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A hotel here, a hotel there, a hotel everywhere - Views on News from Equitymaster
 
 
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  • 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.

     

     

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