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August 10, 2017

Sector Report: Hotels

This report is available to users in India for ₹40,000 + applicable taxes


2016-17 Industry profitability improved on account of increase in occupancy rates


The premium segment has been reeling under severe stress since 2011-12, due to demand slowdown and huge supply addition. After plummeting to adecade low of 59% in 2013-14, the industry's OR increased marginally to 60% in 2014-15 and to 62% in 2015-16, because of moderation in supplygrowth and a pick-up in demand.

OR are estimate to have increased to 64% in 2016-17 and demand grew at 7% better than inventory growth of 4%.The addition of supply and the slowdown in demand during 2013-14 to 2015-16 led to a stable average revenue rate (ARR). With the improvement indemand but intense competition and demonetisation ARR growth remained steady in 2016-17.

With growing demand and lower supply addition, RevPAR improved by 4% and EBITDA margins are estimated to have improved by 150 bps.


The liquor ban impact - 25-30% premium segment hotels to bear the brunt


Four months after the government's announcement of old 500 and 1000 rupee notes, the hotel industry got another blow. Since April 1, 2017, thepremium segment hotels, which fall within the 500 metre range of a national highway of state highway, have been directed to stop selling/servingliquor. Hotels within the city will now pose as a major competition to premium segment hotels on the highway. Demand for rooms is expected to witnessan impact especially in locations that have higher MICE demand and foreign travelers. Cities namely Pune, Agra and Kolkata are expected to face thehighest brunt over short term.

We have assessed 384 premium segment hotels across the 12 cities of which 102 hotels stand affected which means nearly 27% premium hotels ofthe top 12 cities will be compelled to stop liquor sales. The major impact would be encountered by cities such as Pune, Kolkata and Agra.


Impact of Goods & Service tax (GST) on Hotels Industry


The impact of GST is expected to be neutral as post the implementation of new tax slabs, state level taxes (luxury tax) has been removed from thesystem. The luxury taxes were as high as 15% in New Delhi and as low as 5% in Noida. For cities. As per the new tax structure, rooms with a rateranging between Rs 2,500-7,500 will be taxed at 18% and rooms with a rate of more than Rs 7,500 will be taxed at 28%. As per CRISIL Research, theoverall tax burden on the consumer has gone down with the introduction of one tax system and no impact on demand is expected on the industry as awhole. However, with premium hotels falling in both tax slabs, there is a slight shift in demand we can expect at the property level but within the samecategory.