The hotel industry has finally reasons to be happy about. The current financial year has started on a positive note. The impact of the improved macro environment and relatively stable political climate is finally having its manifest effect on India’s hotel industry. The overall economic scenario has improved considerably in the past year leading to higher business confidence.
Tourist arrivals have grown by 9 percent YoY in the first four months of the current financial year. For April-July 2000 tourist arrivals stood at 7,05,908 as compared to 6,48,065 for the same period in the previous year. Normally tourist arrivals are lacklustre in the period, April to September, which is considered the lean season for the hotel industry. However this strong growth augurs well for the rest of the year.
Occupancy rates in metro cities have picked up due to higher tourist inflows and business travel. The metro dominated hotel chains like Indian Hotels and EIH, which derive over 70 percent of their profits from their respective hotels in Mumbai and Delhi, have seen a pick up in occupancy rates in the first quarter. Foreign direct investment looks set to pick up, this should give a further boost to foreign and domestic business travel. This indicates better times ahead. After four years of declining occupancy rates and pressure on average room rates (ARRs), all this is surely good news for the beleaguered sector.
To add to the above, the recent depreciation of the Indian rupee too has brought windfall gains to the hotel industry. Since the beginning of this financial year the Indian rupee has depreciated by 5 percent from Rs 43.52 per US$ to Rs 45.8 currently. Over 60 percent of hotel industry earnings are in foreign exchange due to their dollar earning capacity as majority of guests in metro hotels are foreigners. As a ball park figure a 1 percent depreciation in the rupee, contributes to around 1 percent of hotel company profits before tax. The major hotel chains like Indian Hotels Company Ltd (IHCL) and EIH L
td derive respectively 53 percent and 65 percent of their earnings from foreign exchange (as of March 2000). Hence the above factor will definitely spruce up their bottomline.
On the ARR front however the improvement seems to be slow. This is due to higher competition in the industry and also the fact that hotel companies normally increase their tariffs post September. Most business hotels are still resorting to giving high discounts to the corporate sector. However, ARRs are likely to start showing an improvement from October onwards when room tariffs are likely to be revised upwards.
Everything in the hotel industry however is not as rosy as it seems. There are some long term concerns hovering around the industry. The main ones being increasing room supply especially in the five star segment in metro cities, high expenditure and luxury taxes and government’s lax attitude in promoting tourism in India.
In Mumbai around 100 percent capacity additions are planned over the next five years as 3,294 new rooms are to be added, with these the room 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 four to five years an increase of 35 percent from the current level of 3,960 rooms. Competition from foreign hotel chains in future is going to change the face of things to come in the next four to five years.
However as majority of expansions are going slow or stand delayed, the current hotel chains have time to get their act together. Many hotel chains are undertaking renovations and refurbishment to compete with the new upcoming hotels. The medium term outlook for the business metro hotels looks bright as revenues are expected to pick up over the next two years and additions to room supply are going slow.
Share price performance in absolute and relative terms
||18 Aug, 2000
|Indian Hotels Co. Ltd (Rs)
|Relative to BSE Sensex (%)
|EIH Ltd (Rs)
|Relative to BSE Sensex (%)
The outlook for the sector looks positive with a pick up in business travel, slow capacity additions and attractive valuations. Time to check in.