Why robust tourism numbers are yet to spice up the hotel sector

Only if growth in tourism and passenger traffic continues at the current pace and translates into a sustained revenue growth for hotels will it spice up their operating performance

Vatsala Kamat
Updated24 Nov 2017, 07:27 AM IST
The September quarter performance, no doubt a seasonally weak quarter for hotels, did little to cheer the Street. Graphic: Naveen Kumar Saini/Mint
The September quarter performance, no doubt a seasonally weak quarter for hotels, did little to cheer the Street. Graphic: Naveen Kumar Saini/Mint

Over the last few months, while data on tourism and travel in the country exudes optimism, hotel revenue and profits continue to disappoint.

The latest available data for October shows that foreign tourist arrivals (FTA), a gauge of tourism in the country, shot up by 18.1% year-on-year (y-o-y), a huge jump compared to 8.6% growth in October 2016. More impressive is the 15.8% y-o-y growth in FTA between January and October, compared to 9.6% during the same period last year.

This aside, even domestic air passenger growth in October jumped to 20% plus, with revenue passenger kilometres (RPK) also rising substantially.

So, ideally rising domestic travel and inbound tourism together should culminate in performance by the hotel sector. Why then are the stocks of premium hotel chains in the listed realm still languishing? The September quarter performance, no doubt a seasonally weak quarter for hotels, did little to cheer the Street. The average occupancy rates (see Chart) have certainly moved up from two years ago, but are still hovering below 70% for both business and leisure destinations. Average room rates are also stuck at the year-ago levels.

EIH Ltd failed to meet investor expectations on all counts, recording low single-digit operating margin and a net profit that was half that of the year-ago period. As for Indian Hotels Corp. Ltd (Taj), domestic standalone revenue was down year-on-year, although the pain in international operations was far greater. Even Taj GVK Hotels Ltd, which has been a victim of the political uncertainty in the Telangana belt, staged a dull show.

Add to this the fact that most hotels are reeling under a high debt burden. The interest expense incurred would keep eroding profits.

That said, the scenario is far better than a year ago in some ways. According to ICICI Securities Ltd, “the demand growth of 6.4% in FY2017 outpaced that of supply at 3.2%.” Even the average occupancy therefore has held out at marginally higher levels.

Given the positive outlook, some hotel stocks such as EIH moved up from their lows. However, they slackened again on account of weak performance in the last two quarters. Only if growth in tourism and passenger traffic continues at the current pace and translates into a sustained revenue growth for hotels will it spice up their operating performance. For now, there is hope that the second half of FY2018, which is seasonally a better half, would be brighter for investors.

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First Published:24 Nov 2017, 07:27 AM IST
Homemarketmark-to-marketWhy robust tourism numbers are yet to spice up the hotel sector

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