Why Is Jefferies Bullish On Indian Hotel Sector?

(The Corner Office Journal) -- Jefferies said the Indian hotel sector is amid cyclical tailwinds with supply-demand mismatch, especially at the time when many demand drivers are firing all together.

“MICE (meetings, incentives, conferences, and exhibitions) and event tourism are emerging powerful catalyst for leisure/business travel, benefiting from the age demographics and growth in Indian Inc.,” the brokerage said in an investor note.

India’s hospitality segment is favorably placed with demand CAGR at over 10% likely outpacing the supply CAGR of 7%-9%, it added.

“We believe that the stock re-rating for hotels is here to stay on back of strong travel/tourism upturn,” Jefferies said.

The brokerage initiated coverage on Chalet Hotels Ltd. with Buy rating and a target price of 945 rupees per share. Jefferies also reiterated Buy calls on Indian Hotels Company Ltd. and ITC Hotels Ltd. It has a target price of 980 rupees and 240 rupees on these companies, respectively.

Jefferies cites the following factors for being constructive on the Indian hotel sector:

Recession Resilient

=> Travel industry in India may not be recession proof, but it is recession resilient.

=> Travel demand in India, as in many countries, has historically been influenced by economic conditions, including recessions.

=> Irrespective, domestic tourist and air traffic in India have grown at a CAGR of 11%-12% over the past 20 years and could clock a similar rate over next decade.

MICE Tourism

=> Government push, infrastructure development, new world-class convention centers and growing size of Indian businesses have also pointed towards strengthening of India’s position in the global MICE tourism.

=> India's MICE industry can grow at a CAGR of 12%-18% over the next few years as per industry reports, increasing its revenue contribution for branded chain hotels (currently at 15%-20% of mix) and also benefit transient rates (over 50% of revenue mix).

Event Tourism

=> Event tourism is an expanding segment of the industry focused on planning/traveling to attend specific events.

=> Religious pilgrimage was among the earliest forms of event related travel in India, but has now increasingly expanded in segments, including sports, concerts and cultural festivals.

=> The live events industry is slated to grow at a CAGR of 18% over the next few years, as per industry estimates.

Under-Penetration Story

=> Supply is catching up but few structural issues, including expensive land acquisition, regulatory hurdles and low return on investment on incremental greenfield capital expenditure contribute to slow adds.

=> Branded hotel rooms/capita in India is far lower versus global peers. Hoteliers have shifted focus towards Tier II/Tier III cities bringing quality accommodations to previously underserved markets.

=> Hotels inventory in China doubled between 2010-2020, following rapid macroeconomic growth with increased penetration of branded chain hotels (currently 25%-27% of the mix; India at 10%-15%), and a similar trend can play out in India with growing travel demand.

“We expect hospitality industry to remain in a prolonged upcycle with demand growth outpacing supply and expect industry RevPAR (revenue per available room) CAGR to be 7%-8% CAGR over the medium term,” Jefferies said.

(Send feedback to editor@cornerofficejournal.com)

Disclaimer: Investment in securities are subject to market risks, please do your due diligence before investing. The Corner Office Journal advises its users to check with certified investment experts before taking any investment decisions.