Nirmal Bang initiates coverage on hotel sector with 2 ‘buy’ and 2 ‘accumulate’ calls; check list here

The Indian hospitality sector has been the talk of the town due to its stellar performance over the past two years, as the impact of Covid-19 abated. Occupancy rates and Average Room Rates (ARRs) have shown a robust increase, leading to significant improvements in key financial metrics such as EBITDA margins, return ratios, and debt-to-equity ratios. This strong performance has not gone unnoticed by capital markets, resulting in a massive re-rating of the entire sector. So, what’s next?

In a recent note, brokerage house Nirmal Bang initiated coverage on the Indian hospitality sector with a positive view. "While our sector view is positive, we rank companies based on four parameters: magnitude and mode of future expansion, presence across formats and locations, cost management skills, and quality of balance sheet," the brokerage stated. Nirmal Bang has a Buy rating on Indian Hotels and Chalet Hotels, and an Accumulate rating on EIH and Lemon Tree Hotels.

The brokerage has set a target price of ₹980 for Chalet Hotels and ₹750 for Indian Hotels, implying an upside of 17 percent and 16 percent, respectively. For EIH, the target is ₹470, indicating a 10 percent upside, and for Lemon Tree Hotels, the target is ₹150, implying a 2 percent upside.

Hotel Sector Outlook

Nirmal Bang noted that while demand outpacing supply in India has been widely discussed, investors are increasingly cautious about future growth, assuming limited growth headroom in ARR and occupancy rates. The brokerage believes that the ARR increase in the past couple of years has been driven mainly by a demand-supply mismatch, higher propensity to spend on hotels and experiences, and an increase in the travel wallet share of consumers. Long-term data suggests nearly flat blended ARR growth over the last 15 years, with growth in luxury and upper upscale segments in the low-single digit CAGR range.

Encouraging macroeconomic factors and sector tailwinds should enable the hospitality industry to grow in terms of both occupancy and rates. However, only players investing smartly in existing assets and new experiences while keeping costs and balance sheets in check will be able to win the hearts of fussier consumers and demanding investors.

Company-Specific Insights

Indian Hotels (IH): As the largest hospitality player in India, Indian Hotels boasts a dominant presence in the luxury segment with its flagship brand, Taj, holding a 51% market share. Nirmal Bang appreciates IH's strategic investments across various brands, assets, and capabilities, which have transformed it into a growth machine catering to diverse consumer needs across vibrant India.

The brokerage highlights IH's nimble management, diversified portfolio, focus on new business avenues, cost management, and a cash-rich balance sheet as key strengths. These factors position IH as a prime beneficiary of India's thriving tourism and hospitality ecosystem. The valuation premium for IH is justified by its strong portfolio positioning, multiple non-room revenue growth avenues, and robust financial health.

Chalet Hotels: The hospitality arm of the K Raheja Group, Chalet Hotels, operates 3,052 keys across 10 hotels under leading global brands like Marriott and Accor in key cities such as MMR, NCR, Hyderabad, Bangalore, and Pune. Unlike many peers focusing on a capital-light growth model, Chalet continues with its ownership growth strategy, which allows it to reap the benefits of operating leverage during industry upcycles, said the brokerage.

Additionally, Chalet's diversification into commercial real estate (CRE) leasing and residential projects adds strength to its base business. Nirmal Bang's implied blended multiple of 19x EV/EBITDA reflects the sector's tailwinds and Chalet's superior financial performance compared to previous cycles.

EIH (The Oberoi Group): EIH operates 30 hotels, resorts, and cruises across six countries and 22 cities, with a total operational pipeline of 4,269 keys. As a dominant player in the luxury segment, EIH commands premium RevPAR compared to the industry. Nirmal Bang notes EIH's ambitious 2030 growth plan to add 50 new hotels and 4,500 keys, which is bolstered by its strong, cash-rich balance sheet. This financial strength positions EIH well to capitalise on significant growth opportunities. The limited incremental supply in the luxury segment, coupled with expected increases in foreign tourist arrivals (FTAs) and strong domestic demand, should drive ARR growth.

Lemon Tree Hotels: As India's largest hotelier in the midscale category, Lemon Tree operates seven proprietary brands, including a luxury brand. Within 20 years, it has grown to over 100 hotels and 10,000 rooms, making it the fastest-growing franchise in its category. Nirmal Bang notes that while Lemon Tree is focusing incrementally on an asset-light model, the recent addition of the Aurika Mumbai property and the renovation of its existing portfolio are expected to significantly boost room revenue growth over the next three years. Increased management fees and digital initiatives are also likely to enhance operating margins. The brokerage's lower target multiple for Lemon Tree, compared to peers, is due to its higher earnings sensitivity to ARR changes and leverage. Clarity on the company's Lemon Tree 2.0 strategy remains crucial for future performance.

The Indian hospitality sector has demonstrated remarkable resilience and growth post-Covid-19. While the sector’s future looks promising, investors should focus on companies with smart investment strategies, robust cost management, and strong balance sheets. Nirmal Bang's positive outlook, coupled with strategic insights into leading hospitality players, suggests that the sector is well-positioned for continued growth, albeit with a focus on quality and prudent expansion.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.