Hotels record highest brand penetration in a decade, but demand may face challenge

The hotel industry recorded the highest brand penetration at 52 percent in the last decade as of the December quarter of FY24, with 59 new hotels consisting of 4,669 rooms entering the market during the quarter.

In 2023, hotels recorded the highest supply creation, with 14,000 rooms added across 182 hotels, taking the overall chain-affiliated room supply to nearly 183,000 rooms, said Atul Thakkar, Director – Investment Banking, Anand Rathi Advisors Ltd.

Last year, new room supply consisted of an inventory addition of 10,800 rooms at newly-built hotels, 2,600 rooms through the conversion of independent hotels, and 600 rooms through the expansion of existing hotels.

"The positive sentiment in the industry is reflected by a growing pipeline of hotel rooms, estimated at 67,000 additional rooms to open by 2027," Thakkar said. Currently, the total number of branded hotel rooms in India is around 183,000, which is estimated to reach 250,000 in the next three years.

Indian Hotels Company Ltd (IHCL) has a pipeline of 82 hotels and is set to add 11,000 rooms over FY24-26.

In the Q3 FY24 earnings call, the management of IHCL said that it has plans to open four more hotels in Q4 FY24. It has plans to open two hotels in Ayodhya — one property in the next 12 months and another in the next 20 months. The management plans to maintain an average of two hotel openings per month for the next three years.

The company's hotel openings have increased to eight in the December quarter from three in Q2 and five new hotels in Q1 of FY24. In the pipeline, the company has two new brand launches for Tier II and III cities. Analysts noted that the plan to add two new full-service brands at a price point below Rs 10,000 for Tier II and III cities can aid further growth for IHCL.

Samhi Hotels has outlined a pipeline of growth opportunities, including the renovation and rebranding of the existing 301-key Hyatt Regency Pune hotel into a luxury brand hotel managed by Hyatt, slated for completion by September 30, 2025. The hotel chain is also developing a 111-key Holiday Inn Express in Rajarhat, Kolkata, West Bengal, expected to be completed by September 30, 2024. Lemon Tree Hotels, which has a portfolio of 95 hotels with 8,760 rooms, has plans to expand its offerings with an additional 52 hotels and 4,092 rooms. Chalet Hotels is also focusing on inventory expansion and has a target of 5,000 rooms in the coming years.

Lemon Tree's newly launched Aurika, a Mumbai Skycity, in October is a growth driver, with expectations of occupancy increasing from 40 percent in Q3 to 60 percent in the March quarter. This will be further aided by the Miss World event, which will see the occupancy of 100 rooms for 14 days, said Santosh Sinha, analyst at brokerage firm Emkay Global.

The hotel chain's management said that despite a slow period and a large inventory of around 700 rooms, the Aurika filled up quickly.

Demand constraints

While demand currently exceeds supply, which has driven growth in the hospitality sector, there are concerns about lower demand for branded hotels due to lower foreign tourist arrivals (FTAs).

Foreign travellers are considered to be an important customer base for branded hotels. However, FTAs coming to India at 6.19 million in 2022 remain lower than the 2019 level of 10 million.

On the other hand, while the flow of domestic tourists has increased, which has aided the growth of the hospitality industry, their preference for branded properties is lower. It is estimated that only 2 percent of Indian tourists opt for hotels that are part of the organised sector, according to Horwath HTL Consultants, a hospitality consulting brand. Domestic travellers prefer more homestays and less expensive hotels.

Another challenge that some of the hotel chains are seeing is lower demand in major markets. Occupancy in Bengaluru, Gurugram, Hyderabad, and Pune trails pre-COVID levels.

About one-third of Lemon Tree Hotels' inventory is not performing well and is still below the pre-COVID level, especially in the Bengaluru and Pune regions, the company's management said. This is due to their higher dependency on the IT sector, which is experiencing layoffs.

Recovery and growth

A pickup in demand in Bengaluru, Pune, and Hyderabad, driven by the IT sector, will increase the revenue of hotel chains, said Kevin Shah, analyst, Emkay Global.

The impact of lower occupancy in some markets was offset by an increase in room revenue as Bengaluru, Chennai, Delhi, Goa, Hyderabad, and Mumbai displayed strong growth driven by ADR (average daily rate refers to revenue a hotel earns for an occupied room) on the back of sustained demand from corporate travellers.

ADR per room for branded hotels increased by 21.9 percent last year to Rs 7,479 from Rs 6,135 in 2022. ADR recorded 31.5 percent growth from 2020 at Rs 5,684.

Occupancy in branded hotels at 63.6 percent is a tad lower than the 2020 level of 64.5 percent.

On FTAs, Thakkar said that while inflow remains lower than pre-COVID levels, foreign travellers coming to India from January to November 2023 were 17 percent above the corresponding period of the previous year, he said, adding that this creates future demand potential for hotels.

He said that most of the top branded hotels reported double-digit revenue growth in Q3 on the back of domestic demand, a recovery in foreign tourist arrivals, and large global events, including India's presidency of the G20 and sporting events like the cricket World Cup.

The Indian Premier League (IPL), which is expected to start at the end of March, is expected to further accelerate demand momentum, said IHCL.

Thakkar is counting on the growth of the hospitality sector in the temple towns.

"Chain-affiliated supply and use at pilgrim centres have doubled since 2019. Better-quality hotel options have enabled visitors to move away from mediocre independent hotels and other pilgrim facilities. Revenue per available room (RevPAR) for over 100 hotels across several pilgrim centres has risen 38.5 percent since 2019, to Rs 3,200," he said.