Hotels: Expansion mode

Although the Indian hospitality sector has been in the doldrums for the last couple of years due to the unfavorable geopolitical situations (in India and globally), this has not stopped MNC hotel chains from looking at India as the potential market. We take a look at some of the Indian as well as foreign players who have already entered the Indian market and are looking to expand during the coming years.

Prior to FY97, domestic hospitality majors like Indian Hotels (Taj Group), EIH (Oberoi Group) and ITC Hotels (Maurya Sheraton) were the only major private players in the industry. Apart from these, there was the Indian Tourism Department Corporation (ITDC) and Hotel Corporation of India (HCI), both government owned chain of hotels. But post FY97, international players like Le Meridien, Hilton, Marriott, Regent, Hyatt and Radisson entered the Indian market. The reason being the tourism sector saw significant growth in tourist arrivals into the country after liberalisation i.e. FY92 till FY97. During this period, tourist arrivals increased from 1.9 m in FY92 to 2.4 m in FY97, a compounded growth of 5%.

International players entered the Indian market through various methods like joint ventures, management contracts and equity stake. Hyatt International joint venture with Asian Hotels for setting up hotels is already operational. Radisson tied up with Unitech Limited, Le Meridian has a management contract with Dynamix Hotels (unlisted private player) and Regent had partnered with Lokhandwala Hotels (another unlisted player). Lokhandwala Hotels later sold its 26% stake in ‘The Regent’, North Mumbai, to Indian Hotels during FY02. Indian Hotels is now managing the hotel and has renamed it ‘Taj Lands End’. The Leela group entered into a joint venture with Kempinski of Germany for setting up hotels in India and J W Marriott tied up with the Raheja group (unlisted).

Thus, with entry of these international players, capacity is expected to grow significantly in the next five years. For instance, number of rooms in North Mumbai is likely to increase at 30% per annum in the next 2 years with an infusion of around 1,500 rooms during this period. This is 37% of existing capacity of 4,100 rooms. However, the rate of growth is slower in South Mumbai (only Indian Hotels and Inter Continental seem to be the interested parties). Similarly fresh capacity is also expected in other metro cities like Kolkata and New Delhi (450 rooms respectively).

Given this backdrop, it is important to understand that not all players will benefit. The interesting thing to note is that the concentration is on the business and leisure segments, while very few hotels are expected in the luxury category. Setting up a business or leisure hotel would cost around Rs 2-3 m per room, while the construction cost of a luxury class hotel is around Rs 5 m per room. Though the set up cost is much lower for the business and leisure segments, competitive pressure is likely to keep average room rates (ARRs) under check.

So, increase in capacity would mean that occupancies are likely to get further distributed as a result of which ARRs would continue to remain under pressure. Indian Hotels that owns and manages 11 hotels in the luxury segment has got few competitors (37% of total rooms). In this context, it is in a better position to maintain its ARRs.

Post FY00, the Indian tourism sector saw a string of events, which have created a dent in the growth of the sector (Kargil, September 11, Parliament attack, negative travel advisory, the Iraq war and now SARS). As a result, tourist movement has come down from 2.5 m in Jan-Dec 2001 to 2.3 m in Jan-Dec 2002. This has directly affected the financial performance of established domestic majors and also the new entrants in the sector.

Having said that, the Indian tourism sector can see a ray of light at the end of the tunnel, as the worst is probably over. As according to a survey by the World Tourism Organisation (WTO), the number of tourist arrivals is expected to increase from the present 2.5 m to 5.9 m by 2010 and to 9 m by the year 2020. As per these estimates the tourist influx is expected to grow at a healthy 6.5% CAGR. However, since the sector is vulnerable to global events, the risk profile is on the higher side.