Historically, foreign tourist arrivals (FTAs) have been a barometer of the state of the luxury hotel chains in the country. But this time it’s been different.
FTAs between January and July rose 10.8% over the year-ago period, in fact higher than 8.2% registered during January-July 2010 over 2009. However, the June quarter results of hotel firms portrayed a mixed trend.
Revenues, although higher than the year before, were lower than expected. Occupancy rates inched up marginally for Indian Hotels Company Ltd, EIH Ltd and Hotel Leelaventure Ltd (HLVL). Mumbai properties scored better, while oversupply in other cities such as New Delhi, Chennai, Hyderabad and Pune hit pricing power of most properties, which in turn dampened pricing power.
Therefore, June quarter average room realizations were flat or marginally lower among leading luxury chains. Further, operating expenses grew hugely, which in some cases such as HLVL hit operating margins.
However, firms such as EIH benefited from improved business in the Mumbai region and marginal presence in other cities. Of the three listed luxury entities, EIH posted the highest (around 21%) year-on-year growth in revenues. Operating margin expanded to about 19% from about 12% a year ago.
One could defend the sector’s June quarter performance on grounds of it being the off-season for tourism. But several factors such as higher food and fuel prices strained corporate profitability in the last two quarters and rising interest rates, unrest in West Asia and delayed recovery in developed markets, which could impact growth in FTAs point to slower recovery in hotel firms’ profitability as most of them invested heavily in expansions during the last three years.
Besides, even though overall revenues were robust in the last two quarters of fiscal 2011, higher costs ate into profit margins. Analysts say that it may take another three to four quarters for the revenues per available room to touch the fiscal 2007-08 levels, which was among the most buoyant periods for the sector.
The stocks of these three luxury chains have toed the trend line of BSE-500 index on the Bombay Stock Exchange in the last six months, posting negative returns.
Rating agency Icra Ltd, in a recent report says, “the current recovery is still in a nascent stage and yet to make the transition from an occupancy-led up-cycle to a more convincing ARR-led recovery”. Investor returns will improve only after that.
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