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Hotel industry: Slowdown or correction? - Views on News from Equitymaster
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  • Jul 2, 2008

    Hotel industry: Slowdown or correction?

    The slowdown in the global economy, rising crude prices and higher airfares has affected the hotel sector to a certain extent. Due to rising costs, companies are facing pressure on their earnings. Plus, cost cutting measures have led to lower business tourist arrivals in recent times.

    Occupancy levels: Occupancy levels at hotels catering to business travellers have dropped 5% to 10% since the end of January. On a year on year basis, occupancy levels have remained flat. The major dip in the occupancy levels was seen in the IT hubs, Bangalore and Hyderabad. Major expenditure-cutting exercises by information technology sector companies, hurt by the rupee appreciation, have begun to impact the IT hospitality segments. Also, new supply had come up in these regions, which further affected the occupancy levels. However, destinations like Mumbai, Delhi, and Goa witnessed stable occupancies on account of lower supply. Though the tourist destinations witnessed higher occupancies, rising airfare and higher room rates may hit the leisure tourist segment going forward.

    Occupancy (%)
    City FY07 FY08
    North Mumbai 69 68
    South Mumbai 76 76
    Delhi 75 74
    Bangalore 74 70
    Chennai 73 71
    Kolkatta 75 75
    Goa 70 70
    Hyderabad 71 69
    (source : company presentation)

    Room rates: With the dip in occupancy levels and new supply coming in certain destinations, the room rates witnessed a marginal increase, which was much slower than what was witnessed last year. Further, with hotel rooms in India being relatively more expensive (last year was unusual when tariffs rose by 25%), the slowdown was inevitable. Average room rates (ARRs) in the branded hotel category in India have increased by 280% in the past three years, as per HVS International. Bangalore saw a decline in room rates, while Mumbai and Delhi witnessed a 15% to 18% increase as compared to more than 30% hikes witnessed in FY07. Going forward, the prices will soften by the end of the year as the supplies would start coming in from FY09, which would bring tariffs to a more realistic level.

    On the company front: While the big players like Indian Hotels and EIH, witnessed expansion in margins in 4QFY08 due to location advantage and hotels catering to different segments, smaller players like Leela and Oriental Hotels faced pressure in the last quarter. Leela, which earns about 50% of revenues from its Bangalore property, witnessed a 5% decline in margins in the last quarter.

    Expansion plans: The Planning Commission's High Level Group on services sector has pegged the room shortage in the country at 150,000 rooms by 2010, out of which more than 100,000 will be in the budget category. Official estimates peg the number of hotel rooms in the country at 1 m. The room crunch is further evident by absolute figures - the number of rooms in Bangkok (60,000) far exceeds the number of rooms in Delhi (20,000) and Mumbai (25,000) put together. The next few years will thus witness the opening of several hotels across India. Not only the Indian hotel majors, but even international players have lined up huge capex plans. Investments of US$ 11 bn over the next 2 years are expected to be earmarked for the hotel industry in India. Further, new segments like budget hotels, service apartments and management contracts are witnessing increasing interest. The chart below indicates the number of rooms expected to come by FY12.

    Going forward…
    Though the hospitality industry is poised for growth, it will face roadblocks along the way. The room inventory will continue to be low on account of inflexible FSI norms, high land costs, poor urban infrastructure planning and political inadequacies. Further, if the problem of higher crude prices, inflation and the credit crisis continues, the hotel industry is likely to be hit. According to hotel majors, the hike witnessed in the room rates last year is not sustainable and the rates would get rational in the coming quarters. Further, the new capacities will put downward pressure on ARRs and occupancy rates. Thus, those hotel companies with good execution skills, presence across segments and regions would have an edge over their peers in times of uncertainty.



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