BackHotel sector to see longer troughs
Rise in inventory, inflation and a seasonally weak quarter ahead will further hit the profitability of luxury hotel chains
Premium(Abhijit Bhatlekar/Mint)
The trend in foreign tourist arrivals into the country from January to August this year shows a growth of 3.6%, well below the growth rate of 6.2% over the same period last year. Further, depreciation of the rupee has not led to elevated levels of foreign exchange earnings from the hotels sector—the growth rate for the same period is at 14% compared with 23.7% a year back.
This implies lower occupancy rates in luxury hotel chains. The slowdown has led to contraction in business travel, as seen by falling occupancy rates in the business destinations such as Mumbai, National Capital Region, Hyderabad, Bangalore, Pune, Chennai and Hyderabad. Given the situation of oversupply of hotel rooms, revenue per average room is also very low. This along with inflationary pressures and a seasonally weak quarter ahead will hit profitability further. Business and leisure destination occupancies hovered around 56% and 46%, respectively, during the June quarter, showing no improvement from the year-ago period.
A report by ICRA Ltd says, “The industry margins in the September quarter are likely to ebb to 7-8%—lowest in five years."
The institution’s analysis of eight key cities in the country indicates an inventory of 50,600 rooms in the premium space, most of it in Mumbai and the national capital region. The outlook is bleak as the expected 16% rise in inventory will deter any meaningful room tariff hike.
This will mean the industry down-cycle is likely to be prolonged for about five years compared with the earlier trend when there was a 1-2 year-low and a 5-6 year-high.
What could bring cheer to the sector especially in the leisure destinations is an uptick in foreign tourist arrivals. This could happen from the December quarter, given that it is a relatively stronger quarter for tourism in India and this time round, foreigners would have a currency edge, too.
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