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Hotels Check-Ins Up, But Margins Tight

With the hotel industry being seasonal in nature, it is likely to post a muted growth in profits during July-September. While sales are expected to rise at a healthy pace, surge in costs is likely to rein in profits. Financial performance during October-December is likely to be healthy, driven by festive demand and events such as the Grand Pix Formula-1 to be held for the first time in India.Capital expenditure in the Indian hotel industry has been growing at a rapid pace. During April-September, nearly 9,500 rooms were added by the industry. Another 8,000 rooms are expected to be added by March. It is estimated that 1 lakh additional rooms will be operational in the next five years.

While demand for hotel rooms is rising, continuous supply has kept occupancy rates nearly stagnant. A recent study by HVS, a hospitality business consultant, reveals that demand for rooms in 2010-11 (April-March) rose the most in Bengaluru and Chennai. However, sharpest fall in demand was recorded in Pune, where most number of hotel rooms was added last year. Demand slipped marginally in Delhi-National  Capital Region and Ahmedabad, while it was flat in Mumbai.

To keep occupancy levels intact, hotels have been able to raise tariffs only marginally over the past two years. Prospects of a surge in foreign tourist arrivals in the upcoming peak travel season have dampened because of the economic crisis in the US and Europe.

Impact of below-expected growth in foreign tourist arrivals is expected to be higher on five-star and luxury hotels compared with mid-scale and budget hotels. Hotels have, therefore, been increasing their focus on the growing domestic corporate and leisure travelers. A number of organised players are also planning investment in the mid-market and budget segment across Tier I, II and III cities. 

  • The Hyatt group plans to start its first 14 mid-segment hotels by 2012 under the brand Hyatt Place.
  • Carlson, which operates 15 hotels in the segment under the Country Inns and Suites brand, is set to add 38 hotels by 2015.
  • InterContinental plans to open 32 mid-priced hotels between 2011 and 2015 under the Holiday Inn brand, taking its number of such hotels to 37.

The previous phase of expansion plans of hotels in India has resulted in a huge debt burden on these companies. A number of hotel companies recently underwent or are currently undergoing debt repayment or restructuring exercise to reduce their debt burden.

  • Indian Hotels Company, one of the largest players in the industry, recently completed the rebranding exercise by restricting its presence to a fewer brands — namely Vivanta by Taj, Gateway and its budget hotel brand Ginger. The company also took steps to lower its debt and interest outgo by raising funds through a preference share issue to its holding company Tata Sons Ltd.
  • East India Hotels came out with a rights issue of `2,000 crore. Post the rights issue, the company almost became zero-debt.
  • Kamat Hotels has been able to bring down its mounting debt by selling surplus land holdings.
    • Hotel Leela Group plans to sell its property in Kovalam (Kerala) for Rs.500 crore to non-resident Indian Ravi Pillai, as part of an ongoing exercise to ease its debt burden. The hotel is selling its Chennai property to the same buyer.

Hotel Leela had spent Rs.1,800 crore in developing a luxury hotel in the heart of New Delhi. This resulted in company’s total debt rising to Rs.3,800 crore. The company also has the highest debt compared with its peers.

Large hotel brands in India including Taj, Oberoi and Leela, are moving away from funding new properties and are relying on management contracts for adding new hotels. Leela also plans to enter into a management contract with investor Ravi Pillai to manage the Kovalam property for 30 years. This model ensures the company need not invest but it lends its brand name to the hotel.

With the hotel industry being seasonal in nature, it is likely to post a muted growth in profits during July-September. While sales are expected to rise at a healthy pace, surge in costs is likely to rein in profits. Financial performance during October-December is likely to be healthy, driven by festive demand and events such as the Grand Pix Formula-1 to be held for the first time in India.

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Categories: Tourism
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