Stocks to buy: 2 hotel shares that can deliver up to 27% returns

JM Financial has initiated coverage on the hospitality sector with a positive outlook. The brokerage has Chalet Hotels and Lemon Tree Hotels as its preferred stock picks.  After a strong FY23, the outlook for the hotel sector remains positive as demand trajectory continues to inch upwards on buoyant domestic demand, revival of inbound tourism and future events such as the G-20 summit and the ICC Cricket World Cup, JM Financial said.

"On the other hand, the supply of rooms will be playing catch-up, and this augurs well for the incumbents. As per various industry estimates, room supply growth is expected to be 5-6 per cent for FY23-FY27E; alternatively, hotel room demand is expected to grow at 8-10 per cent. We build in higher occupancy levels and 8-10 per cent ARR growth," JM Financial said.

The brokerage said most hospitality brands have been careful about portfolio expansion, and have built an asset-light development pipeline. Consequently, with a much leaner balance sheet, they still have adequate headroom to grow, JM Financial said.

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"As properties tend towards optimum occupancy levels, operating leverage combined with cost rationalisation efforts undertaken during the Covid-19 period should positively impact the bottom line, leading to substantial free cash flows (FCF). We expect net debt/Ebitda for our coverage universe to decline from 1.2 times in FY23 to net cash positive in FY26E. Valuations are at 18–22 times September 2025 EV/Ebitda and reasonable given the favourable demand outlook and other tailwinds in the sector," JM Financial said. 

In the case of hotels sector, 50 per cent of aggregate hotel revenue comes from room rentals. Food and Beverages (F&B) account for 40-45 per cent and remaining 5-10 per cent comes from other services like spa, in-property retail, laundry and transport services.

In the case of Chalet Hotels, JM Financial said the hotelier is well-placed to benefit from the imminent upcycle due to limited room supply coming in the subject micro-markets. 

"Chalet has earmarked a capital outlay of Rs 2,000 crore to expand its hospitality portfolio by 970 rooms to 3,770 keys by FY26 and annuity portfolio to 3 million square feet from 1.2 million square feet by FY27.

"We assume coverage with a ‘Buy’ and an SoTP-based Sep’24 target of Rs 620, ascribing an EV/September 2025 Ebitda of 18 times and cap rate of 8 per cent (for Sep’25 NOI) for the hospitality and annuity assets respectively," it said.

Chalet Hotels shares were trading 2.39 per cent higher at Rs 489.70 in Thursday's trade. JM's target on the stock suggests a 27 per cent potential upside ahead.

In the case of Lemon Tree, JM Financial said the company stands to benefit from the industry upcycle owing to its market leadership in the fastest-growing mid-priced (midscale & economy) segment. Lemon Tree has been successful in delivering sustainable margin improvement of 700-800 bps with a relentless focus on cost optimisation and lean operations, JM Financial said.

"Aurika Sky City, Mumbai, is the flagship property of Lemon Tree and will lead earnings growth along with rapid scale-up in fees as the asset light portfolio also grows over the next 5 years. We initiate coverage with Buy and a target of Rs 115, valuing it at 20 times September 2025 consolidated Ebitda," JM Financial said.

Lemon Tree shares were down 0.14 per cent at Rs 94.65 in Thursday's trade. JM's target on this scrip suggests a 22 per cent potential upside ahead.

 

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