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Hotels 2001: The mood is upbeat

Jan 5, 2001

The year gone by has seen a revival of fortunes for the Indian hotel sector. It started on a good note with buoyant foreign tourist arrivals and a pick up in domestic business travel. The main factors for this are stable political climate in the country over the past year as well as the upswing in the economic scenario. As a result, occupancy rates in metro city hotels have been buoyant in first nine months of FY01. Tourist arrivals from April-October 2000 have grown at a buoyant 8.9% YoY. This was encouraging as normally tourist arrivals during these months are dull due to the hot sultry summer months. This augured better growth rates for the rest of the year. The 2HFY01 has been no exception and till now the mood is upbeat for metro city hotels.

The recent depreciation of the Indian rupee too brought windfall gains. Since the beginning of this financial year the Indian rupee has depreciated by 7% from Rs 43.5 per US$ to Rs 46.7 currently. Over 60% of hotel industry earnings are in foreign exchange due to their dollar earning capacity. A ball park figure of a 1% depreciation in the rupee contributes around 1% to the hotel's profits before tax. The major hotel chains like Indian Hotels Company Ltd (IHCL) and EIH Ltd derive respectively 53% and 65% of their earnings from foreign exchange (as of March 2000). This factor has resulted in higher average room rates (ARRs) for hotel companies in the past year.

To add to improved room revenues, food and beverage revenues too surged. Hotels were aggressive in opening speciality restaurants, bars and introduced many incentive schemes. Flight catering also became a focus area for some of the hotel chains.

In terms of performance, the two largest hotel chains, Indian Hotels Company Ltd (IHCL) and EIH reported a significant improvement in their earnings in 1HFY01. The expectations for the 3QFY01 are even better, as October marks the beginning of the peak season. Room tariffs were also revised upwards in October 2000 by 10%-15%. Hence the markets look forward to good results from hotel companies. This is reflected in the buoyancy in the share prices of these companies over the past couple of months.

Now let's see what's been happening on the supply side. Room supply growth in the five star segment has been quite slow over the past year in the major metros. Mumbai and Delhi hotel markets account for a large chunk of the five star hotel revenues. In the past year 180 rooms have been added in Mumbai to the existing capacity, by the opening of Le Meridien hotel in North Mumbai. Hotels in South Mumbai are relatively unaffected by the upcoming capacity for atleast the next 2 to 3 years as almost all the new capacity is coming up in North Mumbai. In Delhi, the Nikko hotel (200 rooms) and the Maurya Sheraton (100 rooms) have come up in the past year.

We expect the pace of additional room capacity to increase rapidly in these cities in the next four years. Majority of the upcoming hotels are likely to have tie-ups with foreign hotel chains. A few foreign hotel chains have also shown interest to invest in the upcoming hotels. In Mumbai around 100% capacity additions are planned over the next five years. In Mumbai the capacity is likely to go up by 2,944 rooms and the number of rooms will increase to 6,199 rooms from the current 3,255 rooms. In Delhi, the capacity is likely to increase by 1,370 rooms in the next 4 to 5 years a growth of 35%-40% from the current level of 3,960 rooms.

Bombay to face an explosion in room capacity
Existing capacity Rooms New expansions Rooms Scheduled
Taj Mahal 583 Taj, Wellington Mews 250 2003-2004
Taj President 310 Intercontinental 400 2002
Oberoi 337 Regent expansion 400 NA
Oberoi Towers 575 Marriott 400 2002
Orchid 245 Rennaisance 450 2002
Leela Kempinski 423 Marriott Executive Residence 250 2001
Ambassador 123 Sheraton Hotel 394 2002
Holiday Inn 191 Hyatt 400 2002
Regent 100      
Marine Plaza 68      
Le Meridien 300      
Total 3,255 Total 2,944  

We believe that this additional supply will outstrip tourist demand by the next five years, thus creating an oversupply situation. This would put pressure on room tariffs. On the positive side, the mood is upbeat for the major hotel chains as no major capacity additions are expected in these cities in 2001. However, a lot depends on flows of foreign direct investments in the current year, the pace of the domestic economy and the political stability. Also the hotel industry is hoping for some sops from the government in the form of reduction of expenditure tax on hotels. Guests staying in hotels in India have to pay a 10% expenditure tax and a 20% luxury tax. This acts as a deterrent to foreign tourists who come to India and hence affects across the board hotel profitability. We do not expect any reduction in taxes for the hotel sector.

Both the two major hotel chains IHCL and EIH have outperformed the market in the past year. These represent the Indian hotel sector as a whole as they have a widespread presence and account for a major chunk of the 5 star room capacity. On the other hand smaller ones like Asian Hotels, Hotel Leelaventure and ITC Hotels do not attract investors as they did in the past as they are expanding their base from owning one or few hotels to becoming chains with a larger capacity. Hence the going gets tough through this transition.

After their run in share price IHCL is trading at price to earnings (P/E) multiple of 7.9x and EIH at 9.9x FY02 earnings. Though we feel that they have an upside from here as the hotel market is on upswing, however we feel that they will not be able to trade at past P/E multiples of 20-25x forward earnings. This is mainly because of the fact in future room supply will play a big role in determining profitability. On a net asset value (NAV) per share basis both the chains look attractive. IHCL is currently trading at a 54% discount to its estimated NAV of Rs 541 per share and EIH is trading at a 39% discount to its estimated NAV of Rs 353 per share.

A trend that has emerged in the past year or so is that most current hotel chains who are keen to expand are looking on taking over, up and running hotels as against building newer ones. This saves the company 3-4 years, which is the time taken for a hotel to start operations right from conception. This has resulted in a natural process of consolidation in the sector. In the past year, IHCL has taken over some properties in Hyderabad and is likely to take over an existing hotel in Chennai.

Disinvestment of public sector hotel companies has been in the offing since the past year and is still on. The government owned hotel companies, India Tourism Development Corporation (ITDC) and Hotel Corporation of India (HCI) are up for sale. All the major hotel companies including some foreign hotel chains have put in bids and evinced keen interest. HCI's disinvestment process is expected to be completed in the next few months as bids have already made. ITDC's disinvestment too is coming up which is expected to be in a phased manner. As the hotel sector is on an upswing we expect the disinvestment process of these companies to be successful and will happen in the coming year.

The Indian hotel chains are also looking at global avenues. The large chains are eyeing properties in the Middle East and Asia so as to increase their presence and marketing reach. Currently their brands 'Taj' and 'Oberoi' are the two largest and best know brands in the country. However, worldwide competition in the hotel market is very steep hence these companies will take a long time to make their mark on the global map.

  • Download executive summary of JLL's India Hotel Report 2000


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