Recent data on foreign tourism in India seem encouraging for hotels. Foreign tourist arrivals in February were 15.1% higher over a year ago. This was higher than the year-on-year (y-o-y) growth of 9.7% in January.
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These numbers are a barometer of future performance of premium and luxury hotel chains, especially those with properties in metro cities and holiday destinations. Moreover, internal travel, too, has risen as indicated by the aviation ministry.
The hotel industry took longer than the rest of the economy to pull out of the slowdown.
But in the last three months, some leading companies such as The Indian Hotels Co. Ltd, Hotel Leelaventure Ltd and East India Hotels Ltd have shown signs of a recovery.
December quarter revenue of hotel firms was 10-15% higher than a year ago, reflecting the improvement in performance. Revenue growth was driven by two factors—a 5 percentage points y-o-y growth in occupancy rates to 68% and a 5-10% hike in average room rates.
In this backdrop, and also considering that there has been a significant rise in foreign tourist arrivals, financial performance in the March quarter should be good.
However, the balance sheets of most hotel companies are not in good shape. The leverage of most hotels has increased as they added capacity in the last 24 months.
With rising interest rates, the writing is clear on the wall that unless borrowings reduce, high interest costs could suck out profits arising from the strong revenue growth.
This is one reason why hotel stocks have underperformed the BSE-500 Index on the Bombay Stock Exchange since January 2010. East India Hotels’ scrip has shed 37%, Leelaventure stock has declined 28% and The Indian Hotels has fallen 30% during this period.
The need to strengthen the balance sheet is paramount for hotel firms and they are setting about it in their own ways. Leelaventure is monetizing non-core assets or selling land parcels. The Indian Hotels has planned to issue convertible debentures to promoters, thus enhancing equity and reducing leverage. The money raised will be used to retire debt.
Only then can the surge in revenue, driven by higher tourism, translate into improved earnings for the sector.
Graphic by Sandeep Bhatnagar/Mint
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