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ICRA: Indian hospitality sector witnesses subdued growth during Q1 FY2019, FY2019 growth estimated to be in line

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The domestic hotel industry witnessed a muted 2-3 per cent growth in average room rates (ARR) at INR 5,500 during Q1 FY2019 on improved occupancies at 63 per cent (a three per cent growth). As per an ICRA research report on the industry, Q1 FY2019 was the 16th consecutive quarter of growth in revenue per available rooms (RevPAR); the same grew by 4.5 per cent in Q1 FY2019. While demand growth of 5-5.5 per cent was lower than expectation, muted supply addition of three per cent during Q1 FY2019 still reflect as improving occupancies in most markets in India. The RevPAR during FY2018 grew by 4-4.5 per cent.

Says Pavethra Ponniah, vice president and sector head, ICRA,“Though our interactions with most chain hotels in India indicate plans for a seven to eight+ per cent hike in corporate contracted rates for the next season starting January 2019, ability to sell up the rates would be visible only during Q3 FY2019. Down-trading by corporate customers and higher bookings through online travel agents (OTA)s also appear to be constraining ARR growth.”

As per available data, domestic tourist visits (DTV) during CY2017 is estimated to have grown in line with trends of CY2015 and CY2016 at ~11-12 per cent. The domestic revenue passenger kilometre (RPKM), a proxy for domestic travel, continues to exhibit robust Y-o-Y growth, growing by 21.3 per cent during H1 CY2018 (18.7 per cent growth for H1 CY2017). The annual RPKM grew by 15 per cent+ during CY2015-CY2017.

The growth in foreign tourist arrivals (FTA) though healthy was relatively muted during YTD July 18, partly due to diversion of traffic to the 2018 Soccer World Cup in Russia. Further, the Nipa virus scare in Q1 FY2019 and the August floods, both in Kerala, will adversely impact arrivals to India despite some part of the traffic being captured by other domestic tourist destinations.

The aggregate industry revenues (ICRA’s sample) grew by 8.6 per cent during Q1 FY2019 while operating margins expanded by 140 bps (Y-o-Y) to 13.6 per cent. The improvement comes post subdued industry revenues over the previous few quarters (up to Q3 FY2018), because of adverse factors like the liquor ban along the highways – which impacted food and beverage (F&B) and; meetings, incentives, conferences and exhibitions (MICE) revenues. Besides the Goods & Services Tax (GST) rollout, certain company-specific events such as large-scale renovations also impacted revenues. The Q1 FY2019 operating profit margins improvement were driven by higher scale and controlled increase in costs, including employee expenses and power & fuel costs.

Interest expenses have remained low over the past six quarters as the industry had pared debt over the past two years utilising proceeds from sale of assets and fresh equity infusion. There is still a long way to go, though interest coverage has improved with reduction in debt levels and improved operating profit, the overall debt levels continues to remain at elevated levels for the industry on aggregate.

ICRA note says that for the Indian hospitality industry’s revenue to recover, a muted supply growth (CAGR) of four per cent during FY2018-FY2022 remains the key. Currently the supply additions are clearly happening at a moderated pace following ~eight per cent compounded annual supply addition witnessed over FY2011-18. Double-digit growth in supply is expected only in Bengaluru and Chennai during FY2019, and Mumbai and Kolkata during FY2020.

During the last down-cycle, the room inventory nearly trebled during FY2009-FY2014 leading to increased competitive intensity which coupled with an overall slower economic growth led to sharp rationalisation in ARRs.

Regarding future growth estimates, adds Ponniah, “The reported revenue growth of 8.6% in Q1 FY2019 is in line with ICRA’s estimates of revenue growth for FY2019. We maintain our RevPAR growth estimates for FY2019 at ~five-six per cent growth. Upside to ARR growth could also come from channelizing more bookings to company websites/ global delivery systems (GDS) as against bookings through OTA. Further, our long-term revenue growth estimates of 9-10 per cent+ CAGR (FY2019-FY2023) are well supported by robust domestic demand, healthy FTAs and the return of pricing power.”

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