Will hotels lose pricing power amid the gloom in the economy?

Data from the Ministry of Tourism shows FTA (cumulative) from January to May grew a mere 1.8%. This may tell on occupancy rates in the months to come.

After a prolonged slowdown for eight years, occupancy rates in the industry moved up by three percentage points to 69% in FY2019 from the year-ago period, according to data shared by ICRA Ltd. The rating agency added that average room rates expanded 3-4% last fiscal, with the majority of it coming through in the second half of the year. This was the result of demand growth outpacing supply when the prolonged slowdown forced hotels to cut back supply.

But it looks like the party was to be short lived. Weak FTAs and lower domestic travel will take their toll on Q1FY20 performance. Revenue growth may measure up as higher room tariffs are expected to offset any fall in occupancy rates.

However, if the global economic weakness translates into a dull second half, it may drag revenue and profitability. Further, some hotel chains have been scaling up capacity after the optimism seen in FY18 and FY19. If demand fails to keep pace with supply, hotels may lose pricing power.

No wonder, hotel stocks have been highly volatile in recent trading sessions. Shares of leading luxury groups such as Indian Hotels Company Ltd (Taj group) and EIH Ltd (Oberoi group) have fallen 8-9% from end-June levels.