The Hindu Business Line : Onset of tourism season spurs hotel stocks

Mr Raymond N. Bickson, Managing Director, Indian Hotels Company Ltd (IHCL), was asked at a press conference called to announce its second quarter results.

"Do you think you'd be able to sustain the profit margins you have recorded now? Don't you see anything going wrong in the industry?

Mr Bickson replied: "Do you think we'd be sitting here and cracking jokes if we had a premonition that something would go terribly wrong? The industry is passing through a good phase with huge turnout of inbound tourists and a good boom in the aviation sector. We are seeing healthy improvement in average room rates across all portfolios. The food and beverage business across key markets are reflecting steady growth. The industry is piggybacking on positive factors such as good returns, expansion initiatives and a good season ahead.''

Tourism season

The onset of the tourism season has spurred the hotel stocks on the bourses. Shares of IHCL, EIH and Hotel Leela Ventures are logging good returns post stock splits and bonus issues.

"Shares of hotel chains such as IHCL and Leela Ventures have appreciated 20-25 per cent post their stock splits. Splits and bonus issues have added liquidity in this counter and expansion initiatives (room additions) could boost the sector. Companies have managed an operating margin of 45-55 per cent in the current fiscal. All these factors make stocks in the hotel sector a good hold," said Mr Pratik Dalal, Equity Analyst - Hotels & Retail, Emkay Shares and Stocks.

The demand-supply mismatch (of adequate hotel rooms) will help, considering the fact that major hotels are adding to their existing room inventory. Market watchers predict a rise in demand for hotel rooms in metros and developing cities.

Rise in demand

"Among major metros, Mumbai is expected to witness about 8 per cent growth in rooms (in 5-star category) and 10 per cent rise in demand during the next five years. Bangalore will be better placed with about 21 per cent growth in rooms and around 19 per cent rise in demand. Delhi is estimated to have low growth rate in rooms at four per cent against a rise in demand of seven per cent. Chennai will see excess rooms with demand growing at 14 per cent while supply is poised to move up by 16 per cent. Sustained demand for more rooms will translate into good times for the hospitality industry," said a sector analyst.

Occupancy rates

Occupancy rates are expected to move up from the current 72 per cent to 76 per cent and 77 per cent in 2006-07 and 2007-08, respectively. Average room rates, will, therefore, go up by 20 per cent and 10 per cent in 2006-07 and 2007-08, respectively. Average room rent per day in a 5-star hotel ranges from Rs 5,000 to Rs 10,000 and in a 3-star hotel between Rs 2,000 and Rs 4,500 (tariff vary from region to region).

Shares of major hotel chains have performed well over the past one month.

Trading movement

IHCL traded at Rs 149.65, up 0.45 paise or 0.3 per cent, on the BSE on Wednesday. The stock, which appreciated 6.13 per cent week-on-week, has seen good trading volumes at 17,68,926 shares.

EIH Associated Hotels traded at Rs 157, down 0.13 per cent, on Wednesday. The stock has grown by about 3 per cent week-on-week. Hotel Leela Ventures Ltd traded low at Rs 63.55, down by 1.93 per cent, on Wednesday. The stock has logged good 2-week volumes at 3,82,698 shares.

Shares of Asian Hotels, Viceroy Hotels and Indian Resort Hotels Ltd have appreciated 13.5 per cent, 16.08 per cent and 19.57 per cent, respectively month-on-month.