Indian Economy News

The Indian hotel sector would have double-digit revenue growth and 25–28% operating margin growth in FY24: ICRA

  • IBEF
  • October 26, 2023

According to an Investment Information and Credit Rating Agency (ICRA) report, the Indian hotel industry is predicted to see double-digit revenue growth in FY24, driven by the continuation of domestic leisure travel, demand from Meetings, Incentives, Conferences, and Exhibitions (MICE), business travel, and an increase in Foreign Tourist Arrivals (FTAs). The ongoing ICC World Cup 2023 and the G20 conference have also helped the business, it continued.

The report further mentioned that the premium hotel occupancy across India is expected to reach approximately 70-72% in FY24, following a recovery to 68-70% in FY23. Average Room Rates (ARRs) for premium hotels across India are projected to be between Rs. 6,000 (US$ 72.14) and Rs. 6,200 (US$ 74.55) in FY24. Although occupancy is anticipated to reach decadal highs, RevPAR is anticipated to stay at a 20–25% discount to the peak of FY08. The improvement of air connectivity and infrastructure, favourable demographics, and the projected growth in large-scale MICE events with the opening of several new convention centres in recent years, among other factors, all contribute to the medium-term demand outlook's continued health.

The healthy demand amid relatively lower supply would lead to higher ARRs. Further, larger players would also benefit from revenues or shares of profits generated from hotel expansions through management contracts and operating leases.

According to Ms. Vinutaa S, Vice President and Sector Head, Corporate Ratings, ICRA Limited, with stable corporate performance and positive consumer attitudes, demand is predicted to stay high across markets in FY24. However, demand for a particular hotel would rely on factors like location, competition, and other dynamics specific to the facility. Additionally, domestic travel would be the main factor, even though FTA activity is probably going to increase in the second half of FY24.

She further added that Mumbai and Delhi, being gateway cities, are likely to report occupancy north of 75% in FY24, benefitting from transient passengers, business travellers, and MICE events. Even though Pune and Bengaluru may trail behind other markets, they should see notable improvements in FY24 over FY23, notwithstanding this. In FY24, the ARRs would see a healthy year-on-year (Y-o-Y) increase, although it would still lag below the FY08 peak. Demand for mid-scale hotels was also impacted by the steep increase in the ARRs of premium hotels.

The report also mentioned that the continuation of many of the cost-rationalization initiatives implemented during the COVID era, along with the advantages of operating leverage, has led to a notable increase in margins when compared to pre-COVID levels. The ratio of workers to rooms is still about 15–20% lower than it was before COVID-19.

It further stated that while pass-through of cost inflation and stringent management over fixed cost increases have sustained profits, the companies have boosted their use of renewable energy. Larger hotel businesses have found that asset-light expansions increase their margins. Even if those are still far larger than pre-COVID levels, there may be some decrease in margins from the FY23 levels as a result of hotels renovating and maintaining their facilities.

A sample of ICRA comprising 12 large hotel companies is expected to report operating margins of 25-28% for FY24, as against 28-30% for FY23 and 20-22% pre-Covid. De-leveraging of balance sheets has led to lower interest costs and would support net margins.

Ms. Vinutaa S. stated that the anticipation of ICRA stated that ICRA anticipates that the improvement in cash flows and earnings will sustain the capital structure in the future. If there are any asset monetisations, they will mostly concern non-revenue-producing assets. In FY24, hotels' debt indicators should be better than they were before the COVID-19 pandemic. However, the degree of improvement in Return on Capital Employed (RoCE) would rely on the expansion strategy and, in the event of an asset-heavy expansion, could be limited by the high capital cost of additional properties due to rising land and construction costs. Numerous organisations have seen improvements in their credit profiles as a result of the robust business accruals. As a result, in FY23 and Year to Date (YTD) FY24, upgrades have outpaced downgrades. Currently, 94% of ICRA's ratings have a stable outlook.

According to the report, the recent 12 to 15 months have seen an increase in supply announcements and the start of delayed projects as a result of the solid demand rise. On the other hand, supply would fall short of demand, growing at a CAGR of 3.5–4% over the medium term. Issues with land availability presently prevent supply expansion in upscale metropolises and larger cities' micro markets. Rebranding and property upgrades are the main reasons for the increase in the supply of premium hotels in these areas, and greenfield developments are mostly located in the suburbs.

Religious, corporate, and tier-II leisure locations witness large supply announcements. In addition, compared to pre-Covid levels, the cost of building a room has increased by 20–25% due to cost inflation.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.