Is the Hotel Industry Picking Up?

Kotak Insights | Date 25/08/2023

A couple of days back, it was reported that the hotel industry could contribute a significant chunk to India’s GDP in the coming two decades.

The direct contribution of Indian hotel industry to the country's gross domestic product (GDP) is estimated to touch $1 trillion by 2047 driven by a significant jump in domestic tourist visits and international arrivals.

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Note that the Indian tourism and hospitality industry has emerged as one of the key growth drivers in recent years. It accounts for around 7.5% of the GDP and is estimated to double in the coming years.

Now you may be thinking - isn’t two decades too long a time span?

Of course, it is! And even Rome wasn’t built in a day. Think about the Chandrayaan 3 success and the years it took for India to become an established player when it comes to space tech.

Acquiring new properties and establishing new hotels can be a task. That’s why you don’t often see news around hotel companies announcing new hotel locations.

The hotel business is highly capital-intensive. It requires a large upfront investment in land and construction costs, most of which is largely funded with debt. Therefore, the balance sheet of hotel companies is usually riddled with debt.

But when they do announce launching new hotels or acquiring properties, you better believe the sector is showing super strong green shoots.

And that’s what’s seems to be happening currently. Even smaller Indian counterparts like Lemon Tree Hotels have announced launching new properties and hotels.

Bookings during summer holidays have grown by over 2x compared to last year, according to online travel portal Cleartrip.

Even if we consider the global scenario, sentiment seems to be picking up. China has apparently lifted a ban on group tours to more than 70 locations, giving hotel stocks a boost.

China’s culture and tourism ministry has resumed group tours to over dozens of locations in Asia-Pacific, Europe, Africa and North America.

What’s more, the positive news around hotel industry couldn’t have come at a better time.

Bookings are going through the roof all over India ahead of the upcoming ODI World Cup held across multiple states in India. And because of the G20 summit.

Hotels started receiving bookings well in advance as soon as the dates and venues for matches were announced. Just to put things into context, the hype around cricket is so real that a base category room at a five-star hotel in Ahmedabad is going for Rs 50,000 per night.

People are booking hospital beds as a backup in case they don’t get any reservations and due to prices going through the roof!

Remember, there are other tailwinds for the sector as well. Revenge travel being one and the other one being the upcoming festive season.

According to experts, demand is expected to be strong in the upcoming festive season and occupancies are also expected to improve more. Plus, there's expectations of corporate action as inventory that is stalled or locked up, comes up for sale in time to come.

Is this time different?

When Covid hit, hotel companies were among the biggest losers. Bookings came to a standstill and losses kept piling up. Eventually, as the economy bounced back, so did the hotel industry. It slowly started to recover, led by an uptick in domestic travel.

The narrowing gap between supply and demand also helped, by boosting room occupancies and improving room rates.

So this time around, investors believed that hotel stocks are in for a long rally. And they were proved right too. Majority of hotel stocks have seen a sharp run up in their stock prices.

Even ratings agencies have turned bullish on hotel stocks. ICRA has come out with a report estimating the pan-India premium hotel occupancy at 70-72% levels in the current financial year. And it is estimating a 13-15% revenue growth for the Indian hotel industry in FY24.

So the question remains – is the bull run in hotel stocks just getting started?

We can’t be entirely sure to say that. Even though the industry is expected to grow leaps and bounds, it can take years before hotel stocks become investor favourites and start churning out multibagger returns. For starters, a lot of hotel stocks still have a lot of debt on their books.

Also, the upcoming world cup and G20 summit are recent triggers that supported hotel stocks. But the effect has already factored in stock prices of hotel companies. Once the World cup gets done, we can expect some correction in hotel stocks.

On the flip side, if companies manage to pare down debt or add a chunk of inventory by managing debt effectively, there could be some winners. Top companies like Indian Hotels, among others have said they’ll become debt free by 2025 and also add more rooms.

We will have to wait and watch how this sector performs in the coming years.

All in all, the Indian hotel industry is surely making some noise and there can be many untapped investing and trading opportunities to look out for.

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We would love to hear from you - what trends are you paying attention to in 2023? And which hotel stocks are you tracking?

Let us know in the comments section below.

Until then - Happy Investing!

Sources: Kotak Securities, Hotel Association of India, ICRA, BSE filings, Cleartrip

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