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The travel and hospitality industry continues to be the sector, which has largely profited from the fast growing economy of India. This has largely been due to the 4.4 m tourist arrivals in FY07 (13% growth) over the previous period. The compounded growth in tourist inflow over the last ten years (FY97-FY07) has been 4.3%, while in the last five years, growth stands at 11.6% per annum. The hotel industry went through a rough patch between FY00 to FY04 owing to factors like the Asian financial crisis, Afghan war, Middle East unrest, September 11 attacks, SARS and domestic riots.
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India occupies the forty-sixth position among the sixty tourist destinations in the world. The flourishing economy helped boost the demand for the industry. Globalisation and liberalisation gave it a new impetus. Also, to encourage the tourism sector, the government is planning to propose a conditional 10-year tax holiday for all tourism projects in the country. Companies will enjoy full tax exemption up to 50% of profits, but will qualify for tax benefits for the remaining amount only if they re-invest it in tourism projects. The Centre and States are also working out a PPP (Public-Private-Partnership) model to increase hotel capacity. Efforts to diversify tourist attractions by offering new products such as adventure tourism, wellness tourism, medical tourism and golf tourism are expected to have a positive effect on both foreign tourist arrivals and domestic tourism.
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As per the 2004 findings, the total number of approved rooms by the Government of India stands at around 99,000 (estimated). These rooms are further classified into various segments out of which, Five star and Five star deluxe hotels account for around 27% of the total capacity, three star hotels (22%), four star (8%), two star (9%), one star and Heritage hotels (2% each) and the rest is divided between unclassified and unapproved hotels.
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The five star hotel segment has grown the fastest during the last five years at a CAGR of 12%. Further this segment can be divided into 3 sub-segments namely Luxury, Business and Leisure. The growth in this segment indicates the genre of travelers coming into the country. Over the last few years the country has witnessed a large influx of business travelers in the country owing to relaxation of the government’s stand on Foreign Direct Investments (FDI) for most of the sectors in the country.
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| Supply |
Supply is catching pace. Metros will witness an oversupply situation after four to five years.
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| Demand |
Largely depends on business travelers but tourist traffic is also on the rise. Demand normally spurts in the peak season between November and March.
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| Barriers to entry |
High capital costs, poor infrastructure facilities and scarcity of land especially in the metros.
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| Bargaining power of suppliers |
Limited due to higher competition, especially in the metros.
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| Bargaining power of customers |
Higher in metro cities due to increasing room supply.
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| Competition |
Intense in metro cities, slowly picking up in secondary cities. Competition has picked up due to the entry of foreign hotel chains. |
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With the foreign traffic in the country touching 4.4 m mark in 2006, the hotel industry reached new heights this year. With disposable incomes having gone up, the leisure destinations have benefited and with the heightened industrial activities, business destinations have witnessed a healthy surge in the tourist traffic. Though both leisure and business travel was in upswing this year, it was the foreign business travel which grew the fastest.
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Due to the favourable demand supply gap prevailing in the country, the average room rates (ARRs) and occupancy rates witnessed an increase for the third year in a row. The all-India occupancy mark touched the 70.8% mark for the first time and many cities were completely sold out on a number of weekday nights, resulting in hotels hiking their rates sharply.
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India is no longer a city of metros with the growth having spread to newer regions. On the back of the service sector spreading its reach to smaller towns, clusters of manufacturing hubs emerging across the country and large SEZs being established across states, the demand for hotels in these regions have increased. Over the last 2 years, IT cities like Pune and Hyderabad, satellite towns of Faridabad, Gurgaon, Noida and Ghaziabad and tourist destinations like Jaipur and Goa are witnessing faster growth in room rates and occupancy than the metros.
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Around 25,000 total rooms across different segment categories are present in Mumbai, Jaipur, NCR, Bangalore and Pune among other cities. Around 50,000 new rooms are expected to come up in these cities by the end of 2009. Each city will have different factors that will drive revenue growth for hotels. For instance, the Commonwealth games in Delhi, IT boom in Hyderabad and Pune would drive the demand for rooms going forward. Of the new rooms, while 53% will be added in the luxury and first class segment, 47% will come up in the mid market segment of which 16% will be budget hotels. Hotel majors have lined up expansion plans across segments to capitalise on the rising tourist inflow.
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According to the 2002 estimates of the World Tourism Organisation (WTO), international tourist inflow in India by 2020 would be 10 m, which means the tourist influx has to grow at a CAGR of 6.5% for the next 14 years. This makes the country one of the fastest growing tourist destinations in the world second only to China. As of FY07, the increase in the tourist arrivals is well inline with the WTO estimates.
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India accounts for 0.5% of world tourism, and the tourist inflow is expected to grow at the rate of 4% till 2010. Strong GDP growth, improving infrastructure, confidence on the country's economic prospects, open sky policy and the 'Incredible India' campaign has improved the outlook for India. This positive outlook would increase the tourist arrival in the country and the hotel industry is expected to be the major beneficiary. Even domestic tourism is gaining momentum. Rising disposable incomes, cheaper airfares and better connectivity would continue to increase the demand for rooms. The favourable demand supply gap is likely to continue till FY09 when major expansions would come in. With no new supply coming in the near future, average room rates are expected to surge higher. ARRs have grown at a compounded rate of 18% over the last three years.
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Many international hotel chains either have or on the look out for setting up shop in the country. Companies like the Hilton and Hyatt group have already tied up with local giants East India Hotels and Asian Hotels. Others like Four Seasons, are on the lookout for a partner or would be setting up their own hotels, government permitting. This clearly shows that India is on the international tourism radar.
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Although prospects are promising, as mentioned earlier, any change in the global geo-political situations can and have adversely affected the performance of this sector. Also, the heightened demand for land, especially from real estate players has led to a steep escalation in the prices. Also, shortage of manpower is going to be a huge challenge going forward. Hotel players with a diversified portfolio across different segments are likely to be the key beneficiaries. This should be one of the determining factors while investing in this sector.
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