Indian Hotels, Lemon Tree - On A Strong Wicket: HDFC Securities Initiates Coverage

HDFC Securities Institutional Equities

India’s hotel industry has witnessed a robust turnaround in demand after the pandemic, led by the rising discretionary spending on tours and travels, revenge tourism, improving economic environment fuelling corporate travels and revival of mega wedding season and other cultural events.

Furthermore, with demand outpacing supply, which the latter is unlikely to catch over the next two-three years, we expect both average room rates and occupancies to remain strong, leading to higher revenue per available room for the industry.

The current trend is very similar to the last upcycle the sector witnessed from 2004 to 2008, which commanded improved margins and multiples for listed entities. With international travel yet to pick up and corporate events gradually gaining pace, we believe that domestic hotel players having strong hotel pipelines and healthy balance sheets are in a very sweet spot to seize the opportunity that the upcycle in the sector would throw up.

We initiate coverage on Indian Hotels Company Ltd. and Lemon Tree Hotel Ltd. on a positive note, as both companies have a strong pipeline of room additions based on an asset-light model. This, along with sustainable cost reduction initiatives undertaken during the pandemic is likely to drive their toplines and spur margins without leveraging their balance sheets.

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