Hotel Stocks Lose Premiumisation Appeal as Growth Headroom Narrows, Say Experts

Hotel Premiumisation Story Faces Reality Check as Growth Room Narrows

After two years of exceptional growth driven by premiumisation, rising travel demand, and record room rates, India’s hotel sector is entering a phase of caution. Market experts now warn that the industry may be approaching saturation, with a surge in upcoming supply threatening to disrupt the bullish narrative that powered hospitality stocks to multi-year highs.

While demand for travel remains robust, analysts say the next leg of growth will be more moderate and competitive, raising questions over whether hotels will continue to be a compelling premiumisation play for investors.

Aggressive Room Expansion and High Capex Begin Testing the Thesis

The Indian hospitality sector is witnessing an aggressive expansion cycle with a massive wave of new room supply expected over the next three years.

IHCL, India’s largest hotel chain, plans to add 22,000 keys over the next few years to its current 28,273-room inventory. This includes 4,000 rooms through ownership and 18,000 through asset-light management contracts, under its Accelerate 2030 strategy, which aims to double its portfolio to over 700 hotels by FY30.

Lemon Tree Hotels is targeting a pipeline of 35,000–40,000 rooms within the next three years, with renovation of 1,600 keys nearing completion.

Chalet Hotels continues with an asset-heavy approach, committing ₹2,500 crore in capex to add approximately 650 luxury and upper-upscale rooms between FY25 and FY28.

According to industry veterans, this rapid expansion could be too much, too soon.

Ajay Srivastava, CEO of Dimensions Corporate Finance Services, cautioned:

“There’s going to be huge supply over the next 36 months. Every hotel has announced thousands of rooms. This space will get very crowded, and everyone is overstimulating local demand.”

The concern is simple: supply may soon outpace demand.

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Experts Say the Premiumisation Boom Has Played Out

Kuunal Shah of Carnelian Asset Management said the sector’s biggest tailwinds are already behind it:

“Post-Covid pent-up demand has played out. Occupancies recovered, ARRs improved, and cash flows surged. Now nearly 6–7% of room capacity will be added over the next 18 months.”

With more rooms entering the market, ARRs are expected to soften, even if occupancies remain stable. Large chains may maintain pricing power, but smaller players face mounting pressure, forcing consolidation across the sector.

Returns May Come Under Pressure as Real Growth Slows

Srivastava emphasized that nominal returns may look healthy, but the real picture may disappoint:

“Premiumisation is happening, but will you get return on capital? With inflation at 8–10%, if your returns don’t match that, you’re making nothing.”

He added that while hotels will post decent returns in the near term, the curve could turn sharply downward within a year due to the overwhelming supply coming into the system.

Hotel Stocks Appear Expensive After Stellar Multi-Year Rally

Most hotel companies are now trading well above their historical averages on a one-year forward P/E basis, leaving very little margin of safety.

Shah warned that these elevated valuations could see a correction if ARRs soften or new capacity depresses profitability:

“Hotel stocks are trading at elevated valuations, and the next couple of years could see cyclical consolidation with muted returns.”

As supply-driven pressure intensifies, even minor dips in room rates or occupancy could lead to a market re-rating.

Demand Remains Strong but Competition Will Intensify

To be sure, India’s long-term hotel demand story remains intact. Rising disposable incomes, increased leisure travel, booming weddings and MICE events, and a rapid expansion of domestic aviation continue to drive occupancy.

But the pace of growth may slow, and the next phase will likely be defined by:

• Higher competition

• Pricing pressure

• Moderated ARR growth

• Shrinking real returns

• Greater consolidation

Experts believe that while the hotel sector will grow, it may not deliver the exceptional returns witnessed in 2022–2024.

Premiumisation Narrative Weakens as Investors Turn Cautious

For investors betting on hotels as a premiumisation play, the outlook may need recalibration. Premium brands will continue to attract customers, but margins and earnings growth may not sustain the pace seen in recent years.

Srivastava issued a blunt caution:

“The big boom is over! You’ve got to be careful what you’re buying.”

Shah added a more measured assessment:

“The next 7–10 years may be promising, but don’t expect great returns over the next couple of years.”

Final Outlook: Growth Continues, but at a Measured Pace

India’s hotel sector is not collapsing—it is simply normalising. The structural story of tourism growth, rising affluence, and brand expansion remains intact. However, the near-term investment case looks less compelling as supply surges, valuations peak, and real returns shrink.

The industry is entering a more competitive, more balanced phase—one defined by moderation rather than euphoria.

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