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Challenges and opportunities in the Indian hospitality sector

CARE Ratings has recently released a report on the Indian hotel industry. Some of the takeaways from the report are elucidated below.

Existing Inventory

The upscale segment of the hotel industry in India is highly organized and concentrated in few key cities. The total number of ‘keys’ (rooms) in the top 11 key cities covered by CARE Ratings is estimated at 92,537 as at the end of FY18. Of this, about 53% of the room inventory is concentrated in Mumbai, NCR and Bengaluru.


The existing room supply for the country grew by 7.5% y-o-y in FY18 totaling to 128,163 rooms (as of 31 March 2018). This considers the 8,944 new rooms that entered various markets during the year, as well an expansion of the existing properties.

Upcoming supply

The future supply landscape is ever-changing and subject to several external forces that may often delay project openings. It is noteworthy that the pipeline for proposed supply totaled 114,466 rooms back in FY08 – the highest in a decade, whereas in FY18 it contracted significantly to just 49,380 rooms.


Performance of major markets in India (11 cities)

The Overall average Occupancy rates (ORs) increased by about 180 basis points y-o-y during FY18 in 11 major cities in India. ORs increased from 64.8 per cent in FY17 to 66.6 per cent in FY18 on back of increased demand from domestic and foreign travellers for business and leisure activities. However, the average room rates (ARRs) increased by only about 1.6 per cent during the same period to Rs 5,759 per day due to stiff competition faced by players in the market. This increase in ORs and ARRs led to the all India RevPAR performance of major markets to record a growth of about 4.4 per cent over the preceding fiscal and reach Rs 3,837 per day in FY18. This rate was last achieved in the year FY11.

Occupancy rates (OR)

ORs for five-star hotels witnessed the sharpest growth of about 240 basis points y-o-y during FY18. This was followed by 3 star hotels that registered a growth of about 200 basis points and 4 star hotels that registered a growth of 180 basis points during FY18 while the five star D hotels witnessed lower growth of only 110 basis points y-o-y. two star hotels however, witnessed a decline of about 10 basis points in their occupancy rates during the year.

Average Room Rates (ARR)

Despite registering a decline in occupancy rates, two-star hotels witnessed the maximum growth in the group in average room rates increasing by about 8.5 per cent y-o-y during FY18. This was followed by three-star hotels that registered a growth of about five per cent y-o-y in FY18. Four star and five-star D hotels recorded a growth of three per cent y-o-y each in average room rates. Five star hotels, however, registered the lowest growth about 1.8 per cent y-o-y in the group during the year. This may be attributed to the gradual escalation of commercial activity in Tier II and Tier III cities as well as increased domestic travel.


Each star category witnessed a y-o-y increase in RevPAR in FY18, with the three-star category leading the pack, recording a 8.2 per cent growth during the year. The improvement in RevPAR across all star categories can be attributed to both occupancy and average rate, with the exception of two-star hotels.

The expected future inventory in 11 major markets (across categories – only branded) is lower at around 49,380 rooms for the next five years (FY18 to FY23). Therefore, with increasing demand on back of improvement in economic activities and lower room additions, we expect the industry to sustain the average room rates (ARRs) going forward and grow at an average of 3.5-4.5 per cent per annum. Also, we expect the occupancy to inch up to an average of about 68-70 per cent by the end of FY23 compared with 66.6 per cent in FY18.


City-wise performance (Premium hotels)


  •  Business travellers account for about 80 per cent of the total room demand in the city.
  • Mumbai’s hotel market achieved the highest occupancy recorded over the past few years amongst all major markets across the country and also recorded the second highest average room rate (Rs 7,740), further consolidating its position as the best performing hotel market in terms of RevPAR too. This was primarily backed by strong growth in corporate travel from industries such as BFSI, pharmaceuticals, FMCG, etc along with an upswing in meetings, incentives, conferences and exhibitions (MICE) demand in major commercial hubs such as BKC, Powai, Goregaon and Airoli, CBD Belapur in Navi Mumbai and the promising growth in the Extended-Stay segment – have favourably impacted Mumbai’s hotel market.
  • In terms of future supply, Mumbai is expecting an addition of about 4,000 rooms by FY23.


