Markets
Hotels eye more room for growth with renovations
Summary
- Revenue per available room was flat at ₹4,335 year-on-year in Q1FY25, showed HVS Anarock data compiled by Motilal Oswal Financial Services.
The Indian hospitality industry raised the curtain on FY25 with a subdued start. Demand for hotel rooms in the June quarter (Q1FY25) was marred by a cocktail of unfavourable factors, albeit temporary, such as general elections, heatwaves, muted air traffic growth and lower number of wedding days. The revenue per available room (RevPAR) was flat at ₹4,335 year-on-year in Q1FY25, showed HVS Anarock data compiled by Motilal Oswal Financial Services. Thus, another key metric—the average room rate (ARR) increased slightly by just about 2% to ₹7,067. However, this was offset by a 70-basis-point dip in occupancy to 61.3%, as per HVS data. One basis point is 0.01%.
But the momentum is seen picking up ahead helped by pent-up demand, higher wedding days/auspicious dates, and an increase in meetings, incentives, conferences, and exhibitions (MICE) events. Plus, the supply of branded rooms is expected to lag demand, which augurs well for industry growth. “Various estimates peg FY24–28 industry supply CAGR at 5–6% versus demand CAGR at about 10%," said an ICICI Securities report dated 30 August. CAGR is compound annual growth rate.
Short-term blip in revenue
Amid this, over the medium-to-long term, listed hotel companies continue to bet on renovation of existing properties to generate better RevPAR. In Q1FY25 earnings call, The Indian Hotels Co. Ltd’s (IHCL) management said St. James in London, President in Mumbai, Taj Holiday Village in Goa and Jai Mahal Palace in Jaipur, were some of its properties that were under renovations during the quarter. Renovations usually lead to a short-term blip in revenue, but the IHCL management said that investing in renovation of some key properties such as Taj which is a major source of revenue, is critical.
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In some cases, the capital expenditure incurred on renovations may weigh on balance sheet strength and hurt near-term margins, but is eventually expected to boost earnings growth. For instance, Lemon Tree Hotels Ltd management reiterated its plans of spending around ₹100 crore each in FY25 and FY26 on renovations.The company typically undertakes renovations in the first half of the year. In Q1FY25, around 700 rooms were shut for renovations. After the renovations, the company anticipates Ebitda of ₹60 crore annually from ‘Keys’ portfolio with an ARR of nearly ₹4,500.
For EIH Ltd, around 209 rooms of The Oberoi Grand, Kolkata will undergo significant renovation and would reopen after three years. Similarly, after an upcoming renovation of around 74 rooms in The Oberoi, Bali, the management believes the ARR can grow about 2x at that property.
“With occupancies at all-time highs, a key lever has almost maxed out," said a Nuvama Research report dated 19 August. Going ahead, hotels across the board have turned to renovating their key big-box assets and sprucing up older assets to reprice and increase RevPAR growth going forward, it added.
Renovation and repairs
Apart from renovations, these companies are also adding more inventories and expanding their portfolios. Here, management contracts (where properties are not owned, only managed by companies) are expected to be in favour. For this asset-light model, companies are seen either acquiring operational hotels or utilizing existing land banks.
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For now, investors in some hotel stocks are sitting on decent gains. In the past one year, IHCL, EIH and Chalet Hotels shares have rallied by over 50% each. On the other hand, Lemon Tree has been a relative laggard with returns of around 23%.“Heading into the festive season, from September 2024, a key monitorable will be sustenance of demand growth from H2FY24's high base, which we expect to be in high single-digits (RevPAR growth of 7–8%)," said ICICI Securities. That apart, after the industry's solid rebound after the pandemic, analysts caution that companies face cost pressures due to higher wages and commissions, which can weigh on margins outlook.
