Indian Hotel Industry: Revival on the Horizon

Published by Sharekhan Education | February 25, 2022

Indian Hotel Industry: Revival on the Horizon

Amit Pathak | Sharekhan Education

Hotels are a deeply cyclical business. An economic downturn typically hits hotels first and sees them recovering last in an upcycle. The industry expects a similar story to play out after the Omicron covid wave, with industry occupancies/Average Room Revenues(ARR) expected to increase. Let’s take a look at the latest trends in the Hotel Industry:

The Hotel Industry in India is highly fragmented. Organized hotel chains like IHCL, EIH, have led to increased consolidation in the sector through mergers and acquisitions. Organized players have the advantage of brand trust and recall, global quality standards, and value-added offerings. According to an industry expert, Horwath HTL India, the top ten hotel chains have 105,000 rooms, approximately 67% of the total supply.

Cost optimization to drive efficiency

The Hotel industry has a majority of its costs fixed (i.e. ~70% of total costs), with power/lighting and employee costs taking the major share. Due to the 20 long months of the pandemic, hotel players have re-aligned their cost base to tackle this extremely challenging environment. Hence, the industry expects over 27% reduction in operating costs from pre-Covid levels, which would help the companies to drive efficiency.

Asset-light expansion focus

Leading hotel chains have moved to an asset-light model. They plan to expand mainly by developing existing land, using unused floor space index (FSI) in operating hotels, and through management contracts. Under management contracts, the company earns a basic management fee based on a fixed percentage of the hotel’s gross income.

The industry anticipates domestic business travel demand in India to recover rapidly as current infection rates decline. Recovery on inbound corporate travel (foreign) may take longer to pick up. Leisure travel comprises vacation travel, including short-duration vacations. Its demand will primarily be in leisure destinations like Goa, Jaipur, Udaipur, Dehradun, etc. Leisure travel has largely remained unaffected because of Omicron, and no major cancellations have been witnessed so far.

While we acknowledge that estimating the exact trajectory of demand for hotel rooms over the next 6-12 months remains a challenge owing to Covid related uncertainties, we build in a scenario of 6.4% demand CAGR between FY20-25E vs. the estimated supply CAGR of 5% over the same period. The anticipated bounce back in demand from leisure and business travel is likely to translate into ARR growth of 5-7% in FY24E.

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