The Indian Hospitality Industry: What can we expect moving forward?

Karan Mahesh Jun 22, 2023

With recap of 2022 performance

For a year that looked quite gloomy at the outset due to the devastating Omicron variant, India’s hotel industry outperformed all expectations in 2022. Even with the low performance of the first quarter, total-year revenue per available room (RevPAR) recovered to 100% of pre-pandemic levels (2019).

Most of the top-line recovery was driven by growth in average daily rate (ADR), as hoteliers took good advantage of a surge in revenge travel which aligned with the decline in COVID-19 cases that began in April 2022.

Since the very beginning of the pandemic, Indian hotels have shown a great degree of resilience in recovery. Although performance declined more drastically with every subsequent wave, recovery too rose more sharply.

STR published a piece earlier this year on why India’s recovery was sustainable, diving deeper into multiple themes around 2022 performance. To briefly explain our analysis in a few points:

2022 performance broke a decade-long trend in occupancy and rates for the country. The months that followed the decline in COVID cases produced a significant uptick in demand (both pent-up and otherwise), which brought along pricing confidence. In December, India recorded its highest year-end ADR since 2008.
Weekdays, weekends, and shoulder days all showed a similar recovery pattern. Although leisure markets led the pack, business markets were above their pre-pandemic levels since April 2022.
Unlike other countries across the globe, where group business has some way to go to reach pre-pandemic levels, India has witnessed a rapid surge in group demand since April 2022 at considerably higher rates than transient business, which is typically not the case anywhere else.
A large contributor to this ADR jump was of course weddings. However, classifying these weddings as “revenge” or “pent-up” is not the best description, as wedding dates across 2023 are almost sold out as well.

Lastly, the most important aspect of sustainable recovery was scale. Luckily for India, there weren’t one or two markets driving recovery for the country. Like the pandemic, recovery also was widespread. Although leisure destinations emerged as absolute winners, typical business-driven markets weren’t far behind by any means. There was a significant amount of business travel that started to come in – largely domestic – since early Q2 2022.

2023: A ‘return to normalcy’

Previously, STR and many industry stakeholders believed this year would be the end of indexing given performance returning back to normal levels. At the same time, while year-over-year percentage change is valuable in spots, it may also not be the best indicator of performance in 2023.

This is largely due to the shift in performance last year, where occupancy and rates broke more than a decade long trend because of surge in demand from Q2 onwards. As a result of higher-than-anticipated levels at that time last time, we need to be okay with seeing year-over-year declines when we compare 2023 against 2022, especially April onwards.

The graphs below show occupancy & ADR bands from 2011 to 2021 as well as a scatter plot of 2022 and year-to-date 2023 monthly numbers. It is quite evident the months in 2023 are likely to be around the same as the grey band behind it, indicating a “return to normalcy,” which is expected.

ADR, however, looks like it is poised to remain above the band, with inflation-adjusted ADR (real ADR) still above that of pre-pandemic levels. The higher-class hotels continue to take advantage of the pricing power that currently exists because of demand.

The only word of caution here is recessionary pressures and other macroeconomic headwinds that may dampen the excitement hoteliers have on gaining the premium to drive profitability. We are witnessing some number of cancellations coming in, especially with larger events, with companies cutting down travel expenses in the face of a possible downturn in the economy.

Another normalcy factor we haven’t observed being so evident in the past couple of years is weekday (Sun-Thu) performance being stronger than that of weekend (Fri-Sat) performance. In the second half of 2020 and 2021 as well as early 2022, we saw weekends performing better than weekdays. Mirroring similar trends across the world, weekdays seem to be getting stronger and more pronounced, which is another indicator of normalcy returning.

As of the time of writing this analysis, year-to-date RevPAR for India had surpassed the INR 5,000 marker, with Mumbai, Goa and New Delhi leading the way for the country.

There are a lot of reasons to remain positive, with excitement around infrastructural development and events like the G20 summit, the Aero-show, IPL and many more city/country-wide events boosting hospitality performance.

As we approach the typically leaner months of summer ahead for majority of the country, we need to be cautious about our expectations.

The graph below shows forward-looking data for the next 90-day window, as of 22 May 2023.

While Mumbai and Goa still lead the pack, country-level occupancy beginning at around 60% with a decent booking pace is reason for optimism.

How do we forecast for the remainder of the year?

Some of the important factors to keep in mind while looking ahead:

Recessionary headwinds and macroeconomic factors: At a country-level, our GDP growth forecast is higher than inflation with the latter taking a sharp downturn in April 2023, which is positive. However, coupling this with recessionary headwinds from the west and the typical seasonality pattern for the country may put pressure on rates.
Outbound vs. Domestic: India has remained a country that is strong on domestic demand. As the remainder of the world continues to open up and international flight capacity increases, there is bound to be some amount of diversion to foreign destinations, especially for a quick getaway. Visa issues, however, continue to be a balancing factor.
Pipeline: There isn’t too much incoming supply, which is out of the ordinary. At a country-level, the pipeline represents around 6% of existing supply, but that can vary depending on which market you operate.
What you see is what you get: There are various ways of looking at the data, but we need to align expectations given the factors mentioned above, on growth targets and possible year-over-year declines.

We continue to maintain our cautiously optimistic forecast for the country, with a slight bit of realistic expectation added in.

Author Bio: Karan Mahesh is Account Manager, Central & South Asia – STR