Are Luggage, Hotel & Airline Stocks Factoring in Too Much Optimism?

18 Dec 2020by Aditya Anand Bapat

Are Luggage, Hotel & Airline Stocks Factoring in Too Much Optimism?

It’s lovely December!! It’s that time of the year when people pack their backs and leave for vacations within and outside India. The weather is comfortable in most parts of India, kids have vacations, people are looking at extinguishing their mandatory leaves and there is a scramble for hotels, trains and planes.

Wake up!! This isn’t 2019…….

Jump to 2020………..Hardly any of this is happening. The COVID’19 pandemic has forced hoteliers to keep their properties shut or operate at lower occupancies, trains and planes aren’t operating at full capacity and people are looking for safer options for holidaying. Needless to say, business travelers have become an extremely rare species.

The revenue carnage……

Revenue decline for players in both quarters of FY21 was between 52% and 92%. This is a scary number and is nothing short of a whitewash.

Revenue decline for key players (decline expressed with positive sign)

 

Source: ACE Equity, Company data. Note: We have taken top 5 hotel players by Market Cap, 2 airline stocks and the only 2 listed luggage companies for comparison.

..painted the charts red with losses

If revenue decline looks scary then quarterly losses are even scarier.

Quarterly losses of hotel and luggage companies (Rs. Mn.) -- losses expressed with positive sign

 

Quarterly losses of airline companies (Rs. Mn.) -- losses expressed with positive sign

Source:- ACE Equity, Company Data

 

We all know the reasons, but still………….

It’s not difficult to understand why this whole carnage happened. Short answer is “COVID’19 pandemic”. Let us examine the reasons.

  • Country-wide / state specific lockdowns halted movement of people for either leisure or business travel. International travel is non-existent, barring special cases.
  • Weddings, which stimulate demand for luggage and hotels, are either postponed or scaled down.
  • Schools are shut and most teaching and learning is happening online.
  • Business travel is at near zero.

How equipped are companies to tide over the crisis?

Simplistically, best way to find if a company can tide over this crisis is to check how easily it can pay off its liabilities using its liquid assets (Current Ratio) and how indebted the company is (D/E ratio).

FY20 current ratio (xs)

 

Source:- ACE Equity, Company Data. Note:- Please note that negative D/E ratio for Mahindra Holidays and Spicejet is due to negative net worth

Both luggage companies (VIP and Safari), EIH and Indian Hotels among hotel companies and Interglobe Aviation among airline stocks are better placed.

Do we see any green shoots?

Within the gloom, there are slowly some green shoots emerging.

Firstly, the Ministry of Civil Aviation has increased domestic flight operation capacity to 80% for domestic flights, with international flights still not restarting (barring special flights).

Allowed flights capacity of airlines

Source:- Ministry of Civil Aviation, web sources

 

Secondly, with every wave of “Unlock”, more states are opening for tourism, albeit with conditions

Unlock Stage

States opening for tourists

1.0

Not many hotels open, except for special conditions

2.0

H.P., Goa, Uttarakhand, M.P. opened with riders

3.0

NA

4.0

Goa

5.0

Several states relaxed quarantine requirements

 

Hotel occupancy rates have been inching upwards, as people have been itching to explore drive-down destinations.

All India hotel occupancy rate

Source:- Web sources. Values are approximate

What are luggage, hotel and airline stock prices indicating?

While so much damage has happened to the travel and tourism industry, what are stock prices indicating? Is there complete mayhem in stock prices or are they reflecting hope?

 

Stock price movement over various “pandemic-affected” time periods

 

Company

1M

3M

6M

1Yr

NIFTY

6%

18%

38%

12%

Indian Hotels

15%

25%

49%

-12%

EIH

22%

16%

51%

-30%

Chalet Hotels

41%

30%

50%

-42%

Lemon Tree

42%

51%

44%

-29%

Mahindra Holidays

12%

11%

26%

-3%

Safari Industries

15%

33%

49%

-9%

VIP Industries

18%

15%

47%

-16%

Interglobe Aviation

3%

24%

67%

26%

Spicejet

86%

93%

100%

-1%

Source: Moneycontrol, Markets Mojo. Note:- Cells in green indicate “better-than-NIFTY” stock return

The table above depicts a very optimistic picture of the current situation. Almost all stocks have raced ahead of NIFTY in terms of gains over the past 1 month, 3 months and 6 months. In our opinion, this is a “hope rally”, fuelled more by hope of recovery and normalcy getting established, rather any strong on-ground recovery. To put it in the words of former Fed Chairman Mr. Alan Greenspan, there is “irrational exuberance” surrounding these stocks. According to website Investopedia, “Irrational exuberance is unfounded market optimism that lacks a real foundation of fundamental valuation, but instead rests on psychological factors.

Luggage, hotel & airline stocks…. To buy or not to buy………

People are slowly beginning to step out of their houses and take vacations or staycations to nearby and drive-down destinations, which is the reason for gradual pick-up in hotel occupancies. Occupancies are currently close to 26% (all-India level), much lower than 38-40% needed for achieving breakeven. However, nearly 25-30% hotels across India are expected to shut down permanently, creating a lot of business for the larger, organized ones.

Flights have gradually resumed operations with increasing capacities (80% as on date), while international flights are yet to resume operations.

It is difficult to pinpoint an exact time frame for normal resumption of activities; most obvious answer is – When everybody gets vaccinated. However, this is unlikely to happen soon. Most experts say it will be end-CY2021 or mid-CY2022 till a significant chunk of India’s population gets vaccinated.

Revenue and profitability for the stocks we discussed will have to catch up with stock prices before the rally becomes sustainable. Hence, an entry at correct price is important to generate significant wealth. You may contact experts like us at Research and Ranking to help you in picking the right stocks at right levels. Leave the stock picking to us and help us generate a corpus for you that’ll take you on your next vacation!!!

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