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MOSL : . HOTELS: Travel recovery bodes well for Hotels

HOTELS: Travel recovery bodes well for Hotels

In this report, we present the current demand scenario in key cities and insights based on the 1QFY23 results as well as management commentaries of major hospitality players – Indian Hotels (IH), Lemon Tree Hotels (LEMONTRE), Chalet Hotels (CHALET), EIH, Oberoi Realty (OBER), Brigade Enterprises (BRGD) and ITC.

• Occupancies surpassed the 65% mark in Jun'22, with ARR being higher by 10% than Jun'19 levels.
• The hospitality basket reported higher flow through (incremental EBITDA to incremental revenue) in 1QFY23 v/s 1QFY20, with CHALET leading the pack (2.4x) followed by EIH, OBER and LEMONTRE.
• RevPAR grew v/s pre-pandemic level across hotels fueled by better occupancy and ARR with gradual pick-up in leisure and business travel.
• ORR is likely to improve further while ARR would remain resilient in anticipation of a resumption in foreign inbound travel that would continue to propel topline.

ARR and ORR surpass pre-pandemic levels in 1QFY23 (v/s 1QFY20)

• According to HVS Anarock, ORR and ARR have been able to sustain over the pre-pandemic levels in 1QFY23, indicating a strong recovery. While ORR remained above pre-pandemic level throughout 1QFY23 at around 65% (up ~2pp v/s 1QFY20), ARR was on a rise in Apr'22/May'22/Jun'22 being higher by 4%/9%/ 10% v/s Apr'19/May'19/Jun'19, respectively.
• The pan-India occupancies in Jun'22 reached the 65% mark (3% up v/s Jun'19) along with higher ARR at INR5,850 (10% up v/s Jun'19). RevPAR improved 13% v/s the pre-pandemic levels for the month.
• According to STR, RevPAR growth in Mumbai/Bengaluru/Delhi & NCR/Goa/ Hyderabad/Chennai/Rajasthan stood at 16%/5%/5%/57%/8%/12%/41% in 1QFY23 v/s 1QFY20, respectively.
• Despite a drop in domestic air traffic by 8% in Jun'22 v/s the previous month due to seasonality, demand in hotels remained buoyant with travelers using other modes of transport. As per the RBI, FASTag collections per day in Jun'22 have seen a 2% increase to INR1,434m v/s INR1,409m in May'22, indicating that more and more travelers are opting for hotels within drivable destinations.

Financial highlights: Aggregate revenue grows 24% v/s 1QFY20

• The 1QFY23 aggregate revenue for the hospitality basket - IH, CHALET, LEMONTRE, EIH, OBER, BRGD and PHNX - grew 46% QoQ and 24% v/s 1QFY20 to INR27.9b. ITC's performance led the pack with 41% growth v/s 1QFY20, followed by LEMONTRE (36% v/s 1QFY20) and IH (standalone; 33% v/s 1QFY20), aided by a recovery in business travel.
• EBITDA for the basket came in at INR9b in 1QFY23, higher by 3.1x QoQ and 2x v/s 1QFY20. EBITDA growth was the highest for EIH of 3.1x v/s 1QFY20 followed by IH (standalone/consolidated)'s EBITDA growth of 2.4x/2.2x v/s pre-pandemic, respectively.
• ITC's EBITDA grew 2.3x v/s 1QFY20 at INR1.8b while LEMONTRE delivered an EBITDA growth of 2.1x. BRGD/OBER/CHALET's EBITDA grew 45%/32%/30% v/s 1QFY20 levels, respectively.
• Adjusted net profit of the hospitality basket stood at INR2.8b in 1QFY23 v/s INR162m in 4QFY22 and INR146m in 1QFY20.
• Compared to the pre-pandemic level, CHALET reported the highest flow through in 1QFY23 at 2.4x followed by EIH at 1.3x and OBER at 1.2x. LEMONTRE, IH (consolidated/standalone), BRGD and ITC saw EBITDA flow through of 93%, 83%/80%, 73% and 63%, respectively, in 1QFY23.

 

Operational highlights: Occupancy and ARR improve v/s pre-pandemic level almost across all hotels 

• Across players, RevPAR improved v/s pre-pandemic level due to better occupancy and ARR aided by a pick-up in travel. IH domestic network/ standalone RevPAR grew 39%/38%, respectively; while EIH rose28% v/s 1QFY20.
• RevPAR growth for IH domestic network/standalone operations was led by ARR growth of 32%/25% coupled with 340bp/700bp expansion in occupancy v/s 1QFY20, respectively.
• EIH's domestic network (including management contract) hotels' RevPAR grew 28% v/s pre-pandemic to INR7,968 in 1QFY23, led by 800bp improvement in occupancy to 72%; the ARR improved 14% v/s 1QFY20.
• BRGD/OBER/PHNX saw RevPAR growth of 23%/16%/13% in 1QFY23, with ORR improving 1,200bp/1,100bp and 140bp and AR coming in higher by 2%/2%/11% v/s 1QFY20 levels, respectively.
• LEMONTRE's RevPAR was flat v/s pre-pandemic at INR3,138 in 1QFY23, led by a 20% improvement in ARR to INR4,822 v/s 1QFY20; while ORR was down 1,240bp for the same period.
• CHALET's RevPAR contracted 5% with ARR declining 8% at INR7,457 while ORR was up 300bp in 1QFY23 v/s 1QFY20.

