Hotel industry: More than just hospitality... - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Hotel industry: More than just hospitality...

Jun 27, 2007

India occupies the forty-sixth position among the sixty tourist destinations in the world. The flourishing economy helped boost the demand for the industry. Globalization and liberalization gave it a new impetus. India is the fastest growing tourist economy, where tourism grew at a whopping 18% CAGR over the last four years. In terms of operating metrics, topline growth was fairly robust, driven by the tourist surge. The topline was up 29% YoY. Margins saw an impressive expansion as well, as these players effectively managed the operating costs. The higher margins led to the stronger growth of 45% YoY in the bottomline.

Rs (m) FY06 FY07 Change
Net sales 25,515 32,988 29.3%
Expenditure 17,127 20,750 21.2%
Operating profit (EBDITA) 8,388 12,238 45.9%
Operating profit margin (%) 32.9% 37.1%
Other income 1,090 1,431 31.3%
Interest 1,198 1,659 38.5%
Depreciation 1,632 1,920 17.6%
Profit before tax 6,648 10,090 51.8%
Tax 2,396 3,687 53.9%
Profit after tax/(loss) 5,193 7,514 44.7%
Net profit margin (%) 20.4% 22.8%
* The above numbers include the results of Indian Hotels, EIH, Taj GVK, Oriental Hotels and Hotel Leela

India story: India continued to be one of the most exciting emerging markets in the world with GDP growth of 8%+ over the last three years. With India being on the radar of global investors, large number of visitors arrived in the country. 4.4 m visitors were welcomed in the country. Moreover, arrivals recorded double-digit growth in all 12 months of the year- even during the lean summer and monsoon months. Domestic tourism is also on the rise. With incomes increasing, Indians have transformed their concept of a holiday. A significant mismatch in the demand-supply scenario was aided by huge growth in domestic as well as international business and leisure tourists. The current boom in demand was particularly witnessed in the National Capital Region (comprising Delhi, Gurgaon, NOIDA and some other surrounding areas), as well as in Bangalore, Chennai, Mumbai, Hyderabad, Kolkata and Pune. While room rates saw firm trend, the occupancy growths were little slower than in the past few years. This was due to new supply coming in Delhi, Bangalore, Chennai and Hyderabad. But as per the hotel majors, this is a temporary phase and now with no supply coming in the next one year, the occupancy rates would rise again. It is likely that that demand will outpace supply in the short to medium term, and average room rates (ARRs) and occupancy rates (Ors) will see further growth during this period thereby driving industry profitability.

All the hospitality companies witnessed growth in sales in this year. Indian Hotels led the way with 38% YoY growth. Taj GVK and EIH followed with 29% YoY and 24% YoY growth respectively. Further, there is Leela and Oriental Hotels with 17% YoY growth each.

Movement of average room rates in star hotels in India
FY02 FY03 FY04 FY05 FY06
Five star deluxe 4,668 4,335 4,686 5,606 7,099
Five star 3,277 3,114 3,372 3,897 5,019
Four star 2,368 2,246 2,580 3,088 3,799
Three star 1,696 1,669 1,670 1,830 2,044
Overall average 3,467 3,269 3,569 4,299 5,318

Operating benefits: The hotel sector is a high fixed cost industry and thus benefits from operating leverage (profits improve sharply once the business generates enough revenues so as to meet the fixed costs and any incremental business revenues flow straight down to the bottomline). For the full year, operating margins have expanded by 420 basis points (4.2%), led by a reduction in all the overhead costs (as percentage of sales).

While Indian Hotels witnessed the highest increase in the operating margins, Hotel Leela's margins declined due to higher labour costs.

% of sales FY05 FY06 % Change
Raw material and cost of goods 2,167 2,684 23.9%
% of sales 8.5% 8.1%
Staff cost 4,786 5,883 22.9%
% of sales 18.8% 17.8%
Power and Fuel cost 1,725 1,850 7.2%
% of sales 6.8% 5.6%
Other expenses 8,450 10,335 22.3%
% of sales 33.1% 31.3%

Government initiatives: India has also made a mark on the world's psyche after the hugely successful Incredible India campaign. This promotional campaign by the Ministry of Tourism, showcasing India abroad, was launched in 2002. The target was to see 5 m foreign visitors in the country and the target is set to be achieved this year (2007). A sum of US$ 16.2 m was spent in 2006 on the campaign to promote tourism in the domestic and overseas markets. Also to encourage the tourism sector, the government is planning to propose a conditional 10-year tax holiday for all tourism projects in the country. Companies will enjoy full tax exemption up to 50% of profits, but will qualify for tax benefits for the remaining amount only if they re-invest it in tourism projects. The Centre and States are also working out a PPP (Public-Private-Partnership) model to increase hotel capacity. Efforts to diversify tourist attractions by offering new products such as adventure tourism, wellness tourism, medical tourism and golf tourism are expected to have a positive effect on both foreign tourist arrivals and domestic tourism.

