Best Hotel Stocks in India

The hotel industry in India has emerged as the eminent sector propelling the Indian economy.

This comes on the back of the transformation in the industry over the decades. The industry has moved in line with the changing behaviour of customers.

Apart from this, the inclusion of newer technologies such as online booking systems and digital payments and demand for heritage & boutique hotels has also helped.

The hotel industry is closely linked to the travel and tourism industry.

As per the India Brand Equity Foundation (IBEF), the travel market in India is projected to reach US$ 125 billion by FY27 from an estimated US$ 75 billion in FY20.

Porter's Five Forces Analysis of the Hotel Sector in India

Porter's Five Forces is a model that identifies and analyzes five competitive forces that shape every industry.

These are barriers to entry, bargaining power of suppliers, bargaining power of customers, threat of substitutes and competition within the industry.

A change in any of the forces normally requires a company to re-assess the marketplace.

Let us have a look at how these five forces shape the hotel sector:

#1 Barriers to Entry

The most attractive segment is one in which barriers to entry are high as they restrict the threat of new entrants.

Conversely if the barriers are low, the risk of new companies venturing into a given market is high.

In the hotel sector, barriers to entry are high. These are primarily led by high capital costs, intense competition in the industry, poor infrastructure facilities and scarcity of land.

#2 Bargaining Power of Suppliers

The bargaining power of suppliers is the ability of suppliers to put the firm under pressure. Suppliers may refuse to work with the firm or charge excessively high prices for unique resources.

The bargaining power of suppliers in the hotel sector is limited due to higher competition, especially in metros.

#3 Bargaining Power of Customers

The bargaining power of customers is the ability of customers to put the firm under pressure. It is high if buyers have many alternatives and low if they have few choices.

In the hotel sector, the bargaining power of customers is high in metros due to increased room supply.

#4 Competition

For most industries, having an understanding of the competition is vital to successfully marketing or selling a product.

The competition in the hotel industry has intensified due to the entry of foreign hotel chains. It is higher in the metros and is slowly picking up in tier-2 and tier-3 cities.

#5 Threat of Substitutes

A substitute product uses a different technology to try to solve the same economic need.

The threat of substitutes was low in the hotel industry. But now, with the advent of apartment and home rentals websites like Airbnb, it is moderately high.

Porters Five Forces Analysis of the Hotel Sector in India

When to Invest in Hotel Stocks

The hotel industry is highly cyclical and linked to economic growth. This means that if and when for some reason, the economy flounders, so will the hotel stocks.

The demand and supply of hotel rooms can affect the viability of a hotel in any part of the world. This is mainly because unlike commodities or fast-moving consumer goods that can move around for consumption, the demand for a hotel is a function of its location.

As Ellsworth Statler, father of the modern hotel industry has said, ''There are three things that make a hotel famous - location, location, location.''

Therefore, the decision to invest in the sector is based on a combination of both;

• a top-down approach (starting from a macroeconomic perspective) and
• a bottom-up approach (focusing on company and stock-specific fundamentals and valuations).

Key Points to Keep in Mind While Investing in Hotel Stocks

Here are some key points to take note of before you invest in hotel stocks:

#1 Cyclicality of the sector

This is the most important factor one must keep in mind while investing in hotel stocks.

Since economic cycles affect the earnings prospects of hotel stocks, the best time to buy them is at the start of an economic expansion. The best time to sell them is just before the economy begins to slow down.

Investing in a hotel stock at the peak of an economic cycle could result in a huge chunk of the investment being wiped it. Nevertheless, identifying the bottom of the cycle is not an easy task.

#2 Business mix

A hotel chain should not be leveraged on any specific segment i.e., luxury, leisure or business. Though demand elasticity is lower at the premium end, when the tourist flow falls, this player could be the worst hit.

Moreover, look for hotels with a well-diversified location mix as well. Diversification smoothens the earnings, effectively boosting returns.

Therefore, before you compare the performance of two hotel companies, say for instance, Indian Hotels vs Lemon Tree Hotels, do factor in their segment and location mix.

#3 Profitability of the company

Hotel companies can generate revenues by two methods:

Setting up a hotel which involves huge capital outlays for management expertise, and management contracts.

While the first method is prevalent, the latter is gaining traction owing to its capital-light model.

Under a hotel management contract, the hotel owner appoints a management company to operate the business on the owner's behalf. Some management companies are also brand owners, in which case, the hotel operates under the management company's brand.

The owner remains the owner of the real estate and the business. While the owner retains the majority of the risk and reward from the operation, he pays a fee to the management company, which is responsible for the day-to-day management of the hotel.

Such management contracts bode well for established hotel companies such as Indian Hotels and EIH. It allows a capital-intensive business to pursue capital-light growth, bolstering revenues and profitability. So, a company with a mix leaning towards management contracts will generate higher profits.

