Profit growth to lag occupancy rates at hospitality firms

Profit growth to lag occupancy rates at hospitality firms

Hotel companies have reason to cheer. The number of foreign tourists coming to India for the winter season rose 8% to 1.8 million in the three months to December, compared with a year ago. Tourist arrivals were up 15% in November alone. The increase in foreign tourists propped up occupancy rates for hotels, which had already improved due to increased domestic leisure and business travel.

Though aggregate industry figures are unavailable, hotel firms such as Indian Hotels Co. Ltd with its Taj brand, EIH Ltd (EIH) with its Oberoi brand and Hotel Leelaventure Ltd in the premium category are expected to record 70% occupancy rates for the quarter, up from about 59% a year-ago and 65% in the previous quarter. Of course, properties in metros where occupancy rates are around 75% or more will buoy the average. Reports suggest that leisure destinations such as Goa, Kovalam and Jaipur, too, registered higher occupancy and average room rates. What this means is higher revenues for hotels, both on a year-on-year (y-o-y) and quarter-on-quarter (q-o-q) basis.

But it may be a while before investors could cheer. Higher occupancy rates have been backed by higher average room rates. After turbulent times, most hotels in leading Indian cities were able to raise room rates by about 10-15%. Besides, the Commonwealth Games during the quarter could have had a one-off positive impact for the quarter for premium hotels. Yet, some analysts feel that higher operating costs will impede profit expansion, as food and beverage costs, and administrative and staff costs have risen.

Perhaps, most large hotels have not passed on the entire cost burden to customers. Hence, operating profit margins could take a beating on a y-o-y basis. Smaller hotel companies such as Kamat Hotels (India) Ltd and Royal Orchid Hotels Ltd, which are Mumbai-centric may report higher operating profit margins on a y-o-y comparison.

Another problem faced by the sector is its capital-intensive nature. Most hotel chains such as Hotel Leela and EIH have added rooms, and as the properties turn operational, interest costs would eat into profits. Analysts estimate lower y-o-y profit for most premium hotels during the December quarter. Not surprising then, that most hotel shares have underperformed the Nifty since the beginning of fiscal 2011, though they have inched up from the abyss they had fallen into, in fiscal 2009.

But there are reasons for continued optimism in the sector. November-February is the peak tourist season. Hotels are expected to raise room rates significantly to improve profitability during this period. An Edelweiss Securities Ltd report says, “In the current tourist season, hotels are looking forward to ORs of 75-80% after a long lull. ARRs are expected to show strong growth and remain buoyant in Q4 as well." ORs are occupancy rates and ARRs are average room rates.

If this plays out, and sustains going forward, it could create positive investor sentiment in the sector.

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