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As more foreign tourists check in, the hotels sector may get to cash in

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Foreign tourist arrivals are rising and they hold the key to good performance by luxury hotel chains.

After weak growth for several months, a strong 6% increase in arrivals during the December quarter (Q3 FY20) augurs well. This raises hopes of better realizations for hotel firms by way of better room and occupancy rates.

A report by ICICI Securities Ltd forecasts a jump in occupancy rates at leisure destinations to 76% in Q3 FY20, from 64% and 55%, respectively, in Q1 and Q2. This also marks a substantial improvement from the year-ago period.

Perhaps recent government measures such as a reduction in e-visa fees and the goods and services tax rates for hotels have made India a more competitive tourist destination.

Meanwhile, the festive mood and holidays in October and November also spiked domestic leisure travel, which buoyed occupancy rates, especially in premium hotels.

Analysts are hopeful that average room rates in this segment of hotels may improve by 5-7% year-on-year. Hence, Q3 FY20 revenue of hotel chains such as the Indian Hotels Co. Ltd and Lemon Tree Hotels Ltd has been estimated higher from the year-ago period.

That said, the hotel industry being a capital-intensive business, room capacity, each property’s operating parameters and indebtedness would determine the overall operating performance.

For instance, Lemon Tree’s revenue will be driven by capacity additions, while EIH Ltd is expected to post a dip in revenue due to loss of income from inflight catering following the closure of leading airlines.

Similarly, the operating margins of hotel firms are likely to be chequered. The Street has pencilled in a robust performance by Indian Hotels in the quarter, with a 150-170 basis point margin expansion. On the other hand, Lemon Tree’s margins might face a temporary setback as the fixed overheads from new properties may be quite high.

It looks like the Street has already factored in the mixed-bag performance expected from hotel firms. While the Indian Hotels stock has moved slightly higher in the past year, stocks of EIH and Lemon Tree still languish lower by about 24-26% than year-ago levels.

Even so, most hotel firms have cleaned up their balance sheets and operate on an asset-light business model after a decade-long battle with overcapacity.

In fact, those with greater exposure to business destinations and customers may not churn out great results in Q3 FY20, given the debilitating macroeconomic conditions.

That said, management commentary on the revenue clocked per average room, working capital administration, and the outlook for domestic business and leisure travel would impact investor outlook for hotel companies.

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