Hotels: Occupancy up, but operating profit lags

Hotels: Occupancy up, but operating profit lags
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First Published: Sun, Nov 08 2009. 11 57 PM IST

Updated: Sun, Nov 08 2009. 11 57 PM IST
The Indian hotel sector is on the road to recovery, given the uptrend in room occupancy rates, economic activity and marginal tariff revision. Leading hotel stocks have moved up, backed by a marginal improvement in revenue and profit. Yet sustained and robust earnings growth will set in only in fiscal 2011.
What augurs well for the industry is that much of the planned additional capacity for next year has been deferred.
While rating agency Crisil Ltd estimated in 2007 that 14,890 rooms would be added between fiscal 2010 and fiscal 2011, a Morgan Stanley report on the sector states that the estimate is down to less than half at 6,214 rooms. “We believe a large chunk of the supply has been pushed back due to a slowdown in global economies, regulatory and construction delays, high real estate prices and a lack of easy bank credit,” states the report.
This could correct the oversupply situation until demand kicks in and occupancy rates gain momentum. Industry sources suggest that occupancy rates have increased since August from 55% to around 65% in key cities, due to improvement in corporate performance. They will only get better in the next two quarters, as the peak tourism season sets in. Cues could be taken from the increase in year-on-year air traffic during September in the three major airports of Delhi (21%), Mumbai (15%) and Hyderabad (15%).
Given these factors, analysts project occupancy rates to touch 65-75% by the end of fiscal 2010. From October, room rates have also been raised by 10-15% in prime properties, as the peak season for leisure travel in India spans from November to February/March.
The hotel sector was in the doldrums following a global recession, terrorist attacks in Mumbai and the swine flu epidemic. Revenues and profits went downhill consistently from the quarter ended June 2008. After four quarters, the September quarter results have signalled a recovery with a sequential 5-8% expansion in the revenues of leading hotel companies such as Indian Hotels Co. Ltd (IHCL), EIH Ltd and Hotel Leela Ventures Ltd (HLVL). The share prices of IHCL, EIH and HLVL—at around Rs81, Rs126 and Rs36, respectively—have more than doubled from their 52-week lows.
But operating profit expansion has been negligible in the first two quarters of fiscal 2010. The three companies— more so IHCL and HLVL— have high debt levels and interest outflow due to earlier expansions, which will hinder any drastic improvement in earnings in the second half of fiscal 2010. Despite the rise in demand, therefore, it’s unlikely that there’ll be any trigger soon for another rally in this sector.
Write to us at marktomarket@livemint.com
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First Published: Sun, Nov 08 2009. 11 57 PM IST