Investor optimism about the hospitality sector is largely due to two reasons. One is improving business in the hospitality industry after the third wave of the pandemic, while the other is analysts’ forecasts of a recovery in industry occupancy rates.
According to various analyst estimates, occupancy rates are expected to reach pre-Covid levels in the first half of the current financial year. In interactions with industry experts, ICICI Securities found that industry occupancy rates, which recovered in February 2022 to 55% after falling to 50% the previous month, would improve to 70% in April-September 2022. This level of occupancy is similar to what the industry was seeing before the pandemic disrupted business.
According to industry estimates, room additions are expected to grow at a compound annual growth rate of 3-5% over the next three years. During the same period, the demand for rooms is expected to increase by 10 to 12%. In the current FY23, analysts expect growth in the 12-15% range as the economy reopens further and travel (leisure and corporate) and events will resume.
Analysis by national brokerage firm Nirmal Bang shows that the replacement cost – the price a business pays to replace an existing asset at the current market price with a similar asset – of hotel rooms ranges between 1.75 and ₹2.5 crore per room in the upper premium category and ₹40-60 lakh for relatively low-end properties. Most hotel stocks are trading above their replacement cost due to improving demand and earnings in recent months.
Analysts believe there is room for further growth in hotel replacement as demand for the near future remains strong. Among hotel stocks, analysts believe that Indian Hotels and Lemon Tree Hotels will benefit from further improvement in demand.