Hotel sector to feel the heat of slowdown as tourist arrivals moderate

Stocks of top hotel companies rose on Wednesday following news reports of a possible cut in goods and services tax (GST) for high-end tariffs. Will the euphoria last?

In a fortnight from now, company results will start trickling in. Dull prospects for the historically weak September quarter may dampen investor sentiment.

Rashesh Shah, analyst, ICICI Securities Ltd, said: “The general slowdown in the economy, along with the ongoing monsoon, will negatively impact occupancy levels in hotels in the medium term.”

The domestic slowdown has prompted most core sectors, facing falling sales and profits, to implement cost-cutting measures.

In addition to this, the year has seen the aviation industry, which offers significant patronage to premium hotels, suffer losses, and even closure. This has, and may continue to, hurt business travel in the near term.

Meanwhile, data on foreign tourist arrivals (FTA) from the ministry of tourism has not been encouraging.

Between January and July, FTA grew by about 2.1% from the year-ago period, compared to 5.7% y-o-y growth in 2018.

Hence, occupancy rates in the premium segment may dip in the September quarter.

In the last two comparable quarters of 2018 and 2017, occupancy rates had hovered at 67-68%. Stable occupancy had helped hotels to raise average room rates in end-2018 and early-2019.

Lower utilization of hotel rooms does not augur well for room rates, which, in turn, would drag down profitability. In this context, the 10% GST rate cut expected for room tariffs of ₹7,500 and above may bring some relief, as it could bolster demand for premium segment hotels. No wonder, shares of Indian Hotels Co. Ltd (IHCL) and Hotel Leela Venture Ltd rose by 3.9% and 4.2%, respectively on Wednesday. Stocks of other hotels, such as Taj GVK Hotels and Resorts Ltd, and Royal Orchid Hotels Ltd also rose sharply.

“The recent measures announced by the government, such as lowering e-visa fees (80-90%), development of specific tourist circuits, along with parallel infrastructure development, can support growth in the long run,” added Shah.

Be that as it may, the long-term story of hotels depends on the health of the economy. At present, the unprecedented fall in gross domestic product growth, in spite of lower interest rates, only signals more pain ahead. Forecasts show that global tourism would be impacted adversely by the economic slowdown and geopolitical tensions.

The listed universe in the hotel sector posted a mixed bag of results, with leading luxury chains such as EIH Ltd and IHCL disappointing investors. The September quarter, too, is unlikely to improve sentiment among investors.