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.
A hotel here, a hotel there, a hotel everywhere - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Feb 11, 2000

    A hotel here, a hotel there, a hotel everywhere

    Anybody who writes or discusses the hotel sector nowadays only talks of falling occupancy rates and average room rates and the trying times that the Indian hotel industry is going through. These focus only on the demand side problems facing the industry. However it is important to see what the supply side scenario will look like in the future.

    Room supply in the five star segment has grown by only 3 percent over the last five years. Hence this has not been an area of concern in the past as new capacity additions in the five star segment in the metro cities have been slow. The existing hotel majors Indian Hotels Company Ltd (IHCL), EIH Ltd, Asian Hotels, Hotel Leelaventure, Bharat Hotels, Oriental Hotels and ITC Hotels have enjoyed this slow growth to their advantage from 1990 to 1996. The slow growth in room supply in the past can be attributed to the high land costs, long gestation periods, license problems and scarcity of good locations.

    However in the metro cities after three to four years the hotel industry is expected to face major problems on the supply side. The hotel sector boomed from 1992 to 1996. Led by the lure of easy money and missed perception that hotels is a simple business, profitable (especially the five star segment), easy to get a foreign tie-up prompted many companies in construction and real estate business to enter the business.

    However, the business is not as simple as it seems. The profitability of a hotel rests on 3 key factors - the location; the project capital cost and experience of the promoters in operating hotels.

    As Mumbai and Delhi five star hotels account for majority of the revenues and profits of leading hotel companies (varying from 70-100 percent) it is necessary to see what impact capacity increases in these regions would have on the hotel industry. Also as these are primarily business hotels, every company who is currently not present in these two markets is keen to open a hotel here. In Mumbai around 100 percent capacity additions are expected over the next four to five years as 3,294 new room additions have been planned, with this the capacity is expected to go up to 6,249 rooms from the current 2,955 rooms. In Delhi the capacity is likely to go up by 1,370 rooms in the next few years an increase of 35-40 percent from the current level of 3,960 room capacity.

    However, we would regard these as long term concerns as many of these hotel projects are in their earlier stages of inception, or have been delayed. A primary reason for the delays has been the current downturn in the Indian hotel industry forcing many companies to go slow on expansions. For instance, the last five star deluxe hotel set up in Mumbai - The Regent, has trimmed its expansion plans in 2000 due to project delays, cost escalation and funding problems. As most hotel chains have plans to open hotels near Mumbai's international airport this will certainly lead to oversupply in this region. The high costs of property in Mumbai will also ensure a longer gestation period.

    Hence the major hotel companies do not need to worry about new room supply in Mumbai and Delhi at least for the next three years. In times of oversupply the existing hotel chains will be able to reduce tariffs to a larger extent than the new hotels. On a shorter term scenario, hotel companies have to live with low occupancy rates. However occupancies are expected to pick up with improvement in the economic scenario and a stable political condition.



    Equitymaster requests your view! Post a comment on "A hotel here, a hotel there, a hotel everywhere". 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

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    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.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    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.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    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