The prospect of faster-than-expected economic recovery on the back of successful Covid-19 vaccine trials has resulted in a sharp surge in aviation and hotel stocks.
Shares of most companies operating in these sectors have outperformed the markets this month as investors were seen rotating out of 2020 winners such as IT and pharma and buying into sectors that were badly bruised because of the Covid-19 pandemic.
For instance, Indian Hotels, InterGlobe Aviation, SpiceJet, and EIH have gained between 18 per cent and 26 per cent in November. In comparison, the benchmark Sensex has gained 11 per cent.
The gains have been underpinned by positive data on Covid-19 vaccine trials by drugmakers Pfizer and Moderna.
“While Covid-related risks remain, the stock market has been boosted by positive sentiment. A vaccine is now in sight as more than one successful trial data is available. We could expect vaccine approval and distribution in the next two quarters. Thus, recovery in hotels and travels sector could be faster than anticipated,” said Narendra Solanki, head of equity research (Fundamental), Anand Rathi Shares & Stock Brokers.
Though aviation and hotel stocks are rallying in anticipation of easing of travel restrictions, the sectors are still not out of the wood, some experts feel.
While domestic air traffic is rising month-on-month, it remains around 50 per cent lower than pre-Covid levels. According to consultancy HVS Anarock, hotel occupancy, too, has improved from around 10 per cent in April to 26 per cent in September. However, occupancy and average daily rate are expected to reach pre-Covid levels only by 2022 and 2023, respectively — assuming that a vaccine is ready by early 2021 and becomes widely available before the end of the year.
“The pandemic-led disruption has led to contraction in top lines, but airlines have also strengthened their cost base. Renegotiation has helped in reduction of lease rent. Some of these cost efficiencies will stay. Cargo movement, too, has improved. The market is pricing in improvement in traffic and resumption of services on several routes,” added Prakash Diwan, stock market expert.
Paarth Gala, analyst at broking firm Prabhudas Lilladher, said: “The commentary from second quarter result – including reduction in cash burn, capacity deployment guidance, and deferral of a qualified institutional placement (QIP) – has been positive triggers for IndiGo. SpiceJet stock could benefit from anticipated clearance of the Boeing 737 Max aircraft and compensation from the aircraft manufacturer.”
Meanwhile, hotels face the twin issues of lower operating leverage due to lack of occupancies and higher fixed costs, which have led to losses for the leading operators. The key near-term trigger for firms in the sector has been the Unlock 5.0 guidelines and gradual opening of hotels across the country.
For the country’s largest hotel chain, Indian Hotels, the relaxations helped improve average occupancy levels in the domestic business from 20.5 per cent in the June quarter to 32.5 per cent in Q2. Average room rates also increased 12 per cent on a sequential basis to Rs 5,424 in the quarter. In addition to pick up in demand for leisure destinations, the company’s revenues were boosted by online food delivery and staycations.
Says Rashesh Shah of ICICI Securities: “With the unlocking of economy, the hotel business is gradually picking up with revival of demand being witnessed in the domestic leisure segment.”
The sequential uptick in demand and halving of operating costs helped reduce operating loss from Rs 266 crore in Q1 to Rs 150 crore in Q2. Similarly, Chalet Hotels, too, was able to control its costs and reduce losses at the operating level. The company has kick-started its commercial projects in Mumbai and Bengaluru as it is optimistic about the outlook for office spaces.
Despite the sequential improvement, it could take a couple of quarters for hotels to breakeven. Indian Hotels, which had indicated a breakeven occupancy level of 40 per cent with fully operational food and beverage units, posted a Rs 500 crore loss in the first of the financial year and could see these losses continue for a couple of quarters more.