Hotels Sector Analysis Report 

• After witnessing exceptionally bad years in FY09 and FY10 due to the global economic slowdown and terror attacks, the Indian hotel industry appears to be now on a path of slow recovery. Foreign tourist arrivals (FTAs) to India surged from 5.11 m in 2009 to 5.58 m in 2010, thereby resulting in an increase of 9.3% YoY.
• India occupies the sixty-eighth position among the top tourist destinations in the world, according to the Travel and Tourism Competitiveness Report 2011. To encourage the tourism sector, the government in recent times, has taken some measures which will benefit the sector. In the general budget for 2011-12, Rs 11.7 bn for development of tourism infrastructure and promotion of tourism was allocated. This figure is higher by Rs 1.0 bn as compared what was allocated in the previous year. The Centre and States are also working out a PPP (Public-Private-Partnership) model to increase hotel capacity.
• Government of India increased spend on advertising campaigns (including for the campaigns 'Incredible India' and 'Athithi Devo Bhava' - Visitors are like God) to reinforce the rich variety of tourism in India. The ministry granted Tourist Visa on Arrival (T-VoA) for the citizens of Finland, Japan, Luxembourg, New Zealand and Singapore. It also promoted India as a safe tourist destination and undertook various measures, such as stepping up vigilance in key cities and at historically important tourist sites. The tourism ministry has envisaged a budgetary allocation of Rs 200 bn in the Twelfth Five Year Plan.
• According to the latest Tourism Satellite Accounting (TSA) research, released by the World Travel and Tourism Council (WTTC), the demand for travel and tourism in India is expected to grow by 8.2 % between 2010 and 2019. This will place India at the third position in the world. India's travel and tourism sector is expected to be the second largest employer in the world. Capital investment in India's travel and tourism sector is expected to grow at 8.8 % between 2010 and 2019. The report forecasts India to get more capital investment in the travel and tourism sector and is projected to become the fifth fastest growing business travel destination from 2010 through 2020.
• Over the past few years, the hotel industry has witnessed a shift in the product mix towards the budget and mid market hotels. Renowned hotel companies have launched brands (eg. Ginger by Indian Hotels (IHCL)) catering to the budget and mid-market customers, who were thus far being served by the unorganized sector.

• Supply
• It is expected that the hotels industry is expected to fall short of meeting the long term demands of an economy growing at 7-9% p.a. Regarding the supply from foreign nations, around 40 international brands are said to enter the country in the next five years (as per Cygnus estimates).
• 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.
• Barriers to entry
• High capital costs, poor infrastructure facilities and scarcity of land especially in the metros.
• Bargaining power of suppliers
• Limited due to higher competition, especially in the metros.
• Bargaining power of customers
• Higher in metro cities due to increasing room supply.
• 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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• The sector began the year FY11 on a positive note, continuing the trend witnessed in the second half of FY2010. Led by signs of economic recovery, demand from both foreign and domestic travellers continued to be strong. Rising tourist inflow and higher occupancy kept the hotel companies afloat after the slowdown. The foreign tourist arrivals were higher by 9.3% YoY in 2010. Existing hotel companies, new foreign players and real estate players continued with their expansion plans.
• However, ARRs continued to remain subdued during 1HFY11, as new supply did impact room rentals across India. During 2HFY11, the industry started witnessing some improvements in ARRs, though in single digits, as the supply pressures negated the impact of improvement in demand and prevented any steep increases in room tariffs.
• Supply overhang in certain cities, increase in food and fuel costs and rising interest rates eroded the margins for the Indian hotel industry. The balance sheets of hotel companies remained under stress on account of acquisitions of land banks at unrealistically high prices in the past and the resultant rise in debt levels.

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• The Indian hotel industry is still in the nascent stages of recovery. In the near term, despite an anticipated revival in room demand, hotels will not be able to hike ARRs significantly as the expected additions to room inventory will intensify competition. Chennai, Pune and Hyderabad are expected to be among the worst-hit destinations, as the growth in supply is expected to far outpace that in demand. Though, events like the Formula 1 race planned in Delhi in 2011 will benefit the hotel industry. Nevertheless, the industry is yet to witness a sustained and significant improvement in occupancy levels and ARRs.
• In the long-term, the outlook for the sector is very promising. Demand levels are likely to improve as economic growth gathers momentum and companies increase spending on travel. With expectations of healthy salary increases within the corporate world, discretionary spending is expected to increase further, especially on leisure travel. The number of foreign tourists is expected to reach 6.2 m during 2011 and further to 11.1 m by 2021. The demand-supply gap in India is very real and there is need for more hotels in most cities. The shortage is especially true within the budget and the mid market segment. There is an urgent need for budget and mid market hotels in the country as travellers look for safe and affordable accommodation. The Indian hotel industry is on an expansion spree, with several companies announcing investment plans. Investment in Travel & Tourism is estimated at Rs 1.2 trillion in 2011 and is expected to reach Rs 2.8 trillion by 2021 (implying a CAGR of 8.7%), according to World Travel and Tourism Committee (WTCC) estimates. However, in light of the cash crunch and high interest rates, the players are approaching fresh expansion projects with caution.
• While the long term fundamentals remain strong, the sector is highly dependent on external factors which could possibly mar its performance.

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Related Links for Hotels Sector
Quarterly Results | Sector Quote | Over The Years