Hotels set for 11-13% revenue growth next fiscal on a high base

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With consistent domestic demand and a rise in demand from foreign travelers, the hotel industry in India is expected to grow at a healthy rate of 11–13% in the upcoming fiscal year, following a robust 15–17% growth in the previous fiscal year. The industry’s operating performance will remain robust in the near future due to the robust demand dynamics and moderate new supply.

The industry’s profitability is expected to benefit from the robust operating performance, as evidenced by the earnings before interest, taxes, and depreciation (Ebitda) continuing to rise during the current and upcoming fiscal years. This will maintain strong credit profiles, as will minimal capital expenditure. This is supported by a CRISIL Ratings analysis of branded hotel chains with about 70,000 rooms in various categories.

Anand Kulkarni, Director, CRISIL Ratings says, “The domestic travel demand, which remained a key driver this fiscal, will sustain next fiscal as well. This momentum will be supported by healthy economic activity which drives business demand and continuing leisure travel demand which reinvigorated post the pandemic. While the demand will remain strong, the growth rate is expected to taper off next fiscal due to high base. Consequently, the average room rates (ARRs) are expected to grow 5-7% next fiscal against 10-12% this fiscal and the occupancy is expected to remain healthy at current levels of 73-74%.”

Even though they increased this fiscal year, foreign visitor arrivals in India are predicted to stay about 10% below pre-pandemic levels. A rebound in these numbers is expected to boost hotel demand the following fiscal year. In addition to the previously mentioned variables, corporate activity following the pandemic-induced pause is expected to sustain demand in the MICE (meetings, incentives, conventions, and events) sector. A favorable supply situation is another important factor contributing to the industry’s strong performance, along with demand.

Nitin Kansal, Director, CRISIL Ratings says, “Greenfield capex is expected to remain muted with the new room addition remaining at 4-5% per fiscal over the next couple of years. While the demand rebound has boosted the industry sentiments, the cost dynamics still remain a constraining factor for new capex. High land costs, sizeable increase in construction costs, long gestation period coupled with cyclicality in the sector is resulting in cautious new capex in the sector. Therefore, brands may keep adding rooms through management contracts, which will limit their upfront capital costs.”

The impact of favorable demand and supply dynamics is also evident in the industry’s operational profitability. As long as operating costs do not rise proportionately, higher profitability usually results from ARR-driven revenue growth. Additionally, during the previous two fiscal years, hotels implemented a number of cost-cutting initiatives, including improved labor planning and optimization of food and beverage expenditures. Operating leverage will help sustain strong operating profitability, at 32–33% over the current and the next fiscal year — similar to the previous fiscal year and approximately 1,000 basis points higher than the pre-pandemic level, even though costs are predicted to rise gradually (annexure 1).

The hotel companies’ credit profiles will keep getting better in this environment. In the upcoming fiscal year, interest coverage is anticipated to increase to approximately 5.5 times and 4.3 times, respectively, from the previous fiscal year’s ~3.2 times. This fiscal year, the debt to EBITDA ratio improved to about 2.2 times, and from about 2.9 times the previous fiscal year, it fell to below 2 times in the following year.

Even though the industry’s components are all well-positioned for long-term, steady growth, it will be interesting to monitor any downturn in the economy and how it affects business travel, particularly internationally.