Good view for hotel operators in 2024, too?

Over the past two years, the Indian hospitality industry has thrived on recovery trends, led by a surge in leisure demand in 2022 and a boom in corporate travel in 2023. This upswing resulted in impressive stock performance for hotel companies. For instance, in 2023, shares of The Indian Hotels Co. Ltd (IHCL), Lemon Tree Hotels Ltd, and Chalet Hotels Ltd witnessed gains of 38%, 40%, and 100%, respectively.

Looking ahead to 2024, investors are keenly awaiting the December quarter (Q3FY24) results, with solid expectations. While a slight dip in occupancy rates is anticipated, this is expected to be offset by a rise in holiday travel, the ICC Men’s Cricket World Cup, and the wedding season. Lemon Tree Hotels is set to benefit from the launch of Aurika Mumbai, and Tata group’s IHCL, known for its Taj brand, is projected to achieve double digit sales growth.

Additionally, Chalet Hotels, which includes JW Marriott and Four Points by Sheraton, is likely to see robust growth in Q3, driven by capacity expansion, operating leverage, and average room rate (ARR) growth. The industry's ARR is poised for an uptick in Q4 with the resumption of business travel post holidays.

The period from January to March will also be buoyed by weddings and conferences. “Our channel checks for forward hotel room rates for Jan’24 Mar’24 compared to the Jan’23 Mar’23 period (previous year) indicate that hotels continue to follow a strategy of keeping rates at least 10% higher than previous year levels," said a ICICI Securities report dated 2 January.

As such, FY24 is shaping up to be a strong year for the hospitality sector. However, the stock rally suggests that much of this optimism has already been factored into valuations. “Sustenance of RevPAR growth in FY25 (we estimate high single digit) is key for the current valuations and optimism to sustain," said analysts from Dolat Capital Market in a report on 2 January.

This is especially as growth starts to moderate on high base, a key risk, they said. RevPAR is revenue per available room. The big event for the industry to look out for in 2024 is the Indian Premiere League. The tournament is scheduled from 23 March to 29 May, with cricket matches to be held in various locations across India.

As a result, year on year revenue growth looks promising for the quarter ending June (Q1FY25) and Q2FY25, with the second half of the year traditionally slower. Plus, operating leverage should kick in for hotel operators that have added new properties. Citing the report India Hospitality Industry Overview 2022 by HVS Anarock, ICICI Securities notes that industry level occupancies that rebounded to 60% in 2022, are estimated to reach 66% in 2023 and to 68% in 2024.

At the same time, industry ARR is anticipated to rise to 7,106 in 2023 and 7,639 in 2024 from 6,100 in 2022. Despite a year on year increase in foreign tourist arrivals in India from January to October 2023, numbers are still below pre pandemic levels. A further uptick in foreign tourist arrivals is expected in 2024, indicating potential for growth and driving demand and revenue.

However, risks include a shift in consumer preference towards international holidays and a sharp rise in domestic airfares, which could dampen demand. Jinesh Joshi, an analyst at Prabhudas Lilladher, advises caution regarding the extent of room rate hikes possible in 2024. As such, investors would do well to keep an eye on the trend in occupancy rates, a crucial indicator for growth..