Hotel industry in India is slated for a healthy revenue growth of 11-13% in the next fiscal after a strong 15-17% growth in the current fiscal, backed by steady domestic demand and ramp up in foreign traveller demand. The strong demand dynamics along with modest new supply will keep the operating performance of the industry healthy over the near term.

The healthy operating performance will augur well for the industry profitability where the earnings before interest, taxes and depreciation (Ebitda) will continue the strong momentum over the current and the next fiscal. This, along with limited capital expenditure, will keep the credit profiles strong. A CRISIL Ratings analysis of branded hotel companies with ~70,000 rooms across categories, indicates as much.

Says Anand Kulkarni, Director, CRISIL Ratings, “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%.”

On the other hand, the foreign tourist arrivals in India, despite a growth this fiscal, are estimated to remain ~10%¹ below pre-pandemic level and pick-up in the same will provide fillip to the hotel demand next fiscal.

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

In addition to demand, favourable supply situation is one of the critical drivers of the strong performance of the industry.

Says Nitin Kansal, Director, CRISIL Ratings, “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.”

Effect of conducive demand supply dynamics is also visible on the operating profitability of the industry. The ARR-driven revenue growth typically translates into better profitability, given that operating costs do not increase proportionately. Plus, 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, operating leverage will help maintain strong operating profitability, at 32-33% over the current and the next fiscal — similar to last fiscal and ~1,000 bps higher than the pre-pandemic level (annexure 1).

In this milieu, credit profiles of the hotel companies will continue to improve. For instance, interest coverage is expected to rise to ~4.3 times and ~5.5 times this and next fiscal which will be higher than ~3.2 times last fiscal. The debt to Ebitda ratio is seen improving to ~2.2 times this fiscal followed by below 2 times in the next from ~2.9 times last fiscal.

While all the ingredients of the sectors are well 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 bear watching.

¹ Foreign tourist arrivals are expected to be at 9.5-9.8 million persons this fiscal against 7.9 million last fiscal and 10.6 million in fiscal 2019