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.
Hotel sector: The need of the hour - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jun 17, 2009

    Hotel sector: The need of the hour

    With the new government in power, the hotel industry is hoping for some respite considering the tough scenario that the sector has been facing. Some issues are on the regulatory front, which if resolved will be beneficial for the hotel industry's long term growth.

    Non industry status: The hotel sector is highly capital intensive with a large amount of fixed expenses. The sector has been demanding an industry status for a long time now. Though the seventh five-year plan (1985-1989) had proposed that tourism be conferred the 'industry' status, the decision and implementation was left to the states. Granting this status would have entitled tourism to secure several benefits in terms of financing, tax exemption and subsidised power tariffs among others. However, considering the loss of revenues (as industry status entitles to many concessions) only a few states have granted the 'industry' status to tourism. Thus on account of the reluctance of states, hotel players continue to pay 30 to 50% higher power tariffs as most states have commercial tariffs for power usage in hotels. Also, hotels are clubbed along with real estate business as speculative, thereby not entitling it to priority lending by banks. This in turn makes it difficult for the hotel players to borrow long term funds at cheaper rates. This affects their expansion plans.

    Average Cost of Debt
    Country %
    US 7.5
    France 6.3
    China 7.0
    Thailand 7.3
    UAE 8.3
    Germany 6.5
    Spain 6.5
    India 14.0
    Source :HVS International

    In recent times, the government has taken some measures which will benefit the sector.

    • In 2008-09, Rs 5.2 bn for development of tourism infrastructure was allocated. This figure is higher by Rs 970 m as compared to the previous year. However, it is only 1% of the total government spending.

    • RBI has allowed ECB upto US$ 100 m in January 2009. This would help in raising funds.

    The industry, hence, is hoping that considering the recent troubled times, the government would grant the status. This would enable hotels to access cheaper debt from international markets and also provide tax concession (VAT/sales taxes, property tax). Also, industrial rates on consumables like electricity and water amongst others would be applicable.

    Infrastructure: Infrastructure plays a very important role for the tourism sector. Development of airports, railways, roadways, better connectivity between places and facilities and upkeep of places of tourist interest is very necessary. However, not much has been done on this front. India needs to invest US$ 320 bn just to overcome infrastructure bottlenecks. While projects worth US$ 350 bn are in the pipeline, slow execution and corruption has hampered the progress.

    Tax: Hotel industry also faces issues on the tax factor. Being a state subject, luxury taxes vary as per the state law. Also, different taxes apply to different categories of hotels within the same state. Globally, a unified tax structure is followed. high tax is charged on F&B too and variations exist between the rates among the states (VAT, sales tax).

    Difference in taxes
      Standard luxury tax Effective tax rate
    Andhra Pradesh 5 8.3
    Gujarat 6 10
    Delhi 12.5 20.8
    Karnataka 12 20
    Maharastra 10 10
    Kerala 15 15
    Rajasthan 10 10
    Goa 10 10
    Tamil Nadu 12.6 20.8
    Source : HVS

    Tax benefit for 5-star properties: The Union budget of 2007-08 provided a five-year tax holiday for two-star, three-star and four-star hotels and convention centres in Delhi, Faridabad, Gurgaon, Noida and Ghaziabad. However, this was not extended to the five-star establishments in and around the capital to expedite hotel room construction before the 2010 Delhi Commonwealth Games. With bulk of the tourist staying in 5 star hotels, the concession is needed for the development of this segment.

    Approvals: Setting up a hotel is not an easy task. One is required to fulfill a slew of formalities. The hotels have to apply for multiple licenses and approvals through multiple government agencies. In many states, rules are fluid and are open to loose interpretations. Further, lack of transparency and presence of bureaucracy pushes the project schedule back by 6-12 months. This makes it detrimental for new hotel development.

    Going forward
    The hotel industry is expected to have a tough FY10. As per WTTC, the travel GDP is expected to decline by 3.5%. The hotel players may witness a RevPAR fall of 10% to 15% during the year.

    In India, the economic slowdown and the terrorist attack in Mumbai have played havoc to both business and leisure travel in 2009. CRISIL Research expects the profitability of premium hotels to be impacted due to a sharp decline in occupancy rates and room rates. It expects demand to decline by 15.5% YoY in 2009-10. This is going to affect the profitability of the sector. The hotel companies are already facing cash flow pressure, thereby affecting their expansion plans. The balance sheets of the hotel companies are under stress on account of acquisitions of land banks and rising debt levels.

    While the government is promoting year 2009 as 'Visit India', concrete measures on problems faced by the sector need to be solved urgently to get the industry back on track.



    Equitymaster requests your view! Post a comment on "Hotel sector: The need of the hour". 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