With elevated room rates, Q4 to be another strong quarter for hotel sector, says Emkay; adds Lemon Tree, IHCL, Chalet

The hotel sector is expected to remain strong in Q4 and Q1, according to a recent research report by domestic brokerage Emkay Global Financial Services. This is based on the brokerage's channel checks, which indicate that average room rates (ARR) have improved year over year (YoY) due to demand from meetings, incentives, conferences, and exhibitions (MICE) events.

“In India, MICE events are quite popular. In only six major locations, we anticipate almost 400 events in 2024 (Exhibit 5). While the Men's Cricket World Cup and the G20 took place in 2023, events like the Bharat Textile Expo, Miss World (Mumbai), and the Indian Premier League (IPL) (from March 22 to May 26, 2024) are anticipated in 2024, which might increase demand for hotels,” the brokerage said. 

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Strong demand is driving the signing of new management contracts by companies like Lemon Tree and Indian Hotels Company Ltd (IHCL), as well as Chalet's acquisition of a resort in the NCR, according to the brokerage.

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The domestic brokerage has kept its target price for Chalet at ₹900 but raised it for IHCL and Lemon Tree to ₹575 and ₹150, respectively, as a result of factoring in new signings and rolling forward forecasts by a quarter to FY26. On the strength of encouraging macros, the brokerage keeps an ADD on all three stocks.

According to the brokerage, Q4FY24 average hotel prices are still high based on channel checks (for entry-level rooms with breakfast included). While rates for Lemon Tree and Chalet will continue to be high, Q1FY25 will mixed with some moderation in rates on a QoQ basis for IHCL.

“In Q1FY25, it is anticipated that the average room rates (ARR) for our sample set would increase by 10%–30% YoY. Based on our checks, the JW Mumbai Sahar City, Westin Mumbai, Westin Hyderabad Mindspace, and Duke Resort led the way in the YoY improvement in Chalet rates in Q1FY25,” the brokerage said.

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Outlook positive; revenue to improve as signings continue in Q4; maintain ADD

The brokerage claims that in Q4, management signings for Lemon Tree and Indian Hotels Company Ltd are still robust. Ten additional hotels have signed new licensing and franchise agreements with Lemon Tree, adding 478 keys (compared to 9 signings adding 621 keys in Q3). As they account for new signings, the brokerages EBITDA for Lemon Tree rises by 0.3%/0.6% for FY25/26E.

At an enterprise value of ₹3.15 billion, Chalet bought "Courtyard" from Marriott Aravali Resort, NCR, suggesting a 9x EV/EBITDA for FY26E, which appears to be value-accretive. In their post-transaction note, the brokerage has already accounted for the acquisition and carried it forward to FY26.

The management comments of Indian Hotels Company Ltd. about the third-quarter demand outlook was optimistic. Reservations for IHCL through the end of March point to a sustained demand trend, which will be bolstered by the IPL beginning at the end of March. IHCL secured seven new management contracts in Q4FY24, adding 1,307 keys.

"We maintain ADD on all 3 names, aided by supportive macros. We prefer Chalet Hotels with a rev/EBITDA CAGR of 24%/34% over FY23-26E," the brokerage said.

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