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India covers more than 3.2 million sq. km and, home to 1.46 billion people, it officially became the most populous country in the world in 2022. With mountains, deserts, rainforests, plains and plateaus, the Indian peninsula boasts a wealth of natural wonders.
So, it is little surprise that improving infrastructure and a burgeoning middle class are driving domestic travel and tourism.
“India is like a country of 100 countries,” says Mike Sell, Head of Global Emerging Market Equities at Alquity Investment Management. “Leisure travel is a great story and it’s a real standout because its really strong growth has not been impacted by the so-called slowdown seen in other areas of the economy.”
He adds: “People think India has a growth problem, but it really doesn’t. Growth has been a bit weaker, temporarily, but throughout all that the travel sector has gone gangbusters.”
Skin in the game
Within the Alquity Indian Subcontinent Fund, the travel theme is represented via two key sectors: online travel agencies and hotels.
“Everything in life is a cycle, and hotels are a prime example,” Sell says. “If you have lots of hotel supply coming up and not enough demand, prices go down. And vice versa. But you can’t create a hotel overnight and in a very crowded city you can’t create one at all. Hotels have amazing supply and demand fundamentals.”
The fund primarily invests in domestic growth drivers, so the team seeks out homegrown companies that deliver local services.
Lemon Tree Hotels is one of the larger weightings in the fund. The company identified a gap in the market, recognising there were few options for travellers seeking mid-tier and economy accommodation.
Its first hotel, which offered 49 rooms, was opened in 2004 in the city of Gurugram (previously Gurgaon), which lies to the southwest of New Delhi. Today, it has 110+ hotels in over 64 cities across the country, offering circa 10,300 rooms.
Sell says: “As with many of the companies in our portfolio, Lemon Tree is still run by its founder, Patu Keswani, which leads to a greater level of dynamism in decision-making, given Mr Keswani has direct ‘skin in the game’.”
Having listed in 2018, the pandemic proved an early challenge for Lemon Tree. Its share price recovered by late 2021, however, with strong growth recorded in the following years.
The company remains ambitious and, while the team’s interest in them is primarily centred on their domestic growth story, Lemon Tree opened its first international hotel in Dubai in 2019, followed by Bhutan in 2020. More international locations are in the pipeline. By 2028, the company is targeting more than 20,000 rooms across more than 300 hotels.
“Our conviction in the company remains high, given their robust business model geared to the long-term structural growth in the sector, strong barriers to entry and dynamic management,” Sell adds.
Attractive fundamentals not artificial index constructs
The rise in travel is being facilitated by online travel agencies, which also plays into another key theme in the portfolio, internet-enabled companies.
MakeMyTrip is a prime example, offering hotels, flights and holiday bookings via its website. Founded in Gurgaon in 2000, it has been in the Alquity Indian Subcontinent Fund since October 2023.
MakeMyTrip recorded incredibly strong share price growth in recent years. Having listed in 2010, it struggled to break through $40 per share until Q3 2023. The price per share subsequently accelerated through $50 and $100 during the course of 2024.
“As with Lemon Tree Hotels, we are attracted to the multi-year sector dynamics of the travel sector and the comprehensive ‘moat’ surrounding the company,” Sell explains. “Whilst the fact that this company is not included in the major Indian stock market indices may act as a deterrent to certain peers, we are firm believers in focusing on attractive fundamentals rather than artificial index constructs.”
An equally ambitious government
The Indian Government has allocated significant funding in recent years to modernise domestic infrastructure. For the financial year ending March 2024, capital expenditure was nearly 30% higher than in the previous financial year. Compared with four years ago it is 2.8 times higher.
Billions of dollars have been channelled to key areas such as roads, railways[1] and airports. A prime example of this improvement drive is the public-private partnership behind the construction of Navi Mumbai International Airport, meaning India’s second largest city will be served by two international airports from June 2025.
These improvements further catalyse the domestic travel story, as it makes it easier for people to access more far-flung destinations. Especially for shorter, perhaps weekend, trips.
That said, while air travel is an obvious way for people to move around, it is not a sector the Alquity Indian Subcontinent Fund invests in.
“Airlines are problematic because there are more things that can go wrong. They are very sensitive to currency changes, the fuel price and accidents,” says Sell. “We feel there are better ways to play the leisure story.”
As the two examples above clearly demonstrate, there is no lack of ambition or opportunity when it comes to India’s domestic travel sector.
Relatively insulated against tariffs
India is on course to become the world’s third largest economy within the next couple of years. With a growing middle class and rising disposable incomes, average household incomes are expected to increase circa 1.4x between 2020 and 2030.
Backed by strong demographics, a stable government, improving infrastructure and burgeoning domestic growth, India is forecast to deliver GDP growth of circa 6.5% every year until 2029[2].
April witnessed US President Donald Trump unveil a series of, what the White House called, ‘reciprocal tariffs’. While they are a gamechanger for the world economy; India, in many ways, is insulated against much of the turbulence. The tariff rate for India was set at 26%, but exports to the US account for just 2.7% of GDP and they are expected to play little role in future growth.
The companies in the Alquity Indian Subcontinent Fund are largely positioned to benefit from the country’s domestic growth story. The vast majority provide goods and services to local people and, given the size and scale of the country, have ample opportunity to grow domestically, by expanding to new regions and cities.
“In terms of demographics and the size of the opportunity, there are few markets where domestically focused companies are in a more positive position than they are in India,” says Sell.
“The potential of India has been clear throughout my almost three-decade career,” he adds. “This has been unlocked by Modi over the last few years, enabling India to now gain the attention it deserves.
“The global upheaval unleashed by President Trump’s second term will only shine an even more positive light on the country, given the domestic nature of its growth story and limited impact of US trade and tariffs compared with most major economies.”
[1] https://www.ibef.org/industry/infrastructure-sector-india#:~:text=Budget%202024%2D25%3A-,India’s%20infrastructure%20sector%20is%20set%20for%20robust%20growth%2C%20with%20planned,%2C%20railways%2C%20and%20urban%20development.
[2] https://www.statista.com/statistics/263617/gross-domestic-product-gdp-growth-rate-in-india/
Source: Alquity, as of 3rd of April 2025.
