IGI Logo

Q3 results for our covered hotel companies beat our revenue est. though margins for Lemon Tree Hotels (LTH) disappointed due to the start of Aurika and higher renovation costs. Chalet Hotels reported the strongest rev. growth in Q3, with benefits from capacity expansion and ARR growth. We expect Q4 to be another robust quarter for hotels, based on our channel checks, as occupancies and ARR remain elevated. Our TP for all 3 stocks has increased post results, as we adjusted for the rev. beat and increased our multiple amid continued strength in the industry. We maintain ADD on all 3 stocks, aided by supportive macros.

Q3 review: Chalet delivers strong Q3; LTH’s KPIs impacted by Aurika

Q3 revenue for hotels was above our estimates, while LTH’s margin disappointed with the start of Aurika and higher renovation costs. Hotels reported revenue growth of 17- 29% YoY as they benefitted from ARR growth (8-17% YoY) and occupancy improved by 5-6PP YoY for Indian Hotels (IHCL)/Chalet, though occupancy dipped by 1.7pp YoY for LTH with the start of Aurika Mumbai. Chalet reported its strongest revenue growth (up 29% YoY) in Q3, as it also benefitted from capacity expansion. Margin improved by 200- 500bps YoY for IHCL and Chalet on operating leverage benefits, though LTH’s margins fell ~600bps YoY with the start of Aurika Mumbai and higher renovation costs. Other highlights of Q3 included: i) hotels renovating rooms to support ARR; ii) focus on retail vs. corporate to improve ARR; iii) two new brand launches planned by IHCL; iv) continued hotel openings/signings; v) LTH aiming to be debt free by FY27 vs. FY24 Debt/EBITDA to 3.7x.

FTA picking up from below pre-COVID levels; domestic demand to stay strong

Underlying demand in the hotel industry remains strong. Domestic air travel continues to exhibit strength with the number of passengers increasing 19%/5% YoY in Dec23/Jan-24, with Jan-24 impacted by weather conditions. For Jan-Dec 2023, domestic air passenger travel increased 24% YoY. FTA grew 20% YoY in Nov-23. As of YTDCY23 (November), FTA in India still stands below pre-COVID levels by ~16%. This indicates further scope for growth in FTA, which can support demand for hotels. Moreover, ARR is expected to pick up in Q4FY24, as business travel again resumed, following the holiday season. Q4 would also have weddings and conferences, which would support demand

Outlook positive; revenue and margin to improve further; maintain ADD

Management commentary on the demand outlook remains positive. For IHCL, bookings till March suggest the continuation of demand momentum, further supported by the start of the IPL by March-end. For Chalet, pickup in business travel will support demand. For LTH, Aurika’s occupancy has increased to 60% in Q4 (from 40% in Q3) and will be further aided by the Miss World event. Our channel checks also suggest continued strength in ARR in Q4, led by robust demand. We expect double-digit revenue growth over FY24-26, driven by i) RevPAR registering a 10-13%CAGR over FY23-26E supported by renovation; ii) key count increasing at a 10-15% CAGR over FY23-26E; and iii) occupancy moving towards 75-77% by FY26E. Margin is expected to improve for all three companies, led by i) operating leverage benefit, ii) addition of more keys through management contract for IHCL/LTH that come at a higher margin; iii) increasing contribution of Aurika Mumbai for LTH; iv) increased revenue for Chalet from commercial properties that come at a higher margin; and v) rise in revenue from new businesses for IHCL. We maintain ADD on all 3 names, aided by supportive macros. We prefer Chalet Hotels with a rev./EBITDA CAGR of 22%/33% over FY23-26E. LTH can also see deleveraging by FY27 if Aurika Mumbai’s occupancy picks up along with better ARR.

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354