The industry is likely to have bottomed out the downward cycle; being at an inflection point, it is a re-rating candidate.
The hotel industry has seen an uptick in the business environment on stable macroeconomic factors and decline in inflation over the past few years. It had witnessed a downward phase, incepting from the global crisis in FY08 leading to subdued economic conditions up to FY13. This period was characterised by oversupply of hotel inventory with low demand for rooms, leading to lower occupancy and revenue per available room (RevPAR). However, the Indian hotel industry now stands at an inflection point and is poised to witness further increase in demand with diminishing rate of supply growth.
Demand revival to boost hotel occupancies
The hospitality industry is cyclical in nature and faces high elasticity of demand depending upon the economic scenario. The sector is on the upward trend backed by economic growth, consistently growing middle class & working population and increasing levels of disposable income. Higher disposable income increases discretionary spending of individuals, leading to rising travel and tourism activities. This has resulted in rising occupancy levels over FY14-17. Higher occupancy provides pricing power to the hotel industry, which would lead to improvement in average room rent (ARR) and RevPAR.
Hotel industry emerges attractive
Increasing room occupancy and RevPAR, is likely to provide healthy growth in revenue. ARR is expected to witness an average growth of 3.5%, as per CARE Ratings. Increase in business activities, travel, and leisure destination visits would provide traction to revenues of the hotel players. Considering the above factors, the hotel industry is expected to see room revenue CAGR of ~12% over FY17-21e, as per CARE Ratings. The hotel industry is likely to have bottomed out the downward cycle and is a re-rating candidate.
We prefer (i) Indian Hotels Company, a flagship of Taj group, owing to its portfolio mix, brand recognition and improving financial position; (ii) EIH Ltd, a proxy play in pure luxury and upper-scale segment, owing to stable financial position to aid its expansion plan; (iii) Oriental Hotels, a prominent player in the South Indian market, operating hotels under the Taj group of hotels and (iv) Royal Orchid Hotels, considering its asset-light model providing scalability to the business.