Shares of hotel companies were in high demand in intraday trade on Wednesday, with BSE Select shares up 9% on heavy volume in an otherwise range-bound market. Buying these stocks can be attributed to expectations of strong earnings growth ahead.

Shares of TajGVK Hotels & Resorts, Lemon Tree Hotels and Oriental Hotels rose between 7% and 9% on the BSE. Shares of Indian Hotels Company, EIH Hotel and Mahindra Holidays & Resorts India rose between 2% and 3%. In contrast, the S&P BSE Sensex rose 0.12% to 62,757 at 12:43 pm.

Despite a seasonally weaker tourism sector in the July-September quarter (Q2FY23) affected by the monsoon, the sector’s revenues grew by 23% from pre-pandemic levels, compared to an expected growth rate of around 17%. However, revenue was down slightly (-0.9%) QoQ due to the monsoon.

Occupancy rates (OR) are expected to improve further from pre-pandemic levels, driven by strong demand drivers such as the wedding season, the G20 summit and the resumption of foreign inbound tourism. In its hospitality industry update, Motilal Oswal Financial Services said average room rent (ARR) is expected to continue to increase, boosting revenue per available room (RevPAR).

The brokerage expects hotel ARR to remain flat in FY23/24 due to occupancy, operating leverage and hotel cost rationalisation to maintain higher margins than pre-pandemic levels. Strong growth and strong demand are driving occupancy.

Although Q2FY23 is still slightly weak, ICICI Securities expects the sector to remain strong over the next 12 months on the back of a broad economic recovery. In addition, factors such as the rebound in the number of foreign tourists in 2023, the peak wedding season and the G20 summit will further stimulate the demand for leisure and business hotel rooms.

Regarding room supply, the brokerage expects the launch of new hotel projects to be delayed due to higher land and input costs, which bodes well for existing brands. Also, hoteliers are now relying more heavily on inherently sustainable costs. Analysts said that that would help healthy margin growth in their second-quarter earnings wrap-up.