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Hotels: Making hay while the sun shines!

Jun 16, 2006

The Indian hospitality industry touched new heights in FY06 with higher foreign tourist arrival and higher foreign exchange earnings on account of robust growth in economy. The last fiscal was considered to be a golden era for the hospitality industry, which saw higher occupancy rate and average room rates(ARR). The initiatives taken by the government in terms of making available improved infrastructure, aviation and conducive business environment has facilitated hotels across star categories in the major cities. Lately, the Indian hotel industry is being viewed as investment-worthy, which will help India to emerge as one of the world's fastest growing tourism markets in the coming years.Tourist inflow: The year 2005 has been the best year till date for inbound travel, with foreign visitor arrivals touching a record 3.9 m, resulting in international tourism receipts of Rs 262 bn. This impressive performance in tourist arrivals is attributable to a strong sense of business and investment confidence in India led by growth of the Indian economy, a strong performance of the domestic corporate sector and opening up of the economy to a greater foreign participation. Also, efforts to communicate the 'Brand India' message had its beneficial impact on the sector growth. The most important efforts came from the Indian government initiative to develop several schemes like 'Atithi Devo Bhava' and 'Rural Tourism', to effectively capitalise on the growth potentials in the tourism industry. The Ministry of Tourism has set a target to attract 4.4 m tourists during the year 2006 and the efforts are commensurate with achieving the target. Moreover, the recent budget has approved 50 villages to be converted to tourist destinations that can bring laurels to the industry.

Rs (m)FY05FY06Change
Net sales21,658 28,450 31.4%
Expenditure15,851 18,606 17.4%
Operating profit (EBDITA)5,807 9,844 69.5%
Operating profit margin (%)26.8%34.6%
Other income1,145 908 -20.7%
Interest1,819 1,380 -24.1%
Depreciation1,683 1,858 10.4%
Profit before tax3,450 7,514 117.8%
Extraordinary income 319 1,000 213.5%
Tax1,107 2,425 119.1%
Profit after tax/(loss)2,484 6,053 143.7%
Net profit margin (%)11.5%21.3%
* The above numbers include the results of Indian Hotels, EIH, Taj GVK, Oriental Hotels, Asian Hotels and Hotel Leela

ARR's and occupancy - The players in Indian hospitality industry witnessed higher revenue growth in FY06 due to higher ARRs and occupancy rate. ARRs (of the top 8 cities) rose by 31% YoY in FY06, while the occupancy rate increased to 75% in FY06 as compared to 73% in FY05 (HVS estimates). Bangalore and Hyderabad were the front runners in the growth market. This led to increase in the topline by 31% YoY. Going forward we expect the trend to continue due to the demand-supply mismatch scenario.

Higher Margins: The period saw significant growth in the operating profits as the higher occupancy rate and ARR were coupled with cost efficiency. The higher occupancy rates helped the players spread their fixed cost over a larger base, effectively reducing the fixed cost per room.

% of sales)FY05FY06% Change
Raw material and cost of goods2,2802,73419.9%
% of sales10.5%9.6%
Staff cost4,7135,46516.0%
% of sales21.8%19.2%
Power and Fuel cost1,7621,9259.3%
% of sales8.1%6.8%
Other expenses7,0958,48219.5%
% of sales32.8%29.8%

Jump in profits: Major players in the industry experienced a huge jump in their bottomline in FY06. The profits increased by 143% YoY and margins touched a high of 21% (for the hotels considered in this article). Even after taking out the effect of the extraordinary income, the net profits are up 133% YoY. There has been a sharp fall in the interest cost burden for most of the companies, as they have successfully raised low cost funds from international markets and restructured or repaid their old debts.

The party will continue...
Today, India is one of the most exciting emerging markets in the world. According to recent estimates of the WTTC, Indian tourism demand will grow at 8.8% (CAGR) over the next ten years (from 2005-15), which would place India as the second most rapidly growing tourism market in the world. The tourist arrival will touch new heights fuelled by the low cost airlines, growing infrastructure thrust by the government and India's emergence as an outsourcing hub.With an estimated 26,000 rooms in the branded hotel segment, the size of the hotel industry continues to represent an abysmal figure for India's size and growth prospects. Based on the forecasted growth in demand we expect that another 100,000 to 125,000 rooms will be needed in the next five years, to be able to meet the demand. Till then, the party for the hotel majors will continue.

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