The Indian hotel industry witnessed its highest ever 10 year occupancy in FY2018 and its revenue per available room (RevPAR) was higher by 17 per cent compared to the 10 year low, witnessed in FY2014. Similarly, the pan-India average room rate (ARR) which stood at INR 5,800 in FY2018 was also the highest since FY2014 as per ICRA spokesperson.
The main concerns faced by the players remain fund availability and other case specific factors stemming from heightened competition in the property micro-market, poor revenue management, delayed projected commissioning and overleveraged capex / acquisitions of the past.
Commenting further, Pavethra Ponniah, vice president and sector head, corporate sector ratings, ICRA, says, “The ARRs have slowly but steadily started to improve on a pan-India basis as more cities witnessed a modest uptick in ARRs; ARRs are estimated at an average INR 5,500, up by 1-2 per cent for H1 FY2019. Further this improvement in ARRs has been aided by healthy occupancy improvement. The pan India RevPARs were INR 3,500 during H1 FY2019 (INR 3,400 in H1 FY2018) and also registered a modest growth. RevPARs improvement continued to be driven by uptick in ARRs and occupancy. All key markets witnessed improvement in RevPARs and all India occupancy at 64 per cent was higher by 2 per cent. The Y-O-Y growth in RevPAR was around 4-4.5 per cent. Going forward given the muted pan-India room supply on one hand and robust demand for rooms on the other hand, occupancy is expected to be healthy and will drive ARR recovery. ICRA expects an 5-6 per cent growth in RevPARs in FY2019, the highest since FY2012.”
FTAs into India slowed down from April 2018 onwards due to the Nipah virus scare and diversion of traffic to other global events such as the soccer world cup in Russia. While the FTA growth picked up in Aug 2018, the Kerala floods impacted FTA growth in Sep 2018 and Oct 2018. Kerala witnessed FTAs decline in Q2 (-4.6 per cent) and Q3 CY2018 (-13.6 per cent). In addition, there was general weakness in the global ITAs during Q3 CY2018.
As for the domestic demand momentum, it has remained strong; the domestic revenue passenger kilometre (RPKM), a proxy for domestic travel grew by a robust 20.3 per cent Y-o-Y in YTD October CY2018 at 10.5 million passengers. Domestic demand in FY2019 will continue to be driven by increased air connectivity, and higher appetite for domestic leisure travel.
On the supply side, the supply of room is likely to lag demand over the medium term and grow at a subdued CAGR of 3.6 per cent over the next five years (FY19-23). The number of premium rooms across 12 key cities is likely to go up from 82,800 in FY2018 to 98,900 as on FY2023e, with ICRA research tracking about 16,100 premium rooms under construction and to be launched over the next five years. This low supply growth is expected to be the backbone for the current up-cycle, as demand is expected to grow at a much faster rate.
Industry revenues (ICRA’s sample of 12 companies) which have remained subdued over the previous few quarters, despite the pan India improvement in RevPAR, due to multifarious issues such as demonetisation, liquor ban along the highways, the GST rollout, and certain company-specific events such as renovations, revived strongly during Q2FY2019. Quarterly revenue was at a seven-year high in Q2 FY2019 with the same growing by 12 per cent over Q2 FY2018; the operating profit margin (OPM) was at a six-year Q2 high at 11.8 per cent, improving by 280 bps Y-o-Y.
Going forwards, ICRA expects revenue improvement and margin expansion for the industry. The CAGR growth is expected to be 9-10 per cent over the next four years, with a strong 10-12 per cent during FY2019. Margins are likely to expand due to operating leverage, with return of stronger revenue growth. Interest and debt cover are likely to improve gradually over the medium term but Return on capital employed (RoCE) is expected to remain at sub-cost of capital at least till FY2020. RoCE is expected to improve upwards of 15 per cent in FY2023, from 6.3 per cent in FY2018 to 9 per cent in FY2019E and 16.3 per cent in FY2013E.
Adds Ponniah, “Poised in the first few years of the upcycle, ICRA expects the current industry up-cycle to continue over the next 3-4 years and ICRA’s outlook continues to be stable. The stable outlook will be driven by robust domestic demand and a muted supply pipeline. The return of pricing power across key markets will be more evident from the next rate cycle in January 2019 and a consequent improvement in financial performance is expected. However, costs will need tight monitoring.”