Hotel sector Q1FY23 review – Reports best ever margins in Q1 so far. Is there further scope for expansion?

What's Buzzing?

After passing through a long challenging phase of two years, FY23 began on a strong note in terms of growth and healthy margin expansion as per the recent Q1 performance.

Context:

The past two years have been very challenging for the sector due to pandemic-related setbacks. However, gradual reopening of the economy in FY22 led to a rise of revenge tourism across domestic leisure destinations while corporate demand segment remained lukewarm. Now, with full resumption of the economy from Q1FY23, the corporate demand and MICE segment also joined the growth league. This, in turn, helped hotel players to raise room tariffs without disturbing the demand. In Q1FY23, average room rates were reported to be even higher by 20-25% vs. pre-Covid levels. This led to a sharp revenue growth of over 24% vs pre-Covid levels while it was up 280% YoY on lower base. Hence, the change in the strategy from occupancy-led growth during pre-Covid era to ARR-led growth was clearly visible in the current quarter. Further, major hotel players utilised long 18-24 months of pandemic phase to structurally realign their cost base and become leaner in terms of costs. This, in turn, aided sharp margin expansion of ~1300 bps to ~30% vs. pre-Covid period.

Our Perspective

In terms of seasonality of the hotel business Q2 and Q1 (April-September) are the weak season for the hotel sector while Q3 and Q4 combined together (October-March) generate over 60% of total revenue. However, looking at the strong performance in the seasonally weak quarter, H2FY23 (i.e. peak season) is now looking more promising. This season will also have an advantage of influx of foreign tourists who generally visit India for long haul vacation. So far, they have not participated meaningfully in the current business performance. Hence, given this strong tailwind, we expect occupancy to stay healthy and further push-up room rates upwards. Overall, we expect “Occupancy and ARR-led” growth during H2 that would drive further margin expansion, in our view.