Guests sit in the lounge area a hotel. (Photographer: Krisztian Bocsi/Bloomberg)  

Hotel Stocks Rally Ahead Of Holiday Season As Demand Outpaces Supply

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Investors are betting on hotel companies ahead of the summer holiday season as growing demand and supply constraints have pushed occupancy to its highest in at least eight years.

Shares of hotel companies have rallied by up to 20 percent in an otherwise range-bound market in the last three days. The gainers were led by Taj GVK Hotels and Resorts Ltd., Royal Orchid Hotels Ltd. and EIH Associated Hotels Ltd.

Rising incomes in Asia’s third-largest economy mean that Indians now travel more. Particularly in May during summer school and college holidays, when hotel, air and train bookings spike every year. The industry’s occupancy rate was 65 percent in the year ended March 2017, according to an HVS report. That was the highest since 2008. The supply of rooms fell nearly by half to 47,067 rooms in eight years through March 2017. As supply hasn’t kept pace with demand, individual hotel chains reported higher occupancy rates this year.

For four-five years, supply rose faster than demand, said Raj Rana, chief executive officer, South Asia, Radisson Hotel Group, over the phone. In the last five quarters, the industry has seen a turnaround mainly led by a decline in supply and an increase in demand, he said.

Improving occupancy is leading to higher average revenue per room, which directly impacts profitability, Rana said. He expects the trend to sustain for the next four to five years. Radisson operates at an occupancy of 67 percent and Rana sees it breaching 70 percent in the ongoing financial year. “Regions like Mumbai, Delhi, Ahmedabad, Goa as well as Udaipur have already crossed 80 percent occupancy levels.”

Hotel availability in India is much lower than the global average. There are 0.2 rooms per 1,000 people compared with the worldwide average of 2, according to STR census database for 2016. That compares with 15 in the U.S.

That’s why companies like Royal Orchid are investing in adding capacity. “Six new properties are in the pipeline and the company looks to acquire leased assets for expansion,” Amit Jaiswal, chief financial officer, told BloombergQuint in an interview.

Occupancy rate across the industry has risen above 70 percent, he said, and Royal Orchid operates at 75 percent and is expected to cross 80 percent in year through March. It expects its average revenue rate to rise by 8-10 percent this year.

Domestic travel has increased and long-weekends are driving growth in the leisure business, Jaiswal said. Demand will remain high as compared to supply for the next three years.

Domestic tourist visits jumped 12 percent to 1.6 billion in 2016, according to the latest data available on the Ministry of Tourism’s website. Foreign tourist arrivals rose 15 percent year-on-year to 9 million in January-November last year. The growth, barring after demonetisation and GST, has been steady.

The demand-supply mismatch of premium hotels and increasing operating efficiency would improve profitability and return ratios, said Rahul Veera, assistant vice president at research firm Elara Securities. The industry’s average room revenue growth wouldn’t be as steep as the 2003-08 cycle, but a 10-15 percent increase will improve earnings outlook, he said. “Our order of preference is Indian Hotels Company Ltd., EIH Ltd. and Royal Orchid Hotels.”

Rising demand is not the only reason for the spike in share prices though. Lemon Tree Hotels Ltd.’s successful initial public offering has provided a benchmark for mid-sized hotels, according Vishal Kamat, director at Kamat Hotels India Ltd.

“There is no specific trigger but things are falling in place. The street is looking at valuations after successful IPO of Lemon Tree Hotels.”

He agreed that occupancy rates in cities like Delhi, Mumbai, Bangalore and Pune have improved. For Kamat Hotels, it has increased by 2-3 percentage points to around 80-85 percent.

Supply of rooms will shrink by 7.9 percent and demand will continue to grow at 12.4 percent till 2021, according to a report by Horwath HTL. That gives hotel operators room to increase prices, according to Vikramjit Singh, president at Lemon Tree Hotels. “We have taken up our prices already and going forward with such high forecasted occupancies, we expect prices to harden across the industry.”

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