  • Business travellers constitute about 85-90 per cent of the premium segment room demand in Bengaluru. BFSI and PSU companies mainly account for room demand in CBD area while Whitefield and Electronic city areas have demand from IT/ITeS companies.
  • Hotels in Bengaluru witnessed a surge of 9.4 per cent in marketwide RevPAR in FY18, surpassing the other major hotel markets in the country. Driven mainly by robust growth in occupancies, the city’s hotels also exhibited an increase of about 3.7 per cent y-o-y in average rates. The fact that the resilient market performance was accompanied by a 5.6 per cent growth in supply bodes well for the city that is expected to add approximately 5,700 rooms in a phased manner over the next five years.


  • Business travellers account for about 70 per cent of the demand while the balance comes from the leisure travel demand. Demand mainly comes from the BFSI and PSU segments in Delhi while in Gurugram, IT/ITeS, BPO and telecom sector drive demand. Hotels in Noida region majorly cater to demand from IT, BPO and consumer durables companies. Aerocity district caters to demand from corporates, MICE activities and transient clients. Social events– marriages also contribute to the room demand in NCR. The demand previously catered to by the unorganised sector in the area has been absorbed by the branded mid-market and budget hotels located within the district.
  •  NCR is home to the largest branded hotel market in the country. New Delhi continues to record a y-o-y growth in RevPAR during the year, while Gurugram and Noida being under supply pressure, recorded marginal decline in RevPARs during the year on account of marginally lower room rates.
  • NCR is expected to witness an addition of about 4,400 rooms in the next five years, with maximum rooms (1,800) expected in Gurugram alone.


  • 85 per cent of the room demand in Chennai comes from business travellers.
  • Demand in CBD area comes mainly from BFSI and PSU companies, IT/ITeS companies drive demand in the OMR region. Proximity to electronics and the auto industry players in and around the Sriperumbudur area, makes hotels near airport area attractive for business travellers.
  • It also enjoys demand from other major business sectors including manufacturing, port and port-related activities, the government and embassies, etc along with a growing MICE demand base owing to the recent expansion of room inventories including large-scale meeting facilities in the city.
  • Despite an increase of about 10.6 per cent in supply in FY18, the market continued on its path to recovery with room rates registering a y-o-y growth of about 2.2 per cent during the year. The city witnessed the opening of new hotels, including the Novotel & Ibis Chennai OMR. All the micro-markets in Chennai recorded a marginal decline in occupancy in FY18, while average rates marginally increased during the year.
  • Going forward, only about 1,000 rooms are expected to be added to Chennai market in the next five years.


  • Demand from business travellers account for about 90-95 per cent of overall demand in the city for premium hotels.
  • In addition to serving as a manufacturing hub in Western India, the city has developed into an important IT/ITeS centre. Availability of large commercial floor plates along with a young and educated workforce has driven the rapid development of the city. Proximity and ease of connectivity to Mumbai, the country’s financial capital, has also helped the city.
  • In the past few years, a staggering increase in room supply resulted in a downward spiral in both occupancy and average rate performance which overshadowed the y-o-y double-digit growth in demand, and questioned the strength of the market.
  • However, the silver lining is that the slowdown in new supply coupled with the robust and continuous increase in demand has helped the city’s hotels perform well in occupancy. Occupancy rates registered a sharp expansion of about 500 basis points during FY18. Also, room rates have witnessed an increase of about 5 per cent y-o-y leading to a sharp growth of 13.5 per cent y-o-y in RevPAR during the year.


