Indian Hotels Industry Report - Hotels Sector Research & Analysis in India - Equitymaster

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Hotels Sector Analysis Report 

[Key Points | Financial Year '17 | Prospects | Sector Do's and dont's]

  • Tourism has now become a significant industry in India. It is a sun rise industry, an employment generator, a significant source of foreign exchange for the country. Tourism in India is the third largest foreign exchange earner of the country. The booming tourism industry has had a cascading effect on the hospitality sector with an increase in the occupancy ratios and average room rates.
  • As per world travel and tourism Council (WTTC), India is one of the favorite tourist destinations from the year 2009 and will continue to be one of the favorite till 2018. Further, the Travel and Tourism Competitiveness Report by World Economic Forum, has ranked India at the sixth place in tourism and hospitality.
  • The tourism and hospitality sector is among the top 10 sectors in India to attract the highest Foreign Direct Investment (FDI). According to the data released by Department of Industrial Policy and Promotion (DIPP), the hotel and tourism sector attracted around US$ 10.6 billion of FDI between April 2000 and September 2017.
  • The Indian government has also taken several steps to make India a global tourism hub. The government has initiated ‘Project Mausam’ under which it has proposed to establish cross cultural linkages and to revive historic maritime cultural and economic ties with 39 Indian Ocean countries. Further, since April 2017, the e-tourist visa facility has been made available to citizen 161 countries. The government has introduced e-Tourist Visa (e-TV) for 161 countries as against the earlier coverage of 113 countries (source: Ministry of Tourism).
  • The hotel industry in India thrives largely due to the growth in tourism and travel. Due to the increase in tourism with rising foreign and domestic tourists, hotel sector is bound to grow. There is an emergence of budget hotels in India to cater to much of the population who seek affordable stay. International companies are also increasingly looking at setting up such hotels. Imbalance in increase in tourists both domestic and foreign not been supported with equal number of rooms is a latent source of opportunity for growth.

How to Research the Hotels Sector (Key Points)

  • Supply
  • It is expected that the hotels industry is expected to fall short of meeting the long term demands of an economy growing at about 7% p.a. Regarding the supply from foreign nations, around 40 international brands are said to enter the country in the next five years (as per Cygnus estimates).
  • Demand
  • Largely depends on business travelers but tourist traffic is also on the rise. Also, there is seen an increasing demand for medical tourism. Demand normally spurts in the peak season between November and March.
  • Barriers to entry
  • Economic risks, high capital costs, competition in the industry, poor infrastructure facilities and scarcity of land.
  • Bargaining power of suppliers
  • Limited due to higher competition, especially in metros.
  • Bargaining power of customers
  • Higher in metros due to increasing room supply.
  • Competition
  • Intense in metros, slowly picking up in tier-2 and tier-3 cities. Competition has picked up due to the entry of foreign hotel chains. Also, there is an increasing competition from the startups/online industry due to the increasing penetration of the internet.

