Indian Hotel Industry

Topics: Tourism, Hotel, Financial ratio Pages: 97 (27210 words) Published: March 19, 2009


Since the opening of the market and the rapid economic development, the travel and tourism industry has blossomed. The hotel industry’s fortunes are closely linked to this sector of the economy. But the availability of hotel rooms has not kept pace with the increasing demand. Moreover, as India accounts for only 0.5% of the global tourist trade, there is immense scope for growth. The World Tourism Organization (WTO) expects the Indian tourism industry to grow by 8.8% in the next 10 years. This will need the creation of even larger number of hotel rooms. As there is already a shortage of hotel rooms and this 9% shortfall is likely to be met only by the 1st half of 2009, the sector players will benefit in near term with higher profits. The importance of the sector has already made the GOI increase the allocation to the tourism ministry significantly.

A large middle class of 300 million people with increasing disposable income, cheaper air fares and better connectivity will also increase travel within the country spurring the demand for economy and budget hotels. The booming IT and ITES sectors, MICEs (Meetings, Incentives, Conferences and Exports), and the lure of key leisure destinations including Agra, Goa, Jaipur and Kerala will continue to strengthen the bottom lines of the players. Occupancy rates too have increased by 15% in the last three years to 75% now.

The Indian hotel sector's profitability has increased sharply over the past two years, and we see no let-up on the horizon. India's economic growth is strong, business-tourist traffic is growing at a double-digit clip, business confidence index is at an all-time high, and FDI into the country is rising. The sector is enjoying strong pricing power, which, along with operating leverage, should drive the sector's earnings growth over the next two years. The rupee is also depreciating, which is positive because forex revenues make up 50-60% of the sector's total revenues. A 5% change in the value of the rupee would, on our estimates, alter earnings 7-9%.

There is a mismatch between demand and supply, leading to higher occupancies and average room rates. During 2004-5, revenue per available room in hotels across India increased by 29 per cent over the 2001-02 levels.

Demand will outpace supply in the short to medium term, and ARRs are expected to increase by 13 to 14 per cent annually over the next two years.

TABLE: 1 Supply demand gap in the premium hotels segment (Average of 10 cities)

Room availability16,37817,65618,97622,24723,01024,24624,62025,77327,703

Room demand10,13810,6719,44813,00115,47217,51819,13020,79722,822

Surplus/ Shortage6,2406,9859,5289,2467,5386,7285,4904,9764,881

Increase in room supply1,2781,3203,2717631,2363741,1531,930

Occupancy rate (%) 626050586772788182
Av. Room Rate (Rs)4,2204,0943,8354,0464,3325,2505,9366,772

Note: The data pertains to the cities of Mumbai, Delhi, Chennai, Kolkata, Bangalore, Hyderabad, Pune, Goa, Jaipur and Agra P projection Source: CRIS INFAC

A major reason for the demand for hotel rooms is the underlying boom in the economy, particularly the growth in the information technology enabled services and information technology industries. Rising stock indices and new business opportunities are also attracting foreign institutional investors, funds, equity and venture capitalists.

The overall growth outlook appears to be very buoyant. Growth in demand in 2005, 2006 and 2007 will be 20 per cent year on year. Much of this growth will be driven by the BPO explosion, telecom, IT and energy sectors.

The hotel sector has also got a fillip from the entry of low cost airlines and the open skies policy — which has led to a dramatic...
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