  • Despite an 8.9 per cent increase in room supply, Ahmedabad market witnessed healthy occupancy with over 300 basis points expansion during FY18. Also, room rates increased by over 6 per cent y-o-y on back of number of developments taking place both within the city and on the outskirts including places like SEZs in Sanand and Becharaji. A proposed logistics park in Godhavi, Smart City project in Dholera and the completion of third terminal of the Ahmedabad Airport have attracted major automobile, pharma and engineering companies to the city.
  • Around 1,350 rooms are expected to be added to the Ahmedabad market by FY23.


  • About 85-90 per cent of premium segment hotel demand comes from business travellers.
  • CBD area room demand is primarily dominated by business travel segment from sectors such as BFSI and PSU companies while the Hitech city caters to demand from IT/ITes.
  • Corresponding to the rebound in commercial activity, the Hyderabad hotel market witnessed an expansion of about 270 basis points in occupancy rates while the average rates increased only marginally by about 1 per cent y-o-y in FY18. With opening of Grade-A commercial spaces and major global conglomerates setting up office in HITEC city, demand has been on the upward trajectory.
  • 1,150 rooms are expected to be added to the existing supply between FY18 and FY23.


  • About 75 per cent of room demand for premium segment comes from business travellers.
  • Kolkata is driven primarily by commercial activity emanating from PSUs, PSBs, manufacturing, IT/ITeS, engineering, medical activity and the telecom industry.
  • In FY18, Kolkata witnessed the highest increase of about 20.7 per cent in room supply. However, despite the increase in supply, the city ORs reached 71.9 per cent (y-o-y 100 bps expansion) and the average room rates witnessed about 4 per cent y-o-y increase to reach Rs 6,050 per night.
  • The city demand was supported by events such as Under-17 FIFA World Cup, IPL, Global Bengal Business Summit and some national medical conferences during the year. Also, as per Airports Authority of India (AAI) data, the highest increase of about 25.7 per cent in passenger traffic was witnessed by Kolkata amongst the top airports in India during FY18.
  • Kolkata market is expected to add about 1,800 rooms between FY18 and FY23.


  • Popularly known as the ‘Pink City’ and an integral part of the Golden triangle itinerary, Jaipur’s rich culture and its spectacular forts, palaces, and havelis continue to attract tourists from all over the world, making it one of the top leisure destinations in the country.
  • Also, the city has become a major MICE destination, primarily known for its destination weddings and large scale conventions.
  • In FY18, the city witnessed about 7.3 per cent growth in room supply. Despite the increase in supply, the city ORs reached 67.3 per cent (an expansion of close to 300 bps) and witnessed about 6 per cent growth in average room rates. In line with the ORs and ARRs, RevPARs registered about 10.8 per cent y-o-y growth during the year.
  • Going forward, about 1,100 rooms are expected to be added to Jaipur hotel market.


  • Goa continued to exhibit growth witnessing the highest average room rates of Rs 7,844 per night during FY18, 4.1 per cent higher than the previous fiscal, surpassing the rate leader of India for the past 5 years – Mumbai. Occupancy rates reached 72.1 per cent during the year leading the RevPARs to witness an increase of about 5.1 per cent y-o-y.
  • However, Goa continues to face competition from beach destinations in South and Southeast Asia.
  • The up-tick in the occupancy can be attributed to the increased domestic travel and the booming MICE and wedding business. Also, room demand was further supported by large-scale annual events such as the International Film Festival of India (IFFI) and the Serendipity Arts Festival.
  • The proposed Mopa Airport that is likely to be ready by 2020, is further expected to make significant demand contribution.
  • Going forward, about 3,000 rooms are expected to be added to Goa market by FY23.


  • Room demand in Kerala is driven by both leisure and business travellers, each accounting for 50 per cent share.
  • Kochi is known as the commercial capital of Kerala comprising of shipbuilding and port operations, chemicals, spices, construction, fertilizers and IT industries. Also, large oil corporations such as Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum have plants located at Irumpanam, a suburb of Kochi.
  • Trivandrum comprises of industries such as IT and medical.
  • Apart from this, leisure travellers also drive room demand in Kerala.
  • In H1 FY19, demand in the state was affected on account of floods (August 2018) that impacted the tourism industry. Also, the ripple effects were felt for a few months post that and demand moved to neighbouring destinations such as Sri Lanka, Thailand, etc.


