Demand momentum remains favourable for hotel industry

The Indian hotel industry is expected to report a 7-9 per cent revenue growth in FY2025, over the 19 per cent growth in FY2024. Sustenance of domestic leisure travel, demand from meetings, incentives, conferences and exhibitions (MICE) including weddings and business travel (despite a temporary lull during the election period) are likely to drive demand in FY2025. Spiritual tourism and Tier II cities are also expected to contribute meaningfully in FY2025. Domestic tourism has been the prime demand driver in FY2024 and is likely to remain so in the near term. Foreign Tourist Arrivals (FTA) are yet to recover to pre-Covid levels and the improvement would depend on the global macroeconomic environment.  

The Pan-India premium hotel occupancy is estimated to touch decadal highs of ~70-72 per cent in FY2025, after a healthy FY2024. The Pan-India premium hotel average room rates (ARRs) are expected to rise to Rs 7,800-8,000 in FY2025 (up 8 per cent YoY). The revenue per available room (RevPAR) is expected to have been at an 8-12 per cent discount to the FY2008 peak in FY2024. It is expected to inch towards the FY2008 level in FY2025. The spike in ARRs in some hotels and specific pockets, however, has been higher than the average, with a few outliers crossing the FY2008 peak in FY2024.

Demand is expected to remain strong across markets in FY2025 as consumer sentiments continue to be healthy and corporate performance is stable. Hotel-specific demand would, however, depend on location, competition and other property-related dynamics. Mumbai and NCR, being gateway cities, are likely to report occupancy north of 75 per cent in FY2025, benefitting from transient passengers, business travellers and MICE events. The ARRs would witness a healthy YoY increase in FY2025 across markets. This sharp rise in ARRs of premium hotels also resulted in the spillover of demand to mid-scale hotels.

The demand outlook over the medium term remains healthy, supported by a confluence of factors, including improvement in infrastructure and air connectivity, favourable demographics and anticipated growth in large-scale MICE events with the opening of multiple new convention centres in the last few years, among others. The healthy demand amid relatively lower supply would lead to higher ARRs. Several hotels are also undergoing renovation, refurbishment and upgradation, and this is likely to support the ARRs further, going forward. Larger players would also benefit from revenues / share of profits generated from hotel expansions through management contracts and operating leases.  

Source: ICRA Research; data captures premium supply in 12 Indian cities (Mumbai, NCR, Chennai, Pune, Hyderabad, Bengaluru, Goa, Kolkata, Chandigarh, Jaipur, Ahmedabad and Visakhapatnam)

Sustenance of a large part of the cost-rationalisation measures undertaken during the Covid period, along with operating leverage benefits, has resulted in the sharp expansion in margins compared to pre-Covid levels. The staff-to-room ratio remains ~15-20 per cent lower than the pre-Covid levels. Companies have increased their usage of renewable power while pass-through of the cost inflation and strict control on fixed cost increase have helped support margins. Asset-light expansions have been margin-accretive for larger hotel chains. ICRA’s sample set comprising 12 large hotel companies are expected to report strong operating margins of 31-33 per cent for FY2025, flattish vis-à-vis FY2024 and significantly higher than the pre-Covid 20-22 per cent. However, within the sample set, it is likely to be a mixed bag, depending to a certain extent on renovations and increase in employee expenses amidst growing demand. De-leveraging of balance sheets has led to lower interest costs and is likely to support net margins.  

The uptick in earnings and cash flows would support the capital structure going forward. Debt metrics have been better than pre-Covid levels in FY2024 and are likely to improve further in FY2025. The extent of improvement in return on capital employed (RoCE) would, however, depend on the expansion strategy and could be constrained by the high capital cost of new properties owing to increased land and construction costs, in case of asset-heavy expansion. The healthy business accruals have also led to improvement in credit profiles in several companies, resulting in upgrades significantly exceeding downgrades in FY2023, FY2024 and 4M FY2025.  

The healthy demand uptick has resulted in a pick-up in supply announcements and the commencement of deferred projects in the last 24-30 months. Several global brands have made their entry into India. However, supply, which is expected to grow at a CAGR of 4.5-5 per cent over the medium term, would lag demand. Compared to the downcycle in FY2009, which saw untimely supply increases of over 15 per cent of the inventory at the bottom of the cycle during FY2009-2013, the current low inventory growth is expected to support the upcycle, as demand improves over the medium term. A large part of the new supply is through management contracts and operating leases. Land availability issues currently constrain supply addition in the premium micro-markets in metros and larger cities. The addition to premium hotel supply in these areas is largely on account of rebranding or property upgradation and the greenfield projects are largely in the suburbs. Sizeable supply announcements are seen in tier-II leisure, business, and religious destinations. There is also an increase in per room construction cost by 20-25 per cent, with cost inflation, compared to the pre-Covid levels.

Author Bio: Vinutaa S is Vice President & Sector Head - Corporate Ratings, ICRA Limited.

Vinutaa S

Guest Author The author is Assistant Vice President and Sector Head of Corporate Ratings at ICRA Limited.