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Net revenue for Indian Hotels and EIH was unchanged from a year ago. Photo: Hindustan Times (Hindustan Times)
Net revenue for Indian Hotels and EIH was unchanged from a year ago. Photo: Hindustan Times
(Hindustan Times)

No comfort zone for hotels

Poor demand, untimely capacity addition resulted in oversupply hindering increase in rates, which in turn hit revenue

The March quarter, seasonally the best for hotels, was far from cushy for luxury chains. Poor demand for rooms from both the luxury and business segments and an untimely addition to room capacity resulted in oversupply. This hindered increase in rates. Net revenue for Indian Hotels Co. Ltd (IHCL) and EIH Ltd was unchanged from a year ago. Only Hotel Leela Venture Ltd posted a 16% growth, with some accretion coming from its new property in Chennai.

An investor presentation made by Indian Hotels portrays a dull picture for the near term. A 24% increase in supply during the year ended 31 March versus a 21% increase in demand has put pressure on occupancy rates. “Revenue per available room (RevPAR) declined for the Indian hospitality industry during 2012-13 compared with the previous year," it says in the presentation.

Barring in Goa, occupancy rates across the country, which had shown an improvement during fiscal 2012, again turned sluggish in 2013. Average room rates, too, declined year-on-year throughout fiscal 2013 and across cities except Goa.

Additional rooms also translate into higher overheads. Hotel Leela’s operating margin was significantly down at 18%, much lower than expectations on the Street, mainly due to an increase in operating costs. IHCL and EIH were able to improve profitability marginally through tight cost-control measures and by improving the revenue from food and beverages, too. Further, Hotel Leela continues to reel under high debt—its interest outflow was higher compared with a year ago.

Naturally, the sector has fallen out of investor fancy. Besides, the outlook is uncertain, too. Foreign tourist arrivals (FTA), a key determinant of the health of the hospitality industry, rose by a meagre 2.3% in the March quarter over the year-ago period, compared with a growth of 9.4% a year ago and 10.8% in the March 2011 quarter. Flow of tourists from the US, the UK and Europe has fallen and fiscal 2013 showed a higher percentage of Chinese arrivals.

Stocks of hotels have languished for almost five years, underperforming most benchmark indices. “The sector will see more pain as additional room capacity has to be absorbed by higher occupancy rates. Only then will the average room rates improve enough to cover costs," said Rashesh Shah of ICICI Securities Ltd. Improvement in operating margins seems far-fetched at this juncture.

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