In the hotel sector, the covid pandemic hit hard causing travel to halt. However, these hardships led to some necessary cost rationalization by improving digital efficiencies, which is helping the hotels industry grow faster and surge its demand.
The sector has grown for the last four quarters due to a recovery in leisure and business travel as well as weddings. In the next few months, there will be two major events in the country — the Cricket World Cup and the G20 summit conferences, which will increase demand for upscale to mid-range hotels.
Further, the demand supply dynamics are skewed towards the branded hotels’ chains. While most of them are expanding, supply is expected to grow at 5-6%, while demand is expected to grow of hotels at 8-10%.
Hotels demand India–No Signs of Weakening
There has been no sign of a weakening of revenge travel even as post-pandemic boom effects have faded. Madan Sabnavi, chief economist at Bank of Baroda, said in a webinar on ‘State of the Economy’ that while consumption has been hazy, the services sector remains strong with strong pent up hotels demand in travel and hospitality.
Despite growth, business travel is not yet at pre-pandemic levels of FY19, and it is also growing in tier-2 and tier-3 cities, giving it a longer runway for expansion.
With most of the stocks giving over 40% returns over the last four quarters, the sector that has enjoyed the boom effects is performing well. According to analysts, room rents are expected to continue to grow, and most of them are adding keys to their portfolio, so there is still a good run up ahead.
A recovery in industry occupancy to 60% in 2022 is expected to reach 66% in 2023, and 68% in 2024 and 70% in 2025, according to HVS Anarock.
The industry average room rent (ARR), which stood at 6,100 in 2022, is expected to rise to 7,106 in 2023, 7,639 in 2024, and 7,983 in 2025,” ICICI Securities reports.
In a report by J M Financial, occupancy levels are increased and average room rents grow by 8-10%. During FY23-26, the brokerage expects revenue to grow at a compound annual growth rate (CAGR) between 12.5-21%. Indian Hotels, Lemon Tree Hotels, and Chalet Hotels are covered by the brokerage.
| STOCK | ONE YEAR RETURN |
| Indian Hotels | 43% |
| Lemon Tree Hotels | 52% |
| Chalet Hotels | 45% |
How Covid Helped Industry
The Covid-19 pandemic has compelled hotel operators to reassess their budgets. This has resulted in cutting costs, and also the adoption of a multi-tasking model along with the hiring of temporary/contractual personnel. Allowing for social distancing, hotels have been redesigned with less contact points like, digital keys, mobile payments and QR code menus. As a result, not only are these establishments financially stable but also operationally effective.
Some hotels have also converted some of their fixed expenses into variable or partially variable expenses as a result of the pandemic. In order to limit oversupply of food and staffing, J M Financial says contracts were aligned towards potential earnings and more investments were made in new-age forecasting tools.
Despite most branded hotels adding more keys, this time around they are opting for asset-light models. Management of Lemon Tree said recently that it plans to add 20,000 rooms by 2028, and 70% of these rooms will be asset-light. Indian Hotels has about 9,900 rooms in its pipeline, and 74% of them will be asset-light.
Indian Hotels and Lemon Tree have built a pipeline heavily inclined to asset light additions, so they have been careful about portfolio expansion. Therefore, with a much leaner balance sheet, they still have adequate headroom to grow through outright acquisitions to tap into the continued strength in demand,” says J M Financial.
With growth in hotels’ demand and operational efficiency, the sector is generating free cash flows – a remarkable feat in a business known for its high capital expenditures.
Also Read: