May’24, possible risk of IPL moving out of India, unfavourable mix due to higher share of corporate travels - possibly getting nearer to preCovid levels. As the underperforming demand segments (corporate travel and inbound tourism) come to the fore in 2HFY25E, we expect occupancies to inch upwards to 70-72%, thus leading to low double digit ARR growth during this period (adjusted for extremely high rates during the ODI matches in respective venues). For our coverage universe, we expect ARRs to grow at a lower rate of 6-8% in FY25E (vs. 10% in FY24E) and we assume an expansion in EBITDA margins by 100-150 bps on account of positive operating leverage. Indian Hotels (TP: INR 450) has lagged its peers and we expect it to catch up in the coming months as it stands to benefit in the strong period ahead with a diversified presence across customer segments and locations

* Hotel industry continues to be under-invested: Over the last 6 years, the cumulative investment in the hospitality industry was ~USD 1bn, at an annual average of USD 172mn. If we leave out CY19, wherein the sector saw investments worth USD 762mn, the average annual investment value comes down to ~USD 50mn. Investment volumes have been muted as the demand environment was unfavourable for a large part of the ten years between CY10 and CY20. Starting CY19, the industry was on the path to a slow recovery but this was disrupted by the Covid-19 outbreak in Mar'20 which lasted for almost 2 years till Jan'22.

* Strong pick-up in room additions in FY23: CY22 witnessed a record number of branded hotel signings (19,860 keys) largely following the new hotel openings that also recorded a new high (9,961 keys). The supply of chain-affiliated hotel rooms grew by 10.3% from 149,722 rooms in FY22 to 165,172 in FY23 (increase of 15,450 rooms; Source: Hotelivate). Bengaluru has now overtaken Delhi-NCR to become the largest hotel market by rooms in the inventory. The growth in room supply in FY23 has been significantly higher than the last 10 year CAGR of room supply which is at ~5% which implies that there is increased interest in new capital expenditure for hotel projects.

* Hotel room supply to still lag demand: As of 31st Mar’23, the proposed branded room pipeline for the next 5 years is 69,836 keys. Adjusted for the active development ratio (removing the inactive supply), the total room addition is estimated to be ~55,000 rooms, which implies a 5 year CAGR of 5.9%. Though we have seen some increased activity in the development space, the planned supply should take anywhere between 3-4 years to be commissioned. We expect the upcoming supply to be absorbed with minimal impact in occupancies. Additionally, a large part of the pipeline (73%) is being developed in the Tier 2 and Tier 3 cities. The room supply in Tier 1 cities is expected to grow at the lowest 5 year CAGR of 1.1% in Delhi-NCR and the highest of 5.7% in MMR (Source: Hotelivate).

* High base of FY24E, General Elections and unfavourable mix may lead to a moderation in growth: In 3Q/4QFY24, the domestic hotel industry is on track to record decadal high numbers on the back of strong domestic tourist demand and major global events. ARR is expected to grow by 15-20% YoY in FY24E. The high base of FY24E should result in a moderation of growth in FY25E. Furthermore, in 1QFY20, when the last general elections took place, occupancy and RevPAR declined by 0.4% and 2.9% YoY respectively (Link). We believe a similar situation will play out at the start of FY25E which would lead in a temporary disruption in growth. As corporate sector demand (especially rates negotiated through RFPs) comes back into the revenue mix, it would result in a downward pressure on the room rates

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