For the March quarter, luxury hotel chains registered better performance than a year ago. Revenues of both the Indian Hotels Co. Ltd and EIH Ltd grew by around 20% from a year ago, while that of Hotel Leelaventure Ltd grew by about 30%.
Revenue growth was largely driven by the rise in occupancy rates. Key properties in metro cities clocked an increase of above 70% in occupancy rates during the quarter, which gave hotel firms the confidence to increase room tariffs, albeit cautiously. Average room rents (ARRs) were up about 5-10% during the quarter when compared with the year-ago period.
Yet, hotel stocks have lost flavour, underperforming broader market indices since early 2009. Huge capital expenditure in the last few years, followed by recession, has increased their borrowings, with rising interest rates squeezing out profits.
Hence, while asset size of these hotels has grown, ratios that inspire investor confidence—return on equity and return on assets—have dipped in the last two years.
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What could turn the scenario is sustained rise in occupancy rates. A report from Centrum Broking Pvt. Ltd states that historically rising occupancy rates are followed by improved ARRs, which augurs well for the sector.
For now, two factors seem to augur well for luxury hotel chains. One, the June quarter is robust as both inbound and domestic tourist traffic is high. In this context, data on foreign tourist arrivals—the mainstay of income for luxury hotel chains—between January and May showed a 12% rise over the year-ago period.
Two, only two-thirds of the additional capacity scheduled by the industry will be operational by end-2012, which will ease the demand-supply mismatch.
If operational metrics continue to be favourable, then companies such as Indian Hotels, which has consistently reduced debt, will report better profitability. Indian Hotels’ net profit margin was the best in the last 12 quarters. In contrast, Hotel Leela’s debt has burgeoned, taking the debt to equity ratio to about 4.5 and hitting the net profit margin hard.
“The improvement seen in the March quarter is not sufficient to inspire investor confidence. One must see if this gains momentum in the ensuing quarters,” said an analyst from a Mumbai-based broking firm, who did not want to be quoted.
Only then will the hotels be able to rationalize fixed costs and generate higher profits.
Graphic by Yogesh Kumar/Mint