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Hotels: Check-out 2003 - Views on News from Equitymaster
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  • Dec 24, 2003

    Hotels: Check-out 2003

    One sector that is always almost directly affected by the global economic and geo-political situation is the hospitality industry. Domestic developments could further make or mar the fortunes of this sector. Keeping this in mind, let us consider in brief how the Indian tourism sector has performed in 2003 to date and what is in store for the sector going forward.

    (Rs) Price on
    January 1, 2003
    Price on
    Dec 22, 2003
    % change
    SENSEX 3,390 5,578 65%
    ITC HOTELS 46 137 194%
    INDIAN HOTELS 187 437 133%
    THOMAS COOK 227 420 85%
    EIH LTD. 189 297 57%

    The Indian tourism is a good example of how the internal developments within the country can affect the growth of the industry. To begin with, the bad times for the global tourism sector began with the terror attacks on the twin towers of the World Trade Centre in New York, which brought not just the US, but the whole world to a standstill. That is not surprising considering the huge dependence that the other world economies have on the US.

    However, a string of negative events on the domestic front further aggravated the already bad situation for the hospitality sector. During 2002, communal tensions (Gujarat riots) gripped the country. As a result, the western world issued travel advisories in June '02, which stagnated the inbound travel of foreigners. The impact of the Kashmir issue and the parliament attack prior to that also had an adverse impact on India as a tourist destination. Consequently, there was fall in tourist arrivals in India of about 7% during 2002.

    However, this was not the end of troubles for the sector. The tourism sector, which saw a strong start in 2003 in terms of the number of foreign tourist arrivals into the country, once again was pushed into mess. The US war on Iraq followed by another disaster in the face of SARS, which again made countries across the world issue negative travel advisories with respect to traveling to Asian countries, had a significant negative impact on the sector. This is also clearly visible in the chart above wherein the period from February 2003 to May 2003 saw declining tourist inflows. However, with the US's victory on Iraq and the SARS epidemic also under control, the sector was once again saw a revival in its fortunes. Overall, for 2003, the total inflow of foreign tourists for the first nine months of 2003 saw a 14% YoY growth.

    On the domestic front also, increased movement amongst domestic tourists owing to self-imposed restrictions over traveling to foreign destinations for the reasons discussed above (geo-political concerns), has also helped the domestic hospitality industry to flourish. Further, on the back of improved tourist inflows and domestic travel, which has helped to balance the demand-supply situation, hotels have been in a position to increase the average room rates (ARR), which has led to improved financial performance by the industry players. The effect of this is visible in the stock prices of these companies.

    Further, tourism, which never received serious attention from the Government, as it was considered recreation of the elite, saw budget '04 lay emphasis on tourism, although in an indirect way. The government took some key initiatives like building of new roads, railways, airports and seaports. All these initiatives are key measures to woo the international and domestic tourist.

    What to expect?

    Going forward, with the industry having partially recovered from the trough and the scenario looking upbeat from hereon, many industry players have planned capacity expansions, which are likely to come into existence over the next 3-4 years. Thus, while, in the near-term, the demand-supply mismatch could have been reduced, over the longer-term, the increase in capacity would keep a check on the rising ARRs. However, having said that, the worst is probably over for the Indian tourism sector.

    To conclude, according to a survey by the World Tourism Organisation (WTO), the number of tourist arrivals into India 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.



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