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Financial Year '17

  • The international travel and tourism industry continues to be one of the largest global industries and a major engine of economic growth. At present, 1 in every 11 people worldwide are employed by the tourism sector, with the direct contribution of travel and tourism to GDP US$ 2,306 billion (3.1% of total GDP) in 2016.
  • The Indian hospitality industry has been instrumental in contributing to the nation’s economic growth. This trend is expected to continue especially with the introduction of e-visa for foreign tourists and with the domestic economy improving, there are clear signs of increased domestic travel. The growth rate in room demand (about 6%) has been consistently outpacing the supply (about 3%) growth in India for the past few years.
  • As per a report by World Economic Forum (WEF), India was ranked 12th in the Asia Pacific region and 55th overall in the list of the world’s attractive destinations. Further, India ranked 3rd among 184 countries in terms of travel & tourism’s total contribution to GDP in 2016.
  • As per the most recent data, the number of Foreign Tourist Arrivals (FTAs) in November 2017 were 1,005,000 as compared to FTAs of 878,000 in November 2016 and 816,000 in November 2015. The growth rate in FTAs in November, 2017 over November 2016 was 14.4%. Further, Foreign Exchange Earnings (FEEs) from tourism increased 21.6% YoY to US$ 2.6 billion in November 2017 (source: Ministry of Tourism).
  • As per the Ministry of Tourism, In November 2017, a total of 214,000 foreign tourists arrived on e-Tourist Visa, in comparison with 137,000 foreign tourists in October 2016, registering a growth of 56.2% over previous year. The growth here was attributable to the introduction of e-TV for 161 countries from 113 countries earlier.
  • Domestic travel spending also witnessed impetus, attributing 76.8% to the direct Travel & Tourism GDP. The appreciation of the US dollar has made international travel unattractive to many who are now seeking to travel within the country for holidays.
  • Amongst the Emerging Market and Developing Economies, China’s economic growth in 2016 stood at 6.7% while Indian economy grew at 6.8%. There was a drop in India’s growth from the original forecast due to the short-term impact of demonetisation in November 2016.
  • The Union Cabinet has approved a MoU between India and South Africa, aimed at expanding bilateral cooperation in the tourism sector through exchange of information and data, establishing exchange programmes and increasing investments in the tourism and hospitality sector. 2017 has also been announced as the India – U.S. Travel and Tourism Partnership Year allowing both governments and private sectors to increase travel and tourism between the two countries.
  • In the Union Budget 2017-18, the government has proposed to establish five special tourism zones, and increase the focus towards rural infrastructure development and introduction of bio-toilets. Under Budget 2017-18, the government allotted US$ 142.8 million for Integrated development of tourist circuits under Swadesh Darshan scheme.
  • Further, US$ 14.8 million was allocated for promotion & publicity of various programmes & schemes of the Tourism ministry.

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  • In the long term, the demand-supply gap in India is very real and that there is need for more hotels. The shortage is especially true within the budget hotels and the mid-market hotels segment. There is an urgent need for budget and mid-market hotels in the country as travelers look for safe and affordable accommodation. Various domestic and international brands have made significant inroads into this space and more are expected to follow as the potential for this segment of hotels becomes more obvious.
  • As per a report by ICRA, the revenue growth for the Indian hotel industry is expected to improve to 6-7% in FY18, despite growth prospects being scaled down from the earlier 8-10%, constrained by the regulatory hurdles the industry is currently facing. The growth is expected to come from the rise in online bookings. Hotel bookings is one of the least penetrated segments in the travel categories in India.
  • With a rise in online competition, popular models have come up with online travel agents (OTAs) offering a single marketplace for all travel-related needs. There are also seen meta search engines like TripAdvisor and MakeMyTrip, that operate like travel discovery platforms. Further, online accommodation reservation services like Oyo Rooms have gained popularity. Apart from this, branded hotels are seen operating direct bookings through their websites.
  • Apart from the above, the Indian government has realised the country's potential in the tourism industry and has taken several steps to make India a global tourism hub. The “Clean India” campaign and development of inland waterways for transport and tourism are projects that have gained momentum over the previous year. Additionally, programmes such as “Make in India” and the “Smart Cities” initiative have highlighted the Government’s support to skill development and investments in Hospitality and Tourism.
  • Apart from the above initiatives, the government has proactively sought foreign investment from countries such as China, the United States and Japan, leading to an increase of business related travel to the country.
  • It should be noted that that the base for tourism in India is still very low. The spurt in demand for hotel accommodation over the last few years has inflated hotel rooms in the country. However, a number of international brands across all hotel segments are planning to or have recently entered the Indian market. Furthermore, domestic hotel chains, too, are embarking on strong expansion and development plans across all hotel segments.
  • India, after China, is considered as one of the most lucrative hotel markets in the world and has the second largest construction pipeline in Asia. Growing affluence, potential for economic growth, increases in disposable incomes and the burgeoning middle class are expected to drive both leisure and business travel in the coming years.
  • The long-term outlook for the Indian hospitality business continues to be positive, both for the business and leisure segments. The sector has potential for growth on the back of increases in disposable incomes, increase in foreign tourist arrivals, momentum from government-led initiatives, and the burgeoning middle-class population.

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