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In October, foreign tourist arrivals in India grew by a minimal 1.7% over a year ago. Photo: Bloomberg
In October, foreign tourist arrivals in India grew by a minimal 1.7% over a year ago. Photo: Bloomberg

No room for optimism in hotels sector

With excess room capacity in India and a moderate 4-5% growth in international tourism, it is clear that hotels still have a long way to go before a recovery

In October, foreign tourist arrivals (FTAs) in India grew by a minimal 1.7% over a year ago. For the nine months between January and October, FTAs were 4.3% higher—far lower than the 11.4% growth in the year-ago period.

Taken together with the excess room capacity in the country and the moderate 4-5% growth seen in international travel and tourism, it is clear that hotels still have a long way to go before a recovery.

A slower-than-expected revival in the global economy and political tensions across most parts of the globe justify subdued FTA growth for the next few months. Industry experts say there is not much traction from the European region, which accounts for nearly two-thirds of the foreign tourists coming to India.

An investor presentation by Indian Hotels Co. Ltd (IHCL) following the September quarter results brings out the underlying stress in the sector. It says that supply of hotel rooms from April to September 2015 rose by 4.1%. Although demand grew by 11.1% during the same period, the supply-demand gap is significant enough in most cities to impact occupancy rates (ORs) and average room rates (ARRs).

Analysts say that while ORs have improved in key metro cities due to higher business and leisure travel, ARRs are sticky. In this context, the rise in operating performance of some hotels firms like IHCL, East India Hotels Ltd and even Hotel Leela Ventures Ltd in spite of low single-digit revenue growth is commendable.

Even so, this will not inspire investor confidence, as most hotel companies are debt-laden. Interest cost to sales remains high, though sporadic dips are seen, if and when some hotel firms reduce debt either through strategic asset sales or funds raised. No wonder, hotel stocks have remained out of favour among retail equity investors for a long time.

Further, a September 2015 report by Icra Ltd pointed out that after subdued capacity addition of 4% in 2014-15, the ramp-up would be far higher at 12% and 13% in the next two years. This would weigh down on ARRs and perhaps even on ORs, unless there is a huge growth in tourism.

The writer does not own shares in the above-mentioned companies.

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