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HomeNewsHotels and ResortsICRA gives a stable outlook to the domestic hotel industry

ICRA gives a stable outlook to the domestic hotel industry

The Indian hotel industry has witnessed a recovery aided by a favorable demand-supply mix over the last 18 months. While demand has ramped up, supply additions have slowed down considerably post the sharp ramp up witnessed during FY08-16, leading to strong recovery in occupancies in almost all key markets in the country.

Nevertheless, given the low occupancy levels, in several cities, the return of pricing power has been relatively modest until the recent past. Average Room Rates (ARRs) have increased by 2-4% annually during the past two years. Return of pricing power across key markets would be more evident from the next rate cycle in Jan’19. Industry revenue growth of about ~5% (adjusted for some property closures for renovation) during FY2018 has been aided by the recovery in occupancy and ARR and increase in F&B income. While ARR’s have started recovering, sub inflationary growth, coupled with increase in employee and consumable costs, have capped margin expansions.

Overall, while demand prospects are robust however, headwinds from weaker than expected corporate performance/economic growth; lower growth in foreign tourist arrivals (FTA), in line with the decline in International Tourist Arrivals (ITAs) growth rate, weakness in the global macro-economic conditions and country specific concerns on India (pollution advisories against India, floods in Kerala) could throw up negative surprises.

Aided by a muted supply pipeline, and robust domestic travel, a ~5-6 per cent growth in RevPARs during FY2019 is likely, driven by ARR and occupancy improvement and; the RevPARs for FY2019 are likely to be the highest since FY2012. ICRA’s sample for the industry witnessed strong uptrend in revenues during Q2FY2019, with quarterly growth at 28-quarter high. While the base impact (weak Q2 FY2018 due to the GST rollout, demonetisation, liquor ban etc) has bumped up growth, reopening of a few hotels (Oberoi, New Delhi), growth in RevPAR, F&B income and new openings have also supported revenue growth.

Given the pickup in RevPARs and the prospects, ICRA expects revenue growth (for the industry sample) of a strong 10-12 per cent for FY2019. Despite the higher than anticipated growth, margin expansions have been relatively muted in H1FY2019; margins are likely to expand to 21-21.5 per cent during FY2019 from 19.7 per cent during FY2018. While debt reduction measures undertaken by certain large industry participants has resulted in sizeable reduction in leverage levels as of March 31, 2018, the Return on capital employed (RoCE), though improving, remains below cost of capital.

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