India lifted all COVID-19-related travel restrictions and resumed international flights on March 27, putting a stop to the hospitality industry’s two-year agony. The transition has improved the industry’s outlook, and the stocks of hospitality companies have risen in response. On March 28, major hotel chains, airlines, and tour operators all saw significant gains in their stock prices.
Shares of Advani Hotels & Resorts India Ltd closed the day up 6.5 percent, EIH Ltd was up 6.4 percent, EIH Associated Hotels Ltd was up 12 percent, Indian Hotels Ltd was up about 2 percent, Asian Hotels (East) Ltd was up 16 percent, Asian Hotels (North) was up 5 percent, and Taj GVK Hotels & Resorts Ltd was up 5.7 percent.
The resumption of international flights also boosted the stocks of aviation companies, with Interglobe Aviation Ltd gaining more than 1%. (it was up almost 3 percent during the day). Spicejet couldn’t hold on to its gains from the day and finished 1.4 percent lower. The stock of tour operator Thomas Cook (India) Ltd closed up 4%.
What is Driving The Momentum?
The biggest drivers behind the renewed interest in the sector are an increase in leisure travel and revenge tourism (a phenomenon that causes a rush for travel by people tired of lockdowns), the start of so-called MICE activities, and so on. Meetings, incentives, conferences, and exhibitions are all shortened as MICE.
Corporate travel, in the form of room bookings and MICE, accounts for nearly half of hotel revenue.
“With corporate travel and events opening up, hotels are seeing an uptick in occupancy levels similar to pre-COVID times while leisure travel has also picked up sharply,” said Abhay Agarwal, founder & fund manager, Piper Serica Advisors Pvt Ltd.
According to data, occupancy levels fell below 20% during COVID-19, but have since risen to more than 65%. Hotel key performance indicators are advancing pre-COVID levels, which will lead to increased traction in the food and beverage industry.
Is the Momentum Sustainable?
Experts believe that the sector will be able to maintain its momentum and that things will continue to improve for the hospitality industry.
Leisure travel had become almost non-existent due to the pandemic, and now there is massive pent-up demand, which is helping hotel company stocks.
“We are witnessing a broad increase in ARRs and occupancy levels in tourist locations while business travel has also improved steadily,” said Nishit Master, portfolio manager at Axis Securities Ltd.
An increase in weddings and the start of MICE activity are other positives. “We expect these demand drivers to be sustainable over the next couple of years and thus are positive on the space,” added Master.
The hospitality sector has been one of the biggest beneficiaries of a revival in the economy in the post-COVID era.
Investments of Mutual funds
According to expert opinions, mutual funds are riding the recovery wave and purchasing stocks in the sector.
“They are also playing the opening-up theme and believe in the concept of revenge tourism, as evidenced by higher occupancy levels and ARRs in tourist destinations,” said Master of Axis Securities.
Other triggers include an increase in MICE activity and an increase in business travel. Another important point is that after two years of COVID, progressive generation capacity in the industry are likely to be lower in the coming years, which will help the demand-supply scenario.
Which Stocks are Benefitting
Experts recommend investing in quality names such as EIH Ltd, Indian Hotels, EIH Associates, Lemon Tree Hotels, Chalet Hotels, Mahindra Holidays & Resorts, and Taj GVK.
According to Agarwal of Piper Serica, investors should “concentrate on large hotel chains because size is critical to driving down costs.” They should also look for hotels that are well-diversified in terms of location and have a portfolio that spans all price points, from luxury to budget.”
Hotels with a diverse clientele – a mix of leisure and corporate – typically have more consistent earnings. Their balance sheet should be strong as well as not overleveraged.
“When we consider all of these factors, we particularly like Lemon Tree Hotels because it checks all of these boxes,” said Agarwal of Piper Serica.
Agrawal of SBI Securities recommends Indian Hotels, Lemon Tree, and Mahindra Holidays. “Following the recently concluded QIP of Rs 2,000 crore, Indian Hotels’ balance sheet looks much better and is well poised to capitalize on the hotel industry’s growth opportunity,” he added.
QIP is an abbreviation for qualified institutional placement.
Photo by Andrea Piacquadio