Sustained demand momentum is expected to drive double-digit revenue growth for the Indian hotel industry in FY24 and hoteliers expect this growth to come from higher room rates.
"In terms of occupancy we have reached the peak of 80 percent. So there is little scope for growth but in terms of average room rates things are going to be looking up. Our rates are still not at a par with international markets," said Chander Baljee, chairman and managing director of Royal Orchid Hotels.
Pan-India premium hotel average room rates (ARRs) are expected to be at Rs 6,000-6,200 in FY24, said Vinutaa S, vice president and sector head, corporate ratings, ICRA Limited. While occupancy is expected to be at decadal highs, the revenue per available room (RevPAR) is expected to remain at a 20-25 percent discount versus the peak in fiscal 2008.
Baljee highlighted two reasons for increase in room rates: "Due to large exodus of employees in the industry during the Covid years, hotel chains are now giving pay raises to get talent back. We have also given a substantial pay raise to employees keeping in mind the job losses and salary reduction during the Covid years. Also, capital cost is high in India because of land cost and due to regulations. The inability to manage projects properly results in delay in funds which leads to cost escalation."
These factors, he reiterated, will mean that hotels will raise room rates. "The next two years will pan out well with rates going up," he said, adding that hotels in India are either nearing pre-Covid levels of occupancy or have surpassed it after the recovery set in last March.
The Indian hotel industry is expected to report a 13-15 percent revenue growth in FY24, according to ICRA. With the growth in revenue, hotel chains have started adding more properties. However, new hotels will take time to come up, said Baljee. "Companies have started looking at setting up hotels but building a hotel takes a minimum of three years so the demand-supply gap is going to be there for the next three years at least," he said.
The healthy demand uptick resulted in a pick-up in new supply announcements and the commencement of deferred projects over the last six to nine months, said analyst ICRA’s Vinutaa. However, the hotel supply pipeline is expected to grow only at a three-year compound annual growth rate of 3.5-4 percent, adding approximately 15,500 rooms to the pan-India premium inventory of around 94,800 rooms across 12 key cities. She added that the current inventory growth is significantly lower than the growth of approximately 18 percent witnessed between financial years 2009 and 2013.
"India is growing faster versus international markets in the branded hotel space albeit off a low base. We expect more hotels to come under the branded umbrella," said Baljee.
Royal Orchid Hotels also has plans to increase properties not only in India but also abroad. "We have over 85 hotels currently and before September this year we will reach 100 hotels. We are looking at expansion in East and Central India and also some southern states like Andhra Pradesh and Telangana. We are also trying to explore international markets and looking at neighbouring countries like Sri Lanka, Maldives and Thailand. Hopefully, this year we should have some announcement coming up in terms of international expansion. We are close to starting a hotel in Sri Lanka," the chairman said.
Expanding with a focus on asset-light model, Baljee said they do not have any greenfield projects. "We are expanding some properties with banquet halls to cater to wedding demand which contributes 15-20 percent to our overall revenues. There isn't a very large capex (capital expenditure) for expansion. Most of the capex will be internally generated so that we don't get into a debt trap. Each hotel has a Rs 5-10 crore investment and we plan to add 20 hotels in the next two years," he said.
On growth drivers for the hotel industry, Baljee said that India hosting a series of events in various parts of the country as part of its G20 presidency has given a lot of visibility to India. He said that improving road infrastructure is also boosting tourism.
Also, Indians exploring more domestic destinations is a good sign, he said. "There are 26 million tourists from India who go abroad. Now, if even a small percentage of this is not going abroad, our Indian hotels will benefit," he said.