Graphic: Naveen Kumar Saini/Mint
Graphic: Naveen Kumar Saini/Mint

Favourable demand-supply dynamics to spice up hotels after prolonged lull

  • Supply of rooms will grow 5% over the next five years, compared with a 6.7% expansion in demand, say analysts
  • Government reforms and structural changes are set to improve the demand-supply equation for hotels

In spite of the recent rally in Indian equity indices, shares of hotel companies have hardly shown promise. In October, shares of leading hotel chains, such as Indian Hotels Co. Ltd, EIH Ltd, Taj GVK Hotels Ltd and Hotel Leela Ventures Ltd, have fallen by 8-10% with a few exceptions like Chalet Hotels Ltd and Lemon Tree Hotels Ltd.

However, the fundamentals are turning favourable now. Government reforms and structural changes are set to improve the demand-supply equation for hotels. This is sure to translate into a sustained ramp up in room revenue, which has been languishing since 2008. With low supply of rooms and improvement in demand, analysts said the occupancy rates (ORs) will only nudge higher from the current levels. In its detailed report on the hotel sector, ICICI Direct Research projected average ORs to increase from 67.5% in FY19 to 73% by FY23. This is good news given that hotel ORs have been sticky at 65-67% over the last three to four years, barring a few spurts during the holiday seasons.

The turning point, after nearly a decade of slowdown, what with poor occupancy, weak revenue and high indebtedness, is the dip in supply of new rooms. Analysts’ consensus is that supply will grow 5% over the next three to five years, compared to a demand expansion of 6-7%.

Recall that the sector had tripped on its own overestimation when it had added rooms at a compounded annual growth rate (CAGR) of 9% between FY10 and FY19.

The demand outlook for hotels has brightened due to several government initiatives. Analysts reckoned that the drastic cut in e-visa fees and goods and services tax (from 28% to 18% for tariff above 7,500/room, and from 18% to 12% for tariff below 7500/room) are likely to make India more attractive compared to its South-East Asian peers. This should spur foreign tourist arrivals, which grew at a meagre 2.1% from the year-ago period, compared to 5.7% y-o-y growth in 2018.

Industry experts and analysts were hopeful that the forthcoming tourist season (December to February) will see a revival in hotel revenue. A Care Ratings report estimates 3.5-4.5% per annum growth in average room rates. “Accordingly, the hotel industry is expected to see an increase in room revenue at the rate of 10-12% CAGR over the next three years."

That said, the September quarter could be a damper for stock price movement, as it is a lean season for tourism. Also, an additional kicker for revenue growth that comes from business travel, and the meetings and conferences segment, may take a couple of more quarters to revive, given the economic slowdown. The overall gloom in business activity and consumerism is perhaps weighing on investor sentiment, for now.