Kotak remains positive about hotel stocks, raises target price of IHCL, Chalet, Lemon Tree, Samhi Hotels; here's why

Favourable demand-supply dynamics and improving strength in average room rate (ARR) across companies are likely to bode well for the hospitality industry in India. Factoring this, brokerage firm Kotak Institutional Equities (Kotak Securities) remains positive about the sector as it has revised upward the sector's FY25E EBITDA and raised the fair values of stocks such as Indian Hotels Company, Chalet Hotels, Lemon Tree and Samhi Hotels.

The brokerage firm has raised its EBITDA estimates for FY25 by 2-6 per cent across its coverage universe to factor in double-digit room rate growth in FY25E.

Kotak pointed out that the average hotel room rates in India rose 14 per cent year-on-year (YoY) to ₹7,560 per day in 11 months of the financial year 2024 (11MFY24). The exit room rate for February 2024 at ₹8,900 per day (up 7 per cent YoY) scaled a new peak, with occupancy at 73 per cent, implying a revenue per available room (RevPAR) of ₹6,500 per day (up 10 per cent YoY).

"The strength in ARRs gives us improved visibility for FY25E, leading to an upward revision of 2-5 per cent in ARRs across coverage companies, implying up to a 6 per cent revision in FY25E EBITDA," Kotak said.

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As per Kotak's estimates, the earnings revision is higher for Indian Hotels Company (6 per cent for FY25E and 10 per cent for FY26E) and Chalet Hotels (6 per cent for FY25E and 7 per cent for FY26E).

Kotak has raised the fair value of Indian Hotels Company to ₹620 from ₹535 and that of Chalet Hotels to ₹900 from ₹790 owing to the higher ARR improvement seen in premium hotels.

"In the case of Indian Hotels Company, the earnings revision also includes lower operating costs, as reflected in the earnings of 9MFY24, in addition to a revision in room rates. For Chalet, the earnings revision also factors in the acquisition of a new property in the NCR and the recent equity infusion," said Kotak.

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"In the case of Indian Hotels Company, the earnings revision also includes lower operating costs, as reflected in the earnings of 9MFY24, in addition to a revision in room rates. For Chalet, the earnings revision also factors in the acquisition of a new property in the NCR and the recent equity infusion," Kotak added.

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Kotak said Lemon Tree (2 per cent for FY25E and 4 per cent for FY26E) saw a lower revision in earnings due to lower tariffs for Aurika Mumbai, which partially offset the gain in hotel properties elsewhere, with fair values raised to ₹130 from ₹122. Kotak has raised the fair value of Samhi Hotels to ₹270 from ₹250, with a 6 per cent revision in FY25E EBITDA.

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