  • Room demand is usually driven by leisure travellers.
  • Any macroeconomic conditions have an impact on demand in tourist destinations such as Agra where FTAs constitute majority.
  • In FY18, OR registered an expansion of over 600 bps to reach 65.8 per cent, city’s highest in over 20 years. However, on account of intense competition from the branded mid-market segment, the room rates remained under pressure and declined by about 3 per cent to average at Rs 5,340 per night. This higher occupancy/demand translated into a growth of over 7 per cent in RevPARs during the year.
  • Introduction of the Gatimaan Expressway, Yamuna Expressway and the recently opened Agra-Lucknow Expressway has increased the demand from MICE segment and individual domestic leisure travellers.

Challenges faced by hotels

Government approvals and licenses

  • Major issues for most of the industries in India are related to multiple windows of clearances, even for the hotel industry. Hoteliers face regulatory constraint at every step in the process of development of hotels beginning from land acquisition stage (for which laws differ from state-to state) to approval by various ministries & association on various matters.
  • A company requires approximately 100 clearances for setting up an upscale category hotel in India. The clearances have to be taken from multiple government bodies. It is tedious and a time-consuming process.

Land availability and cost issues

  • The process of identifying new land parcels as per the requirement for hotels is a tedious task in India. Compared to international standards, where land costs accounts for 15-20 per cent of the total project cost, in India this is often in the range of 40-50 per cent. This is also one of the reasons for low development of budget & mid-market hotels in comparison to upscale luxury hotels as budget hotels with lower average rates are unlikely to become viable with such high land cost. As a remedy to the problem, hoteliers have started mixed-use development projects comprising hospitality, commercial, residential and retail components.

Human capital

  • Indian hotels face the continued challenge of shortage of trained employees, especially at the manager and supervisor levels. Most of the companies are falling short of skilled employees for their hotels. Major reason for this shortage is absence of organized training and educational institutes for development of skilled employees like in aviation and other service sectors. Only few major Indian players like Taj, Oberoi and ITC have set up their training institutes with a few international brands like IHG, Carlson etc. Also, hotel and catering management institutes approved by All India Council of Technical Education (AICTE) is less than adequate and much of the talent graduating each year is unsuited for direct employment in the industry due to lack of required skills.
  • Retaining the workforce even through training and development in the hotel industry is a tedious task as attrition levels are too high. One of the reasons for this is unattractive wage packages. Though the industry has been growing at a fast pace, hotel management graduates opt to join other sectors like aviation and catering services where they are paid higher.

Management contract related issues

  • Performance clause in management contracts is one of the most debated clauses between owners and operators of the hotel. It is most often the only clause that provides a window for an owner to terminate the management contract with the brand. However, unlike in other industries where a client has the choice to reject/ discontinue a product/ service if he/she is dissatisfied with the performance, hotel owners do not enjoy such a privilege and inturn have to pay a hefty termination fee to disengage with the operator.
  • Also, owners are seldom informed/ involved in the hotel operations. Non-involvement of owners in hotel operations and lack of transparency can result in a gap for desired objectives. Such non coordination between owners and operators pose a threat to the industry.

Emerging market trends

Indian Online Travel Market

India’s total internet subscribers’ base as of June 2018 stood at about 512 million. The penetration of internet stands at about 35 per cent which is comparatively lower than developed markets like the United States and the United Kingdom but is growing at a much faster rate. India’s e-commerce market was worth about US$ 2.5 billion in 2009, it went up US$ 38.5 billion in 2017. Approximately about 75 per cent of this is travel related. Also, as per the telecom regulator Trai, at the end of June 2018, India had 1,147 million wireless subscribers. With this increased emergence of smartphone in India, providing an easy access to internet and various applications, it is readily becoming a major source of travel bookings including hotel bookings.

