Hotel industry to grow 11-13 per cent this fiscal

The industry is expected to report healthy 11-13 per cent revenue growth this fiscal after expanding 15-17 per cent in fiscal 2024, backed by steady domestic travel demand and ramp-up in foreign tourist arrivals. 

Hotel industry has seen a strong resurgence in demand post-pandemic, primarily due to rise in leisure demand with greater appetite for travel and bounce back in economic activity driving corporate travel. However, foreign tourist arrivals, an important segment for branded hotels, remained below pre-pandemic levels till the previous fiscal. 

Let us examine how domestic and foreign travellers are likely to drive occupancy and revenue in hotels going forward.   Domestic travel demand, a key driver in the past two fiscals, will sustain this fiscal as well. Domestic tourist travel fell significantly during the pandemic but crossed pre-pandemic levels in calendar year 2023. It is expected to rise a further ~10 per cent in CY 2024. Business travel, the other driver of domestic travel demand, is maintaining its momentum, supported by healthy economic activity and corporates focussing on return-to-office.

Foreign tourist arrivals are expected to grow ~15 per cent this fiscal, providing a fillip to hotel demand in India. Even until fiscal 2024, this segment lagged, with foreign tourist arrivals remained ~10 per cent below the pre-pandemic level. CRISIL Ratings expects foreign tourist arrivals to increase this fiscal with greater leisure and business travel, driven by development of travel infrastructure and focus on developing India as a preferred global destination.

Apart from the above factors, demand in the meetings, incentives, conventions and events (MICE) segment is also expected to remain healthy since corporates have resumed their activities post the pandemic-induced hiatus. 

The strong demand outlook is reflected in rising average room rates (ARRs) and high occupancy rates. For CRISIL Ratings-covered branded hotel companies, with ~70,000 rooms across categories, the ARRs are expected to grow 5-7 per cent this fiscal against 10-12 per cent in fiscal 2024. Occupancy is expected to remain healthy at the current levels of 73-74 per cent. Though the growth rate is expected to taper next fiscal due to a high base, it will  remain significantly higher than the pre-pandemic levels, when average ARRs and occupancy was ~Rs 7,800 and ~69 per cent, respectively, in fiscal 2019.

In addition to demand, a favourable supply situation is also a critical driver of strong performance. Greenfield capital expenditure (capex) is expected to remain muted, with new room additions at 4-5 per cent per fiscal over the next couple of years. While the demand rebound has boosted industry sentiment, cost dynamics 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. Furthermore, any greenfield capacity addition takes three-four years to come online, resulting in demand outpacing supply in the near term.

The industry’s healthy operating performance is expected to sustain in the near term due to these strong demand dynamics along with modest new supply. Therefore, brands are increasingly looking at asset-light expansion strategies, such as management contract or franchise models, to grow their presence. These will limit their upfront capital costs and increase their presence across geographies.

The effect of conducive demand-supply dynamics is also visible on the industry’s operating profitability. Operating margins increased more than 1,000 basis points (bps) over the pre-pandemic level to ~32 per cent in fiscal 2024.  ARR-driven revenue growth typically translates into better profitability, given that operating costs do not increase proportionately. Also, hotels had taken several cost-efficiency measures, such as better manpower planning and optimisation in food and beverage expenses, in the past two fiscals. While costs are expected to inch up gradually with inflationary pressures and service requirements, operating leverage will help maintain strong operating profitability, at 32-33 per cent over this fiscal. 

The credit profiles of hotel players have improved significantly over the past two fiscals. The trend will continue this fiscal as well, supported by strong growth, higher profitability and improved leverage. The positive industry outlook has spurred investor interest, with hotel players tapping capital markets to raise funds and deleverage their balance sheets. This has led to interest coverage ratio increasing to above five times in fiscal 2025 from 3.3 times in fiscal 2023 and gearing improving to below 0.6 times in the current fiscal compared with ~0.9 times in fiscal 2023.

Though capex spends are expected to rise going forward, healthy cash accrual and prudent funding mix will keep balance sheets healthy.

While all the ingredients for success are poised for sustained growth over the near to medium term, any economic slowdown and its impact on business travel, especially on a global scale, will need to be monitored. n

Author bio: Mohit Makhija, Senior Director, CRISIL Ratings Limited