India’s hotels sector is seeing wind in its sales
4 min read . Updated: 23 Feb 2023, 01:28 AM IST
PremiumAir India’s mega order for 470 planes is being seen as a reflection of the economic growth India is likely to see in the coming years
Air India’s mega order for 470 planes is being seen as a reflection of the economic growth India is likely to see in the coming years. It also reflects the growth of another sector closely tied to travel: hotels. And even that is riding a high of sorts. The stock prices of the top four hotel companies by market capitalization—India Hotels (which runs Taj and other brands), EIH (Oberoi), Lemon Tree and Chalet (which has tie-ups with international chains)—have all outperformed the BSE Sensex this year.
In the December 2022 quarter, revenues for each of the four grew at least 50% compared to the same period last year, when concerns around the pandemic were greater. In fact, Lemon Tree and Chalet, which faced quarterly losses during that period, have reported profits in the past three quarters. They feel confident to embark on expansion again. Indian Hotels is looking to open 18 hotels over the next 12 months, and aims to have 300 properties across brands by 2025, against 250 now. EIH plans to add 20 properties over the next five years. Lemon Tree plans to increase its room count from 8,300 to 20,000 in the next five years.
However, such expansion can present its own challenges later. For example, hotel companies saw huge investments from 2002 to 2008—the optimistic phase between the dot-com crisis and the global financial crisis. However, post the financial crisis, occupancy and room rates fell, impacting revenues. Then, as the sector started picking up, the pandemic struck in 2020.
Improving Revenues
When the pandemic hit, India’s hotel industry saw three key metrics plunge: average daily rate (ADR), or what a guest pays for a room per night; occupancy rates, the percentage of rooms that are occupied in a hotel at any given time; and the resulting revenue generated per available room (RevPAR).The industry has consistently improved since on all three. Occupancy rates are rising with the revival of in-person meetings and travel, even though it dropped in October, as business travel fell during the festive season. Average daily rates have jumped by a third between July 2022 and December 2022, according to HVS Anarock, a hospitality consultancy. According to Horwath HTL, another consultancy, ADR crossed ₹6,000 for the first time in 10 years. “This does not mean that current rate structures will prevail at all times—premiums derived will drop if market conditions are less conducive," Horwath warned in a report this month.
Supply Boom
Supply of new rooms has grown. For example, chain-affiliated hotel rooms increased from 23,751 in 2001 to about 160,000 in 2021, according to a recent report by HDFC Securities. This growth was driven by the mid-market and budget segments. As a result, the share of the premium segment fell to 35.5% in December 2021, from 56% in 2001. This trend is expected to persist.
Bengaluru and Mumbai are expected to lead in expansion. Of the proposed supply of about 6,800 branded hotel rooms in Bengaluru, over 51% will be either mid-market or upper mid-market, and 17% will be budget rooms, according to Hotelivate, a consulting firm. India lags behind the rest of the world in room supply. Globally, the penetration of hotel rooms per 1,000 population is 2.7. It’s 2.8 in China and 16 in the US. But in India, it’s only 0.1, indicating huge scope for growth, especially as the country gets richer.
Travel Push
The hotel business is closely linked to the travel business, and demand for travel is getting closer to pre-covid levels. Domestic air travel touched 86% of 2019 levels in 2022, as per International Air Transport Association. Indian Railways’ passenger revenues jumped over 70% on a year-on-year basis in the April 2022-January 2023 period.
“Domestic travel has started witnessing a sustainable uptrend after the pandemic. We believe this uptrend can be very similar to the one witnessed during the 2004-2008 period, which is considered to be the best phase for the Indian hospitality sector," HDFC Securities said. In 2023, India’s G20 presidency and the one-day international men’s cricket World Cup can help. The big question is whether demand can match the industry’s expansion. In that, both airlines and hotels are making a similar bet.
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