Online Travel Market has always been predominantly known for Air Ticketing followed by Rail Ticketing. However, with the infusion of global travel brands, increased number of internet savvy people and large number of new hotel openings by various national and international brands at different domestic locations, online hotel bookings has emerged as a prospective opportunity for both online travel companies and hoteliers. In addition to online air ticketing, online hotel bookings has become a major revenue contributor to the online travel company in the recent past.

Going digital

The Indian ministry of tourism has started using social media to promote tourism sites throughout the country. It joined Facebook in January 2013. 70 per cent of all four and five-star hotels in first tier cities in India had established their presence in social media by August 2013. Leading Indian airline Jet Airways put social media at the centre of its marketing, involving 10 different departments in its social media activities targeting consumers.

A considerable increase has been seen across all star categories in reservations using online reservation systems and other websites, with the all-India average increasing from meagre 10.3 per cent in FY13 to 24.5 per cent in FY17. At the same time, direct enquiries or reservations made through Hotel Representatives, Travel Agents and Tour Operators have declined. In keeping with the growing importance of maintaining a positive and impactful online presence, hotels have redirected their

marketing efforts towards digital marketing mediums. Hotels are now using their Hotel Website to reach customers where marketing media measures such as Pay per Click increased to 27 per cent in FY17 from 15 per cent in FY13 and Promotions have gone up to 74.9 per cent in FY17 vis-à-vis 67.3 per cent in FY13.

Financial performance

CARE has analysed the basic revenue and cost structure of the organised hotel industry in India. After increasing marginally by about 0.8 per cent in H1 FY18, net sales of the industry witnessed 5.5 per cent increase during H1 FY19. Revenue registered a CAGR growth of about 3.1 per cent for the 3 year period between FY17 and FY19. The demand slow down for hospitality industry in FY18 could be the outcome of the general slowdown in the economy. Also, GST implementation in the country and various rate revisions further had a significant impact on the travellers’ sentiment.

However, going forward, the sentiments look positive and demand is expected to pick up on back of increased economic activities due to recovery in the global conditions resulting in higher movement in the MICE segment. We expect the momentum to pick up and the industry to register a growth of about 7-9 per cent in revenues for FY19.

Revenue and cost structure of hotels

Revenues in hotels can be classified under three broad headers – room revenue (revenues received as room tariffs), food & beverages (F&B) revenue and other revenue. While the room revenues are a direct function of room rates and occupancy rates, the F&B revenues comprise revenues from restaurants and banquets/convention centres. Other revenues mainly consist of income from auxiliary services provided by the hotel such as laundry, spa services, telephone services and transport. In terms of expenses, employee cost is the largest cost component for hotels.

Room revenue

The total room revenue for a property can be calculated as: Room revenue = Room nights sold * Average room rate, Where, Room nights sold = No. of rooms * Occupancy rate *No. of days (Time period) Generally, the revenues from rooms constitute about 50 – 55 per cent of total hotel revenues.

F&B Revenues

It includes revenues from restaurants and banquets. Usually the revenues from F&B division are about 35-40 per cent of the total hotel revenues. It depends on various factors such as occupancy rates of the property, size of banquets and conferences, connectivity and technology in the banquet area, hotel location, etc.

Other revenues

Other revenues include revenues from telecom services, spa services, dry cleaning and laundry services and transport facilities offered by the hotel. These revenues usually constitute about 10-15 per cent of the total hotel revenues. In FY17, the Rooms Revenue witnessed an increased contribution of 53.6 per cent y-o-y to the total revenue. On the other hand, contribution from Food & Beverage and Banquets declined to 39.5 per cent from 41.5 per cent recorded in FY16. The contribution of the other operating departments has remained range-bound for the past few years.

