Structural Tailwinds Intact; Up-cycle Expected to Continue
Long-Term Drivers Intact The total hospitality industry in India currently comprises 212,000 rooms, translating to an industry size of ~Rs 82,000 Cr. The industry is projected to experience a CAGR of 10.5% over the next three financial years. This growth is expected to generate an annual incremental demand of Rs 8,200 Cr. The demand will be primarily driven by three key factors: 1) Domestic travellers (expected to contribute 50% of the incremental growth); 2) Foreign tourist arrivals (anticipated to account for 30%); and 3) The MICE (Meetings, Incentives, Conferences, and Exhibitions) segment, likely to contribute the remaining 20%. These factors are expected to remain sustainable over the next three years and will significantly drive the sector’s growth. Given the limited supply of luxury rooms in the market, this growth cycle has the potential to extend further, ensuring robust demand and expansion in the industry.
Upcycle Expected to Be a Long and Sustained One
Sector occupancy is anticipated to improve by ~500 basis points, with the Average Room Rate (ARR) expected to grow at a CAGR of 7-8% over the coming years. This growth is likely to be driven by a relatively constrained supply of rooms and an increase in Foreign Tourist Arrivals (FTAs), which remain below pre-COVID levels (10.56 Mn in 2019 vs. 9.24 Mn in FY24). The increase in FTAs is expected to positively impact ARRs. Additionally, the steady rise of the Indian middle class and their increased spending power is projected to contribute an additional Rs 5,200 Cr annually to the hospitality market.
Sector Valuations are Not Stretched with Fundamentals Improving
As fundamentals continuously improve, driven by strong FCFF generation across the Hotel Sector, the FCFF/EBITDA ratio has steadily increased. Pre-COVID, this ratio was in the range of 30% to 40%, but it has now risen to 50% to 60% due to higher revenue realizations and minimal capital expenditures in the industry. This high FCFF/EBITDA ratio is expected to improve further to ~70% over the next three years. Therefore, we believe that valuations for the Hotel Sector will remain sustainable in the future. Similar trends are observed in the sector’s RoIC, which was in the high single digits pre-COVID and has now reached ~15%. With continuous improvement in ARR and minimal capital expenditures, RoIC could improve by 400 basis points over the next three years, potentially keeping Valuations (EV/EBITDA) elevated for the sector. The Hotel Sector trades at relatively low valuations, with EV/EBITDA ratios of 20.7x for FY26E and 17.2x for FY27E. We believe there is room for valuations to increase, given the improvements in RoIC and FCFF generation.
Initiating Coverage on Juniper Hotel Ltd & Chalet Hotels Ltd
We initiate coverage of Chalet Hotels Ltd. with a BUY recommendation and a target price of Rs 975/share, implying a potential upside of 20% from the CMP. Chalet Hotels has developed a distinctive and integrated approach to the hospitality industry, concentrating on the ownership, development, and management of premium hotels and commercial properties. Strategically located, its properties are near central business districts, maximizing land use by developing commercial spaces on surplus land. The company has ~870 rooms in the pipeline over the next three financial years. Upcoming offerings are strategic in high-ARR high-margin regions such as Delhi Airport zone (NCR), Airoli (Navi Mumbai), and a beachfront land parcel in South Goa. Chalet has one of the highest FCFF/EBITDA generation rates in the industry, ranging from 60%-70%, which helps maintain elevated valuations for the company.
We initiate coverage of Juniper Hotels Ltd (JHL) with a BUY recommendation and a target price of Rs 475/share, implying a potential upside of 21% from the CMP. Juniper Hotels, part of the Saraf Group in collaboration with Hyatt, benefits from a strategic partnership that strengthens its market position. Managing seven properties, the company leverages Hyatt’s global reputation to attract corporate and leisure travellers. Significant revenue growth is anticipated from strategic expansion plans and enhancements to the Grand Hyatt Mumbai, positioning it as a key revenue driver. JHL is pursuing an ambitious inorganic growth strategy, aiming to expand its portfolio to over 1,000 keys in the coming years. However, for a more conservative projection, the focus is on adding ~320 additional keys to the Grand Hyatt Mumbai (GHM). JHL’s FCFF/EBITDA ratio is projected to be around 0.96x. This metric indicates strong operational cash flow relative to EBITDA, reflecting efficient cash generation capabilities.
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