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Steady growth ahead!

Indian hospitality industry anticipates a strong 4QFY25 performance

* The Indian hotel industry is poised to continue its strong recovery in 4QFY25, fueled by healthy traction in MICE (meetings, incentives, conferences, and exhibitions) activities, cultural events, and a strong wedding season. According to our recent channel checks, key hospitality players are likely to witness 12-14% YoY RevPAR growth in 4Q (similar to 3QFY25), primarily driven by growth in ARR (11-13%) and higher occupancy levels.

* The strong end to 3Q set the stage for a robust Jan’25 and Feb’25, where key hospitality players are witnessing healthy RevPAR growth, led by a double-digit ARR growth and higher occupancy.

* Mumbai and Delhi NCR would continue to experience RevPAR growth in 4Q, in line with 3QFY25, supported by a strong lineup of MICE and cultural activities. Key metro cities in the southern region (Bangalore and Hyderabad) and Pune are likely to continue the strong traction aided by a pickup in business activities. The business activities are improving sequentially due to fewer holidays.

* We expect the overall hotel industry to maintain its growth rates in 4Q, supported by industry tailwinds, favorable demand-supply dynamics, and corporate rate hikes leading to higher ARR and high occupancy levels. This, coupled with incremental contributions from inventory addition, stabilization of key hotels, and reopening renovated hotels with additional keys, will lead to healthy earnings for most of the hospitality companies in 4QFY25.

Strong 4Q ahead; outlook remains optimistic

* The strong end to 3Q has set the stage for an uninterrupted Q4FY25, which is likely to see a robust performance thanks to similar wedding Muhurats YoY (~29 days in 4QFY25 vs. ~30 in 4QFY24; refer to Exhibit 5) and continued healthy traction in MICE activities (sports events, concerts, business expos, cultural events, etc.; refer to Exhibit 6).

* The unprecedented scale of Coldplay’s India tour in Jan’25 led to a surge in hotel room rates and occupancy in Mumbai and Ahmedabad. These concerts highlighted India’s untapped potential for hosting large-scale international events, reinforcing the country’s attractiveness as a destination for global entertainment and tourism-driven economic activity.

* According to our channel checks, most of the hospitality companies expect RevPAR growth (~12-14%) to be in line with the strong growth witnessed in 3QFY25. Jan and Feb’25 maintained high occupancy rates with double-digit ARR growth (11-13%) led by numerous concerts, MICE events, and the number of higher wedding dates.

* With large events (domestic and international) and MICE activities consistently increasing in India, we expect the hospitality industry to continue its growth momentum over a longer tenure.

Favorable macroeconomic scenario

* A series of decisions taken in the Union Budget 2025 is expected to boost the hospitality sector by creating new possibilities, boosting growth, and building a more inclusive ecosystem.

* The Central government announced the development of 50 Indian tourist spots, with a special focus on spiritual and medical tourism, in conjunction with the state governments.

* Along with developing the infrastructure to boost tourism, the central government has announced measures to boost tourism by streamlining the evisa process for select foreign tourist groups. These efforts are aimed at accelerating the steady recovery of FTAs, which have yet to reach the prepandemic levels (~9.2m in CY23 vs ~10.9m in CY19).

* Further, with currency devaluation vs. USD (~2% decline YoY in INR/USD in 3QFY25), India is being considered a cheaper tourist destination for foreign tourists, offering luxury and world-class hotels. This can drive up the FTA over the pre-Covid levels in the near term.

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

* Key cities such as Mumbai and Delhi are expected to continue their robust performance (ARR up 10-15% in Dec’24) led by the continued traction for larger convention centers and other key events lined up in the cities, with a majority of the companies already witnessing higher RevPAR and occupancy rates.

* With India hosting the 2025 Asia Cup in Oct'25, along with other sporting competitions such as the IPL and the FIH Hockey Junior World Cup, ARR growth is anticipated to improve significantly.