Employee costs are one of the largest cost components of the hotels accounting for about 25-30 per cent of the total expenditure. Hotels therefore have large fixed costs and marginal costs per additional guests are comparatively low.

Selling & distribution costs account for about 15-20 per cent of the operating costs which includes advertising expenses and marketing costs. Power & fuel account for 8-10 per cent. Also, the F&B consumes about 10-15 per cent of the costs on an average. Other operating costs account for the remaining 35-40 per cent of the costs that include the repairs and maintenance, travelling expenses, etc. among others.


The tourism and hospitality sector is among the top 10 sectors in India to attract the highest Foreign Direct Investment (FDI). During the period April 2000-June 2018, the hotel and tourism sector attracted around US$ 11.39 billion of FDI, according to the data released by Department of Industrial Policy and Promotion (DIPP).

GST implications on hotel industry

The GST Council decided that the 28 per cent tax would be imposed on hotel rooms with a tariff of Rs 7,500 above against the previous proposal of Rs 5,000 and above. Rooms with tariffs between Rs 2,500 and Rs 7,500 will attract 18 per cent tax rate.

The GST on restaurants in five-star and luxury hotels has been brought down from 28 to 18 per cent, bringing it at par with standalone air-conditioned restaurants. Food & beverages form 30-40 per cent revenue for five-star hotels.

  • Under GST regime, the overall tariffs for premium hotels (four star and above) may see an increase, which may have some impact on the demand which had seen a pick-up in the last financial year.
  •  Further, the practice of bundling of meals with room tariffs may see a decline, especially for four star category hotels, as higher tariffs above the stipulated levels of Rs 7,500 per day may attract higher tax rates.
  • Hotels having centralized registration will have to get registered in each state whether providing hotel services on own account or through agent (franchise)
  • The biggest relaxation for the industry is the ease of compliance for the industry as there would be no different taxes for the different services provided by the industry.
  • Also, GST would benefit the industry by the input credit system by reducing the overall tax flow for the industry, as earlier they did not have the option to set-off the taxes already paid on inputs of the industry.


  • Going forward, CARE expects the industry to register an overall healthy growth on back of economic growth due to recovery in the global conditions resulting in higher movement in the MICE segment and consistently growing middle class along with increasing disposable income. There are various other key factors that drive the market, including India’s attractiveness as a medical tourism destination; steadily growing Meetings, Incentives, Conferences and Exhibitions (MICE) segment; and, an increasing fondness among millennial to travel.
  • On back of positive sentiments and expected pickup in demand, we expect the momentum to pick up and the industry to register a growth of about 7-9 per cent in revenues for FY19.
  • The expected future inventory in 11 major markets (across categories – only branded) is lower at around 49,380 rooms for the next 5 years (FY18 to FY23). Therefore, with increasing demand on back of improvement in economic activities and lower room additions, we expect the major markets in the industry to sustain the average room rates (ARRs) going forward and grow at an average of 3.5-4.5 per cent per annum. Also, we expect the occupancy to inch up to an average of about 68-70 per cent by the end of FY23 compared with 66.6 per cent in FY18.
  • Accordingly, the hotels industry is expected to see an increase in room revenue at the rate of about 10-12 per cent CAGR over the next five years.
  • The sector also faces several challenges in terms of complex regulatory environment and inadequate tourism infrastructure.
  • Goods and Services Tax (GST) has been implemented from July 1, 2017, with the aim of replacing the indirect taxes on all goods and services. Initially, room tariff above Rs 5,000 was to attract the higher tax rate of 28 per cent, however, this has been revised now and only tariff above Rs 7,500 would fall in the highest tax slab under the GST regime. Accordingly, we at CARE Ratings believe that the effective tax rate would not have any major impact on the Average room rates (ARRs) and Occupancy rates (ORs) of the hotels given GST players would be able to avail the input tax credit for both goods and services.

Source: CARE Ratings

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