The stock prices of hotel sector have seen healthy re-bound after going through the phase of sharp correction. This is despite the fact that the sector has remained one of the worst affected due to ongoing pandemic environment.

The hotel industry up-cycle was abruptly disrupted by Pandemic after five years of favorable demand-supply environment. The severe pain was visible in hotel companies financial results with companies reporting revenue de-growth of over 65% YoY during 9MFY21. Due to this ongoing crisis, it is expected that over 24,000 hotels rooms, (ie. 15% of total room supply) which are on high leverage, are at risk of getting shut down. Further, companies have initiated various cost control measures to stay afloat in this challenging environment. 

Going forward, we believe, the reduced room supply in the future is likely to provide the long term structural benefit to the hotel companies with improved occupancies. Further, various cost efficiency measures initiated by these companies would make them strong and more efficient post end of COVID era. Also, it requires capex of |3.5-4 crore to construct one five star hotel room in metro cities, the current downturn has led to valuations of hotel stock falling below EV/room of |1.5 crore which we believe has led to some value buying interest in these stocks despite ongoing challenges.  Hence, we expect further catch-up in the valuations as we move ahead with gradual opening-up of business activities and resumption of air travel .