Weekly Tactical Pick: Why this hotel stock is set resume its upward journey
Demand is expected to pick up from Q2 FY25 and the company has lined up aggressive room addition plans.
Highlights
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- Q1 FY25 demand would be soft; expect strong pick-up from Q2
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- Favourable demand-supply dynamics to aid pricing growth
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- Robust room addition plans
- Stock correction provides good entry point
While demand in Q1 FY25 would be soft, thanks to fewer business meetings because of the political uncertainties related to the Lok Sabha elections, we expect a strong pick-up from Q2 FY25.
In fact, hotel companies are seeing strong bookings after the election results, indicating a strong pickup in demand.
Hence, EIH Limited (EIH; CMP: Rs 429; Nifty level: 23,399), a luxury hotel player, is our tactical pick for this week.
With India’s rising economic stature, we expect a rise in business travel by foreigners to India.
Also, with the government focus on developing tourist spots, we expect increased leisure travel by overseas tourists. Domestic consumers are also increasing their travel spends, owing to rising incomes. Better infrastructure development and connectivity are boosting travel demand.
In FY2024, EIH’s domestic hotels (including managed properties) operated at an occupancy of ~75 percent and the company indicated that hotels could operate at about 90 percent occupancy, indicating better utilisation of existing assets.
While the demand momentum is strong, supply is expected to lag. Industry experts believe that demand is expected to grow by 8-10 percent CAGR over the next few years, but supply is expected to trail significantly, growing at a 5-6 percent CAGR.
The favourable demand-supply dynamics would sustain an increase in ARRs (average room rates). Also, among the hotel segments, premium and luxury operators like EIH would witness an increase in ARRs.
According to a report by HVS Anarock, Rev PAR (revenue per available room) for luxury hotel properties grew at a faster pace in CY2023.
ARRs for luxury hotels, like EIH, are currently about $250 per night, which is at a steep discount to places like Hong Kong (of a comparable service quality hotel) where they are about $600. EIH reiterated that it would focus on improving ARRs.
In order to tap the strong demand, EIH has lined up aggressive room addition plans.
It plans to add 50 properties (about 4,500 keys), which is more than double the current operational room inventory. So far, EIH has firmed plans for opening 10 properties.
About six properties would be opened in the next two years and the company has announced plans for four additional properties (Goa, Tirupati, Vizag and Gandikota). They would become operational in the next three years.
EIH will announce incremental inventory addition plans, once they are finalised. EIH has a strong balance sheet and this would enable the company to undertake massive expansion. EIH has zero debt and a strong cash and cash equivalents worth Rs 750 crore. Also, a healthy cash flow generation of about Rs 800 crore, on an annual basis, would support expansion plans.
EIH’s stock has corrected by about 15 percent in the past two months and provides a good entry point in our view. Currently, it is trading at an EV/EBITDA of 22 times FY2026 EV/EBITDA projections.
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