Hotel Sector Update + Recos on 4 Top Hotel Stocks By ICICI-Direct

Hotel Sector – Facing Turbulent Tides

The ongoing coronavirus outbreak has had a severe impact on the hotel bookings in India from Feb-20 onwards with massive forward booking cancellations across cities. This in turn has eroded the ability of hotels across India with heavy loss of business during this peak season time.

The extent of this lost business has primarily been seen across all major tourist and business destinations and we expect the situations to remain severely weak with individuals cancelling or deferring their travel plans and thousands of companies adopting the ‘work from home’ and ‘no travel’ policies.

This would lead to weak Q4FY20E and H1FY21E respectively. We anticipate a significant drop in revenues (or expected revenue growth) owing to lower occupancy. Revenue from MICE and F&B which are lucrative segments for hotels, are also expected to fall off the cliff. We thus expect our coverage companies to report drop in revenues in the range of 4%-19% in FY21E with revival expected only in FY22E.

We model a revenue drop of -3% and -17% in FY20E and FY21E and a growth of 15% in FY22E for our coverage companies to | 6942 crore, | 5746 crore and | 6602 crore in FY20E, FY21E and FY22E respectively.

Profitability to take a back seat; revival only in FY22E

Hotel industry has majority of its costs fixed, with power/lighting and employee costs taking the major share. With a drop in room rates owing to abysmally low levels of occupancy and a sharp fall in non-room (most profitable) revenues, hotel players are expected to take a massive hit on their profitability.

We reduce our overall EBITDA estimates by 10% and 49% and PAT estimates by 24% and 99% for FY20E and FY21E respectively. Higher impact is seen on the PAT level owing to interest and depreciation burden. Lemon Tree is the only company which is expected to report loss on the PAT level in FY21E as the company is on a capex mode.

In FY22E, EBITDA is expected to rise by 42% with PAT expected to rise multi-fold over FY21E.

Heavily levered companies to face challenges

In our coverage universe, EIH Limited is the best placed on the B/S front. EIH has the lowest leverage, with Debt/Equity below 0.5x, combined with a strong institutional investor backing.

While Indian Hotels has a strong promoter backing, its Debt/Equity is 0.8x which combined with capex requirement could create cash flow issues if current COVID issue persist for a longer period.

TajGVK’s leverage is at comfortable levels, however we remain sceptical with GVK group (which is highly levered) being the promoter entity.

Lemon Tree Hotels, being on a capex mode is significantly levered with a Debt/Equity of ~2x, which could be a matter of concern at this point. With balance sheet taking prominence over profitability in turbulent times, we have a positive stance only on EIH Ltd.

Valuation & Outlook

Considering the reduction in revenue and profitability estimates, a reduction in target price is also eminent. On the other hand, the recent broad based corrections in hotel stocks majorly factors in this weak scenario. At the same time there is also an uncertainty as to how long this issue is going to prevail extent of its damage to the economy. Hence, we prefer only companies with strong balance sheet and better margin profile. Accordingly, our preferred pick in this space would be EIH which is a domestic play with low leverage; while we downgrade, TajGVK and Lemon tree hotels (Higher debt) to HOLD rating.