 

Key management commentaries: Demand v/s supply gap to sustain the long-term growth story for the overall industry 

• Industry wide views: a) domestic demand is seeing a strong recovery while international travel is lagging. With pick-up in foreign inbound travelers in 3Q and 4Q coupled with resilient domestic demand, 2HFY23 is expected to be significantly better; b) Mumbai continued to be the market leader for the hotels sector, with occupancy of more than 80% in May'22, followed by Pune and Bengaluru; c) players could command better ARR v/s pre-Covid levels with travel making a strong comeback, and d) demand v/s supply gap would be favorable in the next three to five years leading to better pricing power.
• IH: i) Growth in ARR/Occupancy/RevPAR of 31%/9%/42% over 1QFY20, respectively; ii) RevPAR growth in Mumbai/Bengaluru/Delhi & NCR at 33%/22%/20% in 1QFY23 v/s 1QFY20, respectively; iii) ORR in 1QFY23 exceeded pre-pandemic level in almost all hotels, except for Ginger where ORR declined due to its strategy to increase room rent, iv) focus on cost optimization led to reduction in fixed cost as a percent of sales to 35% in 1QFY23 from 46% in 1QFY20; v) Palaces and Safaris not yet seen pre-Covid level traction, as foreign inbound travel has not picked up; it is expected to pick-up by end-CY23; vi) IH expects INR1b+ of enterprise revenue from Qmin in next two to three years; vii) guided to open 14 more hotels and sign 15 more hotels in the rest of FY23, viii) IH has 8,100 rooms in pipeline, representing 25%/40% of total portfolio/ operational portfolio, ix) long-term guidance of 33% EBITDA margins with 35% margins from the new business and x) IH aspires to have a Qmin restaurant in every Ginger hotel. Management expects 55%+ EBITDA margins in Ginger plus Qmin and other portfolio to clock a margin of 40-45%.
• LEMONTRE: i) Increased demand for MICE supported growth, ii) ORR improved in Delhi/Hyderabad/ Bengaluru/Mumbai to 73%/73%/76%/74%, respectively, lagged in Gurugram at 57%, iii) Lower ORR at Aurika - Udaipur, at 37%, due to unrest in Udaipur and room tariffs kept above INR11,000, iv) under Keys, hotels in Bangalore and Pune had ORR in range of 70-80%; while Kerala, Ludhiana and Vizag were laggards, v) Keys' ORR to be in the range of 65-70% in FY23 and account for 17% of portfolio, vi) for 1QFY23, staff to room was 0.63x and expected to sustain at 0.66x going ahead, vii) cost per employee gone up to INR31,500/month from INR27,500, vii) Aurika and MIAL's capex estimated at~INR10b of which INR4.4b is already incurred as of 1QFY23,and hotel is expected to open by end of CY23 with ARR of ~INR12,000, ix) LEMONTRE is looking to go debt free in the next four to five years, x) revenue from corporates has dropped to ~43% from 50% while that from retail has increased to ~45% in FY22 from 35%, xi) ORR is expected to be in range of 75-80% for 2HFY23, xii) ARR for 2HFY23 to be higher than INR5,500 and xii) management fee income is likely to reach ~INR360m for FY23 and ~INR550m for FY24.
• CHALET: i) Hospitality business - ORR at 70%, ARR up 37%, revenue up 5% assisted by business travel, ii) Cost saving of 100-200bp in any new hotel can be expected, iii) Capex - INR7b for FY23, with some spillover in FY24, iv) started the Delhi Hotel Project that will be connected to the Terminals 3 and 4. The capex will be around INR6.5m per room with total rooms to be ~375-400 (i.e. approx. INR2.4-2.6b capex), v) adding one more commercial office in Powai in two to three years, which will add INR1.75b to EBITDA, vi) the management is open to inorganic growth in Delhi, Bangalore and others cities (e.g. Chennai) where it is not present as of now.
• EIH: i) ARR for domestic hotels (including managed hotel) was at INR11,066 in 1QFY23 up 14% v/s 1QFY20 while ORR was 72% v/s 64% in 1QFY20. ii) Consumption/Power/Employee costs were down 8%/2%/10%, respectively, but repair and admin expenses increased 27% and 9% due to intensified travel activities, iii) average energy cost reduced to ~INR5.9/unit from ~INR10.9/unit for electricity. Gurgaon and Delhi have a 100% solar energy consumption, iv) India can benefit from depreciating INR v/s USD, which would increase travel but the rising costs could create an issue.