Hope floats for hotel stocks, but the recovery will be long-drawn

Market


With the gradual reopening of the economy and the rising pace of vaccinations, hotel stocks are once again in focus. Shares of Indian Hotels Co. Ltd, Lemon Tree, Taj GVK Hotels & Resorts, EIH Ltd and Chalet Hotels Ltd rose more than 3% each intraday on Wednesday.

These stocks have climbed in the past few trading sessions after media reports suggested opening up of the borders for foreign tourists in the backdrop of a decline in covid-19 cases. An official announcement in this regard is expected soon.

To be sure, the surge in share prices is also accentuated simply because the hospitality sector was among the worst-hit due to the pandemic. Although the impact of the second wave was less severe than the first, it remains to be seen how quickly the sector bounces back.

A weak link

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A weak link

Analysts expect business recovery to be aided by increased domestic and foreign travellers. Recent management commentaries across sectors have indicated that business-related travel is slowly making a comeback, analysts said.

In a recent media interaction, Chalet Hotels executives said that they expect the hotel industry to fully recover from the aftermath of the pandemic by the second half of FY23. Further, they said occupancies for the company now are around 50% compared to pre-pandemic levels of 70% and room rates have started inching up.

Of course, there is a thread of caution among investors. Analysts caution that a full-fledged recovery, which translates into improvement in average room rate, will be a long-drawn process. Demand for hotel rooms, which comes from foreign tourists, would remain muted for some time. “We expect pent-up demand of the past 1.5 years to aid revival for the industry. We expect hotel room rents and occupancy would improve during 2HFY22. So, the stock price movement from here on would depend on the trends in the occupancy rate. Most parameters look favourable and the worst is over for the sector. That said, we feel a meaningful improvement in the sector’s earnings performance would be gradual, at best,” said Mitul Shah, head of research at Reliance Securities Ltd.

“There are some early signs of revival in the leisure segment, some pick-up is also seen in segments like staycations and this bodes well for the domestic side. However, demand from the international side would take a couple of more quarters to start contributing because the threat of a potential third wave is not completely out of the way. Apart from that, investors in this sector would also closely watch commentary on debt and operating cash flows of these companies in the quarters ahead,” said an analyst with a domestic brokerage house requesting anonymity.

The June-quarter earnings performance of the sector was unimpressive with weak revenue growth as companies continued to focus on cost rationalization amid muted demand.

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