Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Hotel sector: Little room for growth - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jan 7, 2009

    Hotel sector: Little room for growth

    The hospitality industry witnessed a mixed year in 2008. In this article, we shall examine the factors that contributed to the growth and some of the challenges that this sector faces.

    The sector began the year 2008 on a strong note. Rising tourist inflow, higher occupancy and room rates continued to benefit the hotel players. In the first four months of the year, the tourist arrivals were higher by 11.7% YoY. Existing hotel companies, new foreign players and real estate players continued with their expansion plans. Prospects were looking good, until the sector faced a double blow.

    Double trouble
    The worst financial crisis in many decades, high oil prices and a slew of militant attacks hit the hotel industry. Often described as a "fragile" industry, the demand for travel is highly susceptible to events like economic slowdown, wars, disease outbreaks and terrorism. When the Indian tourism and hotel industry had just started gaining recognition worldwide, it was laid low by a double whammy. The first being the global credit crisis and the second, the recent terror attacks on the iconic hospitality landmarks; the 'Taj Mahal Palace and Tower Hotel' and the 'Oberoi Trident'. Nearly 40% of the annual revenues are expected to be lost on account of the recent crisis.

    Lower growth
    During 1HFY09, lower corporate spending, fluctuating dollar and opening of credit crisis did impact occupancy rates in some cities like Bangalore, Pune, Hyderabad and Chennai. The room rates however, remained high. While the actual number of tourist arrivals has increased, the YoY growth is on the lower side. While during 2007, a 16% YoY growth was seen in tourist arrivals during the first 8 months, the same stood at 10% YoY this year, indicating slowdown. According to the Ministry of Tourism, October 2008 saw an increase of just 1.8% in the number of foreign tourist arrivals compared to the same time in 2007.With the latest terror strike (26/11) during the onset of the peak season, things got murkier. This prompted the Indian government to ask hotels to slash their prices in the hope of keeping demand stable. Though the room rates have officially increased, hotels are selling corporate travel packages at huge discounts to maintain occupancy levels. Tour operators believe that the real discounts and tariff cuts are as high as 30% to 50%. With hotel rates touching unreasonably high levels last year, a correction was nevertheless due.

    Going forward
    2008 was definitely a year to forget for the hotel industry and the government is taking plenty of initiatives to revive it. 2009 is to be observed as the 'Visit India Year'. The concept is that those who visit India in 2009 would thereafter experience India's rural tourism, eco tourism, adventure tourism, wellness tourism in specially worked out packages in 2010 and 2011. Further, the rate cuts would also make India a cheap tourist destination to visit.

    Further, cost pressures, liquidity crisis and regulations concerning the real estate sector have made funding for hotel projects difficult. This coupled with unrealistically high land prices and government red tapism could result in hotel projects taking longer to fructify. Real estate players (DLF, Unitech, Parsvnath) are being hit adversely by the market slowdown. The phenomenon is expected to have an effect on hospitality development in India. This may lead to a stop or delay in the completion of projects as well as a revision of the project expenditure. As per KPMG, only 60% of hotel projects announced in key metros are operational as per schedule. Developers have also diverted their plans in favour of commercial or residential buildings due to liquidity crunch and higher land prices leading to a longer breakeven period. Considering all these factors, industry estimates that just over half of the planned 0.1 m new rooms will finally be built. Hence, considering the demand supply mismatch, the new room additions will not create overhang. Thus, we believe that the existing players would benefit from the continued demand-supply mismatch once the economy revives.

    While leisure travel would continue to be low, business travel, domestic travel, medical tourism and mid market segment would be the target areas. As per estimates, domestic tourism has risen from 366 m in 2004 to 462 m in 2006, emerging as a major driver for the industry. Just to give an idea about how big this opportunity is, we can say that the domestic tourists' number is more than the entire population of the US.

    This slump in the industry will also provide opportunities to existing hotel companies with high cash in their kitty to acquire distress assets at cheaper valuations. While the summer would be cold for the hotel industry, with India's fundamental prospects being attractive over the long term, the momentum would get better.



    Equitymaster requests your view! Post a comment on "Hotel sector: Little room for growth". Click here!


    More Views on News

    Indian Hotels: Domestic Operations Performs Well (Quarterly Results Update - Detailed)

    Oct 17, 2016

    Indian Hotels has reported a 5.6% YoY increase in the consolidated topline and a consolidated loss of Rs 1,695 m for 1QFY17.

    Indian Hotels: Recovery Still Far Away (Quarterly Results Update - Detailed)

    Mar 28, 2016

    Indian Hotels has reported a 13.2% YoY increase in the consolidated topline and a standalone net profit of Rs 1.2 m for the quarter ended December 2015.

    Indian Hotels: A good operating performance (Quarterly Results Update - Detailed)

    Nov 24, 2015

    Indian Hotels has reported a 13.2% YoY increase in the standalone topline and a standalone net profit of Rs 1.2 m for the quarter ended September 2015.

    Indian Hotels: Exceptional gain boosts bottomline (Quarterly Results Update - Detailed)

    Aug 28, 2015

    Indian Hotels has reported a 10.2% YoY increase in the consolidated topline and a consolidated net profit of Rs 348 m for the quarter ended June 2015.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms