Best Hotel Stocks To Buy Now | Download Free Research Report

HDFC Securities has issued a research report in which the best stocks to buy now have been identified.

It is stated that the hotel industry is at an inflection point and that the Indian hotel market is comparatively under-penetrated in comparison to global peers.  

HDFC Securities has analyzed high-quality stocks such as Lemon Tree, Indian Hotels, East India Hotels etc and recommended the best hotel stock to buy now.

Make hay while the sun shines

Notable trends are evolving in the Indian Hospitality sector that are likely to provide attractive opportunities for long term investors. These include

(a) robust demand with occupancies at ~64-66% in FY16-18 vs. 59% over FY09-15. Demand in the near term is projected to outpace supply thereby improving occupancies to 68-70%. This is expected to drive healthy ARR growth over FY19-21. Hotels being a high operating leverage business, margins are thus expected to improve significantly.

(b) Improvising customer mix with rising proportion of individual consumers and SMEs vs. large corporate with higher bargaining power.

(c) Consolidation of inventory among branded asset owners through management contracts (asset light). This too improves pricing.

(d) Balance sheet strengthening through sale of non-core assets, sale and lease back, equity issue etc.

We believe that the industry leaders like Indian Hotels (IHCL) in luxury segment (five star and above) and Lemon Tree (LTHL) in mid-market segment (2-star to 4-star) with their superior execution capabilities are best placed. Initiate BUY on Indian Hotels with TP of Rs 150 @ 20x Sep-20E EV/EBITDA in-line with its historical average and Lemon Tree with TP of Rs 86 @ 30x Sep-20E EV/EBITDA owing to its superior growth.


Mcap (Rs bn)

CMP (Rs)

TP/FV (Rs)


Indian Hotels





Lemon Tree





EIH Ltd*





EIH Associated*










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Key risks to our thesis include (a) increase in competition as the industry revives (b) reluctance from hoteliers to raise rates (c) downgrading by customers and (d) higher ARR and tax incidences may divert domestic leisure and MICE demand overseas. Poor infrastructure may accentuate this as travel numbers are burgeoning, but airport/highway capacities are coming under pressure.

 Cyclical upswing – levers lining up: Indian hospitality industry is at the cusp of an up-cycle that has just begun. Demand-supply imbalance starting from global financial crisis and economic slowdown led to reluctance to raise rates commensurate with adequate ROCE. This trend has, however begun to change. With the changing dynamics and improved occupancies, ARRs are expected to improve significantly in the medium term (next 2-3 years).

 Consumption shift from B2B to B2C: Traditionally, large corporate (50%) has been one of the major demand drivers with strong bargaining powers followed by SMEs (35%) and Individuals (15%) for branded hotels. However, contribution from the millennials has been on rise. This is owing to greater affordability, changing attitudes, improved connectivity and increasing number of short stay vacations. This shift in consumer mix is positive.

 Shift in business to asset light approach: The hotel business has three major parts

(a) development

(b) owning and

(c) managing and branding of hotels.

Managing and branding of hotels is an asset light model providing highest ROCE followed by developing the hotels as it involves high risks including the gestation period. As dominant players showcased capability to run hotel chains with success, room keys are increasingly getting concentrated amongst them. This is positive as it increases brand visibility, pricing power and is attracting more keys and faster stabilization.

Key demand drivers of Hotel Sector include:

Business Travel: It comprises inbound and domestic visits for business-related purposes. This includes travel on corporate account and by individual business travelers. This segment is a prime source of demand for hotels especially in business-oriented locations.

Leisure Travel: It comprises vacation travel, including short duration stays. Vacation travel is concentrated during school holidays (summer, Diwali, and Christmas). Thus, demand mainly occurs between October and March and to a lesser extent (with low visitor profile and travel budgets) during the summer and monsoon seasons. Leisure travel is one of the largest sources of demand.

MICE (Meetings, Incentives, Conferences & Exhibitions): MICE requirements are mainly corporate driven for conferences, training programs and other events. The demand locally arises during weekdays and occurs across the year, barring the main holiday periods and from March to May. MICE demands are price sensitive. Conferences that include recreational elements choose either city center or resort destinations.

Weddings and social travel: The weddings segment mainly involves domestic travel for family weddings, destination weddings, and other celebrations. Other social demand also arises from time to time with guests increasingly seeking to use hotels in preference to the earlier practice of staying with the family. Such demand will likely to gravitate to hotels that have the required function areas, guest room capacity and the desired quality to host such events.

Diplomatic travel: Diplomatic travel brings in government representatives of other countries, arriving for a variety of purposes and is often accompanied by large delegations. This demand is typically in major capital or other cities that are source markets for international travel. Thus, Delhi gets the bulk of such demand followed by Mumbai.

Airlines and airline crew: This segment helps create an occupancy base, albeit at a significantly discounted price. Crew demand could arise from international or domestic carriers. While major international airlines will use luxury hotels, price sensitive airlines are open to using upper-midscale hotels. This demand is relatively nominal and mainly takes place for airport hotels.

Room penetration in India is lowest

Increasing purchasing power is reducing the gap between the lean and peak seasons in occupancies

Guests are increasingly seeking to use hotels in preference to the earlier practice of staying with family

Delhi gets bulk of diplomatic travel demands followed by Mumbai

Short stay vacations phenomenon including those taken on weekends and extended weekends are on rise

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