Expansions: The hotel majors have lined up expansion plans. They have also entered into newer segments like budget hotels, spas, food and beverages, cruise and service apartments. Indian hotels added around 700 rooms across different categories, Leela's Bangalore property expanded by 120 rooms. EIH launched a 25-suite luxury cruise (Zahra) on the Nile in Egypt. A world-class luxury train is also proposed to be built by EIH in a joint venture with the Government of Rajasthan and the Indian Railways. The companies have strong cash flows to fund the future capex plans.


According to recent estimates of the WTTC (World Travel and Tourism Council), Indian tourism demand will grow at 8.8% CAGR over the next nine years (2006-15), which would place India as the second most rapidly growing tourism markets in the world. However, addition to the room inventory over the next 2-3 years is not expected to be commensurate with the growth in demand. As per industry estimates, India will require around 120,000 hotel rooms over next 3 years and Delhi & NCR alone will require 30,000 additional rooms by 2010 due to huge tourist inflow expected due to Commonwealth Games scheduled to be held in 2010. Overall, the increased business and leisure related travel, strong room demand, and higher occupancies would help the players in the sector to sustain their pricing power.

Equitymaster requests your view! Post a comment on "Hotel industry: More than just hospitality...". Click here!


More Views on News

TAJ GVK 2019-20 Annual Report Analysis (Annual Result Update)

Dec 11, 2020 | Updated on Dec 11, 2020

Here's an analysis of the annual report of TAJ GVK for 2019-20. It includes a full income statement, balance sheet and cash flow analysis of TAJ GVK. Also includes updates on the valuation of TAJ GVK.

THE INDIAN HOTELS 2019-20 Annual Report Analysis (Annual Result Update)

Dec 1, 2020 | Updated on Dec 1, 2020

Here's an analysis of the annual report of THE INDIAN HOTELS for 2019-20. It includes a full income statement, balance sheet and cash flow analysis of THE INDIAN HOTELS. Also includes updates on the valuation of THE INDIAN HOTELS.

MAHINDRA HOLIDAYS Announces Quarterly Results (1QFY21); Net Profit Up 47.4% (Quarterly Result Update)

Aug 24, 2020 | Updated on Aug 24, 2020

For the quarter ended June 2020, MAHINDRA HOLIDAYS has posted a net profit of Rs 268 m (up 47.4% YoY). Sales on the other hand came in at Rs 2 bn (down 29.4% YoY). Read on for a complete analysis of MAHINDRA HOLIDAYS's quarterly results.

THE INDIAN HOTELS Announces Quarterly Results (4QFY20); Net Profit Down 42.9% (Quarterly Result Update)

Jun 11, 2020 | Updated on Jun 11, 2020

For the quarter ended March 2020, THE INDIAN HOTELS has posted a net profit of Rs 668 m (down 42.9% YoY). Sales on the other hand came in at Rs 11 bn (down 14.6% YoY). Read on for a complete analysis of THE INDIAN HOTELS's quarterly results.

Chalet Hotels IPO: Should You Bet on This High-End Hotel Chain Owner? (IPO)

Jan 29, 2019

Should you subscribe to the IPO of Chalet Hotels Ltd?

More Views on News

Most Popular

Time to Book Profits in Pharma Stocks (Fast Profits Daily)

Jan 15, 2021

In this video, I'll show you why it might be the right time to take money of the table in pharma stocks.

Smallcap Stocks: Your Best Bet for 2021 and Beyond (Profit Hunter)

Jan 15, 2021

The pandemic failed to thwart Richa's investing success formula for 2020.

One Chart to See Before You Sell (Fast Profits Daily)

Jan 22, 2021

In this video, I'll show you a crucial chart that you need to check before you decide to sell any stock or index.

Invest in the Multibaggers of 2021 and Beyond (Profit Hunter)

Jan 21, 2021

Our ace stock picker is ready to capitalise on a big growth opportunity.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms