How domestic travel is being fuelled by India’s growth story
6 MAY, 2025
Author: Mike Sell, Head of Global Emerging Market Equities, Alquity
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.
Leisure travel is a real standout because its strong growth has not been impacted by the so-called slowdown seen in other areas of the economy. Some believe India is facing a growth problem. While growth has temporarily slowed, it remains fundamentally strong - and throughout this period, the travel sector has continued to thrive.
Skin in the game
We represent the travel theme via two key sectors – online travel agencies and hotels.
Everything in life follows a cycle, and hotels are a prime example. When there is a surge in hotel supply without enough demand, prices decline - and vice versa. However, hotels cannot be developed overnight and in densely populated cities, it might not be possible at all. This gives the sector strong supply and demand fundamentals.
We focus on domestic growth drivers, seeking out homegrown companies that deliver local services such as Lemon Tree Hotels. The company identified a gap in the market, recognising there were few options for travellers seeking mid-tier and economy accommodation.
Its first hotel, opened in 2004 in the city of Gurugram (previously Gurgaon). Today, it has 110+ hotels in over 64 cities across the country. Lemon Tree is still run by its founder, Patu Keswani, which leads to a greater level of dynamism in decision-making, given Mr Keswani’s ‘skin in the game’.
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 its robust business model, strong barriers to entry, alignment with long-term structural growth in the sector, and dynamic management team.
Attractive fundamentals, not artificial index constructs
The rise in travel is being facilitated by online travel agencies, which also plays into another key theme - internet-enabled companies.
Founded in Gurgaon in 2000, MakeMyTrip is a prime example, offering hotels, flights and holiday bookings via its website.
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 2024.
We are attracted to the multi-year sector dynamics of the travel sector and the comprehensive ‘moat’ surrounding the company. Whilst the fact that this company is not included in the major Indian stock market indices may act as a deterrent to some, 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 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 trips.
However, airlines can be problematic because they are very sensitive to currency changes, the fuel price and accidents, and 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.
April witnessed Trump unveil a series of ‘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.
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.
The global upheaval unleashed by 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.