* Key leisure markets like Goa experienced marginal growth in OR YoY while commanding higher than average ARR in the country in Dec’24. We anticipate the OR to remain stable, while high ARRs to witness a gradual increase, spurred by rising discretionary income of the middle class following the tax reliefs offered in the union budget.

* Spiritual tourism too has witnessed robust traction, primarily fueled by the Mahakumbh in Prayagraj, with hotels, Dharamshala, and homestays in the region likely to experience over a 300% surge in bookings and business worth INR28b for the hospitality and travel industry.

* With Indian hotels already having a strong presence in 60 locations across 50 spiritual cities (majorly through management contracts), plans to open more than 2,800 rooms across brands in locations such as Ayodhya, Hampi, Vrindavan, Ujjain, Prayagraj, and Makkah in the next three to five years.

* According to HVS Anarock, as of early CY24, there were ~5,700 branded hotel keys across major religious destinations, with an additional ~4,700 keys likely to be added over the next four to five years.

* Further, as per our channel checks, key metro cities in southern India (Bengaluru and Hyderabad) continue to witness better occupancy and an increase in rates, led by higher MICE and a pickup in business activities as 4Q has fewer holidays compared to 3Q. We expect these cities to witness RevPAR growth in 4QFY25 in line with 3QFY25.

Strong performance by the hospitality basket

* According to HVS Anarock, industry RevPAR rose 6% YoY to INR4,920 in 9MFY25, as the ARR growth (up ~6% YoY to INR7,733) was supported by a marginal increase in occupancy (up 10bp YoY to 63.2%).

* Despite a challenging beginning to the year owing to heatwaves and the general election, the earlier commencement of the festive season, additional wedding dates, and demand spikes from high-selling shows (the Dil Luminati tour and the Music of Sphere tour by Coldplay) significantly improved ARRs.

* Air traffic growth remained stable (the number of domestic air passengers grew 8% YoY to 122.2m in 9MFY25), highlighting the strong demand for domestic travel.

* In 3QFY25, aggregate revenue/EBITDA for the hospitality basket (includes IH, LEMONTRE, EIH, CHALET, SAMHI, JUNIPER, PARK, OBER, BRGD, PHNX, and ITC) grew 17%/21% YoY to INR61b/INR24.6b, while Adj. PAT (excluding OBER, BRGD, PHNX, and ITC – as segmental PAT is not available) grew 32% YoY to INR11b (refer to Exhibits 7 and 8).

* In 9MFY25, aggregate revenue/EBITDA for the hospitality basket (includes IH, LEMONTRE, EIH, CHALET, SAMHI, JUNIPER, PARK OBER, BRGD, PHNX, and ITC) grew 17%/19% YoY to INR150.9b/INR53.1b.

* Adj. PAT (excluding OBER, BRGD, PHNX, and ITC – as their segmental PAT is not available) grew 33% YoY to INR18.9b (Refer to Exhibits 9 and 10) in 9MFY25.

* Lemon Tree and Samhi outpaced their peers with the highest revenue growth in 9MFY25 (up 23%/20% YoY), while Samhi recorded an EBITDA growth of 57% YoY, followed by IHCL (up 28% YoY) in 9MFY25.

Valuation and view: ARR growth and high occupancy to propel the hospitality sector going forward

* The outlook for the hospitality sector remains strong with OR to be stable at high levels, and ARR is expected to continue trending higher in 4QFY25/FY26, backed by favorable demand-supply dynamics and a healthy lineup of MICE activities and other cultural activities.

* The medium-term and long-term structural demand drivers, such as buoyant economic activities, new convention centers in New Delhi and Mumbai, and improved connectivity driven by new airports and roads, are intact with the recovery in FTA and rising trends of spiritual, wildlife, and medical tourism to support growth.

* We anticipate hotel companies to post healthy growth in FY26/FY27, aided by: 1) an increase in ARR across hotels, due to corporate rate hikes and room upgrades through renovations; 2) healthy occupancy levels propelled by favorable demand-supply dynamics; and 3) a strong room addition pipeline.

* We reiterate our BUY rating on IH (TP: INR960) and LEMONTRE (TP: INR190).

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