Hotel stocks soar, add ₹1 Lakh crore to market cap in two years

Hotel stocks have been thriving post pandemic and the rally in the space has got further intensified after robust demand boosted occupancies across the segments. Almost all companies in the sector reported healthy operating margins in the third quarter of FY24, aided by strong demand.

The improvement in financial metrics is quite visible in stock performance of hotels as well. A custom index of 12 hotel stocks has added as much as ₹1 lakh crore to its market capitalisation since the beginning of 2022. While the market valuation of Indian Hotels Co (IHCL) surged the most, with an increase of ₹54,212 crore over the last two years, others like EIH and Chalet Hotels saw their market valuation surge by ₹16,453 crore and ₹12,794 crore, respectively during the same period.

In fact, the hotels and resorts stocks have been outperforming the benchmark Nifty50 since 2021. While the Nifty50 has gained 2.2% so far in 2024, the index of hotel stocks has gained nearly 30%, whereas the Nifty Midcap and Nifty Smallcap have added close to 7% during the same period. After a 74% rally in 2022, the index of hotel stocks had surged another 45% in 2023. In comparison, the Nifty50 generated a return of just 4.3% in 2022 and 20% in 2023.

Four of the custom index members --Indian Hotels , EIH, Chalet Hotels and Taj GVK Hotels and Resorts – all rose to their record highs on Tuesday. Even other members like Lemon Tree Hotels, EIH Associated Hotels, Oriental Hotels and Royal Orchid Hotels had tested their new highs during the second week of February 2024.

The operating margin of all hotel firms improved on sequential basis in Q3, reflecting seasonality on stronger pricing and positive outlook. IHCL, the largest hotel by market capitalisation has maintained its outlook to open 20 hotels in FY24 and expects pace of opening to increase to 2+ hotels every month in FY25 (implies 12% room adds CAGR in FY24-FY25). The company is also about to launch a new brand in its portfolio. Similarly, EIH reiterated its target of opening 50 new hotels by 2030. "Industry average room rates (ARRs) sustained double digit growth and most management guide for strong FY25 as well," wrote Jefferies in an investor note.

According to CRISIL Ratings, the hotel industry in India is slated for a healthy revenue growth of 11-13% in FY25 after a strong 15-17% growth in the current fiscal, backed by steady domestic demand and ramp up in foreign traveller demand.