Hotel stocks raise a toast to improving fundamentals after a decade of turmoil

After a woeful decade, the country’s hotel industry is all set for a revival. The rationale for this optimism is simple: all key drivers of hotel revenues are on the fast track.

To begin with, foreign tourist arrivals (FTA) data shows that in calendar year 2017, FTA shot up by 15.7% over 2016 compared to a growth of 9.7% in the previous year. Growth continued at a robust 10% year-on-year (yoy) in the March quarter too.

Domestic travel numbers look even more promising. Following a 28% yoy growth in March, air passenger traffic grew at 24% for the quarter compared to 18% in the preceding quarter (December).

Higher travel and tourism boosts occupancy rates. According to industry analysts, pan-India occupancy rates (OR) have touched a respectable 70% and have sustained above 65% for many quarters now. As a result, a steady increase in room tariffs gave a leg up to revenue per average room (RevPAR) that rose by 7% yoy in February. A recent report by Elara Securities (India) Pvt. Ltd adds, “RevPar across business destinations of Hyderabad, Delhi, National Capital Region and Pune improved on the back of strong demand from meetings, incentives, conferences and exhibitions (MICE) segment and increasing number of corporate travellers.”

Rising RevPAR not only implies better room utilization and revenue generation, but means there is scope for higher profitability as well. Of late, healthy RevPAR along with stringent cost cuts have helped stabilize operating margin at around 25-30% across premium hotels.

So the euphoric rise in stock prices is not surprising. Indian Hotels Co. Ltd, Taj GVK Hotels Ltd and East India Hotels Ltd have returned as much as 35-40% since October, while even the recently listed Lemon Tree Hotels Ltd (listed in March) is up over 40%.

But does the high stock prices leave any room for further investor participation? Brokerages are optimistic. They say the enterprise value is about 25-30 times Ebitda at current stock prices, which although rich, is below the FY2006-07 levels, when revenue growth was not as promising as it is now. (Ebitda is earnings before interest, tax, depreciation and amortisation).

What may spoil the party is mindless room additions by hotels. That is what had pushed the financials of the sector into a trough following almost 110,000 room additions in FY2008. Debt-to-equity ratios, which shot through the roof on account of huge borrowings to fund expansions, have just come down to reasonable levels.livemint


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