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Hotels: Incredible India! - Views on News from Equitymaster
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  • Jan 24, 2007

    Hotels: Incredible India!

    The Indian hotel sector's profitability increased sharply over the past two years and the trend continued even this year. India's strong economic growth, business-tourist traffic growth at a double-digit clip, business confidence index at an all-time high, and the rising FDI into the country led to the tourist inflow. The sector enjoyed strong pricing power, which, along with operating leverage, drove the sector's earnings.

    What was different in 2006 as compared to 2005?
    With the foreign traffic in the country touching 4 m mark in 2005-06, 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.

    The main season of the hospitality sector begins in October. However, the Indian hospitality sector came out with very impressive numbers even in the off season due to favourable demand supply gap prevailing in the country. This led to an overall rise in average room rates (ARR) and occupancy rates. For the third year in a row most markets across categories witnessed an increase both in terms of occupancy and average rate. 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. Average rates, saw exceptionally strong increases over the previous year. Even the food and beverages segment contributed to the jump in the profits. The operating environment for the hotels industry also improved over the past two years, with a sharp rise in room demand and limited room supply.

    This year to capitalise on the increasing tourist inflow, while the companies have lined up expansion plans, the supply will come in only by FY09. Also, the hotel players have entered newer segments like budget hotels and service apartments. India is no longer a metro destination, but even cities like Hyderabad, Pune, Jaipur among others have gained importance in terms of tourist inflows.

    What to expect in 2007?

    India accounts for 0.5% of world tourism, and the tourist inflow which 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 'Incredible India' campaign have 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 air fares 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. ARR's have grown at a compounded rate of 18% over the last three years.

    Going forward, we believe that while there is less scope for occupancies to grow further, future growth will be driven by the ARR's. However, with international players entering the country, the competition is likely to increase. 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. Though valuations of certain companies are high, and one has to be selective while picking a stock (giving due consideration to the growth plans, diversified portfolio, net asset value and cash flows), overall prospects of the sector look good.



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