Hotels: Occupancy improves but higher room rates key for margins
Most ingredients are in place for a better future earnings trajectory in premium hotel chains. What could improve growth rates though is a sharp rise in average room rates that have been stymied for many years.
The hallmark of improving prospects for premium hotels—foreign tourist arrivals (FTAs) into the country, has been robust since December. Save for some seasonal dips, monthly FTAs grew in double-digits year-on-year for most part of the year.
A usually weaker July portrayed a 7.4% year-on-year rise, which was preceded by robust 23.5%, 19.5% and 22.5% increases in the months of April, May and June, respectively.
Besides, occupancy rates (ORs) have inched up to around 63% in the premium hotels category, although it is higher for budget properties. Propelling ORs is higher demand for rooms. This stems from both FTAs and improving domestic travel. The rising use of hotels for MICE (business meetings, incentives, conferences and exhibitions) is the new mix that supports demand, in the absence of leisure travel.
Indeed, demonetisation and the goods and services tax pulled back domestic travel that hurt the fortunes of hotels temporarily. Yet, while revenue growth for the June quarter was subdued, hotels in the listed domain managed to maintain operating margins by trimming costs.
That apart, a time correction in supply, as big names in the hotel industry cut back expansion plans since fiscal year 2013 (FY13), should improve ORs in the quarters ahead.
“ICRA’s premium room inventory database across the country indicates 4.4% compounded annual growth in supply during the period FY2017-FY2020; the expected growth is lower than the supply addition witnessed in the last six to seven years,” said Subrata Ray, senior group vice-president (corporate sector ratings) at Icra Ltd.
Meanwhile, analysts peg ORs at 67-70% over the next three years—up by about 400 basis points from current levels. Consequently, room tariffs should rise at a better pace than the 2-3% seen in the last 12-18 months. This in turn should improve RevPAR (revenue earned per available room)—a key ingredient in determining operating margins of hotels.
It is known that profits of leading premium hotel chains like EIH Ltd, Indian Hotels Co. Ltd and Hotel Leelaventure Ltd plunged with every passing quarter between FY12 and FY15 as room rates failed to improve with falling ORs, as a result of overcapacity. Stock price movements have been erratic on the back of unstable profitability and high interest costs that eat into profits earned.
Prospects have improved since then. In spite of subdued single-digit revenue growth across most premium hotel chains, cost-cutting and sustained room rates translated into a year-on-year growth in the June quarter operating margins.
EIH chairman P.R.S. Oberoi conveyed this optimism at the company’s annual general meeting last week. With gross domestic product growth forecasts at 7.5% per annum over the next five years and with limited rooms under construction, the hotel industry will benefit through higher ORs and room rates, said Oberoi.