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The Indian hospitality and hotel sector is currently going through a historic boom driven by domestic tourism, business travel and destination weddings. Hotel companies are continuously registering double digit growth in average room rates (ARR) and revenue per available room (RevPAR). Amid this bullish trend, stock market analysts and leading brokerage houses are eyeing an emerging hotel stock that has recently transformed its portfolio through aggressive acquisitions. According to market experts, this strategic acquisition will not only help in de-leveraging (debt-free) the company’s balance sheet, but can also provide investors with bumper returns of up to 56% from current levels in the times to come.
In the hospitality industry, it takes a long time of 4 to 5 years and huge capital to build a new hotel from the ground up (Greenfield Projects). In such an environment, strategic acquisition of ready or stressed hotel assets (Brownfield / Distressed Asset Acquisition) proves to be the surest weapon for rapid growth. The company has added premium rooms (Keys) to its portfolio through recent major acquisitions in key metro cities and IT hubs such as Bengaluru, Hyderabad and the Mumbai-Pune region.
The biggest positive aspect of this acquisition is that it has significantly increased the share of upper-upscale and luxury segments in the company’s portfolio. The upscale segment’s revenue per room is almost double that of typical mid-scale hotels. The acquisition of ready-made assets has significantly shortened the company’s ‘capex-to-revenue’ cycle, meaning accretion to cash flows and topline revenues starts appearing immediately after the acquisition.
Financial analysts believe that this latest deal will see structural changes in the company’s financials:
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Operating Leverage and Margin Expansion: The staff-to-room ratio has declined due to the addition of new hotels and shared services (centralized management). Due to this, there is expected to be a direct increase of 400 to 500 basis points in the operating margin (EBITDA Margin) of the company.
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Continued growth in occupancy and ARR: The average occupancy rate of these properties located in key business hubs remains above 75%. Room rents are continuously increasing due to the demand for international conferences and corporate events.
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Bullish stance of brokerage: Major brokerage firms have re-rated the stock’s valuations while maintaining ‘BUY’ rating on it. Analysts argue that while large-cap hotel giants (like Indian Hotels or EIH) have historically been trading at expensive valuations, the stock is available at attractive discounts of 30% to 40% to its peers. This valuation difference gives it full potential to gain a massive 56% in the coming 12 to 18 months.
There is often a risk of increasing debt with aggressive acquisitions, but the company has kept its net debt under control through its recent capital raising process and strong operating cash flow. Strong free-cash flow in the coming quarters will position the company to repay its debt faster, thereby reducing the interest burden and seeing a manifold increase in net profit (PAT).
However, investors should also keep in mind some fundamental risks before investing in any cyclical sector. A possible reduction in international business travel due to the global economic slowdown, a sudden increase in the supply of new hotel rooms or an increase in raw material and manpower costs could put short-term pressure on the Company’s operating margins.
Market experts advise that instead of investing huge amount in lump sum in this multibagger potential stock of the hotel sector, it would be a wiser decision to accumulate through ‘buy on dips’ or Systematic Equity Plan (SEP). If the company successfully completes the integration of its newly acquired hotels as planned and the margin expansion momentum is sustained, the stock could prove to be an outperformer in the medium to long term portfolio.