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Set for a resilient growth journey!

The Indian hospitality industry is positioned for a strong 2QFY25, following a relatively soft first quarter affected by several transient headwinds. Going forward, the sector is likely to witness healthy growth. According to our recent channel checks, we believe that the key hospitality players will witness RevPAR growth of ~9-11% YoY in 2QFY25, which will be primarily driven by rising ARR (+7-9% YoY).

* According to HVS Anarock, the industry RevPAR stood flat YoY in 1QFY25 as the slight increase in ARR (+2% YoY) was offset by a dip in occupancy (-170bp YoY). Multiple headwinds, such as general elections, heat waves, and a lesser number of auspicious wedding days, hampered demand during the quarter.

* Going forward, the sector is anticipated to bounce back driven by: 1) pent-up demand following a softer first quarter, 2) improved traction within the convention centers (high bookings), 3) a stronger wedding season (~44 muhurats over Jul’24-Mar’25 vs. 38 over Jul’23-Mar’24), and 4) favorable demand-supply dynamics.

* To benefit from the anticipated upcycle within the industry, a majority of the players are accelerating their execution plans and rapidly expanding their inventories (owned as well as managed rooms). Apart from this, the companies are strongly focused on renovating the existing portfolio to generate better yields from their existing assets.

* Accordingly, we expect healthy earnings growth within the industry, fueled by increasing ARR and improved occupancy due to the favorable demand-supply dynamics and incremental contribution from inventory additions.

Strong second quarter ahead; optimistic outlook continues

* According to HVS Anarock, the industry RevPAR stood flat YoY at INR4,335 in 1QFY25, as the slight increase in ARR (up ~2% YoY to INR7,067) was offset by a dip in occupancy (down 170bp YoY to 61.3%).

* The Indian hospitality industry experienced a relatively soft first quarter adversely impacted by transient headwinds, such as general elections, heat waves, and less auspicious wedding days/muhurats across regions (only five muhurats in 1QFY25 vs. 22 in 1QFY24).

* Lower air traffic growth (the number of domestic air passengers grew 4% YoY to 40.3m in 1QFY25) and reduced MICE activities also contributed to the lower occupancy during the quarter.

* The Foreign Tourist Arrival (FTA) figure grew 6% YoY in 1QFY25, fueled by 8%/ 9% YoY growth in Apr/Jun’24, partially offset by flattish numbers in May’24. Though the FTA number is still below the pre-Covid levels, it is likely to pick up in the upcoming quarters.

* Going forward, the sector is anticipated to rebound, driven by:

* Pent-up demand following a muted first quarter.

* Improved traction within the convention centers (larger convention centers, such as Bharat Mandapam, were fully sold out in the second half of Jul’24).

* A stronger wedding season (FY25 has 49 muhurats vs. 60 in FY24; however, there was a significant dip of 17 days in 1QFY25, which will be partially offset in the rest of the year. There are ~44 muhurats over Jul’24-Mar’25 vs. 38 over Jul’23-Mar’24).

* Favorable demand-supply dynamics (demand CAGR of branded rooms at 10.6% compared to a supply CAGR of 8% over FY24-27E).

* According to our recent channel checks, we believe that key hospitality players would report RevPAR growth of ~9-11% YoY in 2QFY25, which will be primarily driven by rising ARR (+7-9% YoY).

* Consequently, occupancy is expected to improve in the upcoming quarters. Additionally, growth momentum in ARR is likely to continue, leading to a strong performance for the majority of hotel companies in the rest of FY25.

Expanding portfolio and upgrading assets to benefit from industry uptrend

* To benefit from the anticipated upcycle within the industry, a majority of the Indian hospitality players are accelerating their execution plans and rapidly expanding their inventory (owned as well as managed rooms).

* Indian Hotels has the strongest inventory pipeline of 14,516 rooms; it expects to add ~6,636 rooms over FY24-26, including over 5,578 rooms under management contract. This incremental inventory is being added across geographies and brands to capitalize on the opportunities across the hospitality industry.

* Lemon Tree is likely to double the inventory under management contract to over 8,300 rooms by FY27 from 4,366 rooms as of Jun’24. A majority of the rooms would be operational by FY25-26. A significant portion of the incremental inventory is located in Tier II and leisure locations, benefitting the company from the emerging opportunities within these destinations.

* EIH is also likely to gain from its strong long-term expansion plans (looking to add 50 more properties – owned as well as managed by FY30E), with ongoing projects (seven upcoming properties, including three owned) to aid incremental revenue in the medium term.

* The Park is also likely to add ~2,450 rooms over FY25-30E (on its operational portfolio of 2,395 rooms as of Jun’24), where the incremental inventory will largely be located at key leisure locations. It expects to add ~215 rooms in FY25.

* The other key asset owners, such as Chalet/Samhi/Juniper, are projected to add ~585/165/116 rooms over FY24-26.

* Apart from putting up incremental inventory, the majority of the players are also focusing on renovating their existing assets to generate higher RevPAR.

* Lemon Tree is aggressively renovating its portfolio (out of ~5,900 owned rooms, it expects to renovate ~4,400 rooms, i.e., 75% of its portfolio by the end of FY26). It is followed by Indian Hotels and EIH, which have also indicated higher renovation expenses and renovation of key assets over the next couple of years.

Decent performance by the hospitality basket; SAMHI outperforms peers

* In 1QFY25, aggregate revenue/EBITDA for the hospitality basket (includes IH, LEMONTRE, EIH, CHALET, SAMHI, JUNIPER, PARK OBER, BRGD, PHNX, and ITC) grew 11%/13% YoY to INR42.4b/INR13.6b. Adj. PAT (excluding OBER, BRGD, PHNX, and ITC – as segmental PAT was not available) grew 21% YoY to INR4.4b (refer to Exhibit 8).

* SAMHI recorded the highest revenue/EBITDA growth within the pack (up 31%/ 81% YoY to INR2.5b/INR821m) due to the acquisition of ACIC’s portfolio coupled with healthy RevPAR growth.

* Apart from that, LEMONTREE witnessed the highest revenue growth of 21% YoY to INR2.7b, followed by JUNIPER/ITC at 19% each to INR2.0b/INR7.1b in 1QFY25.

* In terms of operating performance, ITC reported the highest EBITDA growth among the pack at +34% YoY to INR2.7b, followed by OBER/CHALET, which posted 16%/12% YoY growth to INR168m/INR1.3b.

*  All industry participants clocked decent YoY RevPAR growth (up ~1-13%) despite headwinds, propelled by increasing ARR (except OBER, BRGD, and PHNX) and better occupancy (except LEMONTRE, JUNIPER, and EIH). SAMHI led the pack with 13% YoY RevPAR growth on the same store sales basis (like-to-like comparison excluding acquisition).

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

* OR and ARRs are expected to continue trending higher in FY25, backed by favorable demand-supply dynamics. Strong demand drivers such as buoyant economic activities, new convention centers, improved connectivity, and recovery in FTA along with rising trends such as spiritual tourism and wildlife tourism are expected to continue driving the growth within the industry.

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

* We reiterate our BUY rating on IH with a TP of INR715 for Sep’26. We also maintain our BUY rating on LEMONTRE with a TP of INR170 for FY26.

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