Before you compare the performance of two hotel companies, say for instance, Indian Hotels and Mahindra Resorts, do factor in the operating performance.

Here's a list of top hotel companies in India based on their consolidated operating profit.

Company	Net Sales (Rs m)	Operating Profit (Rs m)
The Indian Hotels Company Ltd.	30,562	5,599
Mahindra Holidays & Resorts India Ltd.	20,133	4,859
EIH Ltd.	9,852	574
Chalet Hotels Ltd.	5,078	1,204
Lemon Tree Hotels Ltd.	4,022	1,396
India Tourism Development Corporation Ltd.	2,893	130
Taj GVK Hotels & Resorts Ltd.	2,270	528
Oriental Hotels Ltd.	2,193	304
Mac Charles (India) Ltd.	219	1,021

Source: Equitymaster
Data as of March 2022

#4 Debt to equity (D/E) ratio

A company uses both equity and debt to run a business. However, the amount of debt it uses indicates its fixed obligations. Higher the leverage, higher will be the fixed charges such as interest expense which will lower the profitability.

Hotel companies operate in a capital-intensive industry, fuelled by borrowings. High borrowings can quickly eat into the erratic profit margins of a highly cyclical business.

Therefore, one must look for a debt-to-equity ratio of one or less than one.

Here's a list of top hotel companies in India with low debt to equity ratio.

Company	Debt to Equity (x)
The Indian Hotels Company Ltd.	0.12
Mahindra Holidays & Resorts India Ltd.	0
EIH Ltd.	0.12
Lemon Tree Hotels Ltd.	0.35
India Tourism Development Corporation Ltd.	0
Taj GVK Hotels & Resorts Ltd.	0.43
Mac Charles (India) Ltd.	0.43

Source: Equitymaster
Data as of March 2022

#6 Valuations

Two commonly used financial ratios used in the valuation of hotel stocks are -

Price to Earnings Ratio (P/E) - It compares the company's stock price with its earnings per share. The higher the P/E ratio, the more expensive the stock.

To find stocks with favorable P/E Ratios, check out our list of stocks according to their P/E Ratios.

Price to Book Value Ratio (P/BV) - It compares a firm's market capitalization to its book value. A high P/BV indicates markets believe the company's assets to be undervalued and vice versa.

To find stocks with favorable P/BV Ratios, check out our list of stocks according to their P/BV Ratios.

#7 Dividend yields

There is no consistent trend of dividends across the industry, with different companies having different dividend policies.

Capital intensive industries usually scores poorly on the dividend yield scale of measure. Hence most hotel stocks, except for Indian Hotels don't pay out dividends.

Here's a list of top hotel companies in India that score well on dividend yield and dividend pay-out.

Company	Dividend Yield (eoy)	Dividend Payout (%)
The Indian Hotels Company Ltd.	40	0.2

Source: Equitymaster
Data as of March 2022

For more details, check out the top stocks offering high dividend yields.

Top Hotel Stocks in India

The hotel sector is in its growth phase. The top hotel stocks in India can immensely benefit with so many factors positively affecting the industry.

Here are the top hotel stocks in India which score well on crucial parameters.

Company	RoE (Latest, %)	D/E (Curr FY, x)	Sales CAGR (3 yrs, %)	Profit CAGR (3 yrs, %)
The Indian Hotels Company Ltd.	-0.56	0.12	-12.2	-196.8
Mahindra Holidays & Resorts India Ltd.	0	0	-3.8	4.5
EIH Ltd.	-4.12	0.12	-18.2	-170.7
Chalet Hotels Ltd.	-4.55	1.81	-19.9	114.4
Lemon Tree Hotels Ltd.	-1.61	0.35	-9.9	-235.5
India Tourism Development Corporation Ltd.	2.24	0	-7.3	-43.1
Taj GVK Hotels & Resorts Ltd.	2.54	0.43	-10.5	-25.5
Oriental Hotels Ltd.	-5.16	1.04	14.1	-152.7
Mac Charles (India) Ltd.	32.03	0.43	-10.6	87.4

Source: Ace Equity

List of Hotel Stocks in India

The details of listed hotel companies can be found on the NSE and BSE website. However, the overload of financial information on these websites can be overwhelming.

For a more direct and concise view of this information, you can check out our list of hotel stocks.

Best Sources for Information on the Hotel Sector

Indian Brand Equity Foundation Hotels Sector Report - https://www.ibef.org/research/case-study/growth-of-hotel-industry-in-india

So, there you go. Equitymaster's detailed guide on the top hotel stocks in India is simple and easy to understand. At the same time, it offers detailed analysis of both the sector and the top stocks in the sector.

You can also checkout our playlist on Hotel Stocks on Equitymaster's YouTube channel.

Here's a list of articles and videos on the hotel sector and top hotel stocks in India. This is a great starting point for anyone who is looking to explore more about hotel stocks and the hotel sector.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...