The outlook for the Indian hotel industry over the next 12-18 months is expected to remain subdued given the gap between supply and demand. However, measures by the GoI to drive tourism through several strong policy initiatives could bring in stronger demand, supporting the industry over the next 12-18 months.
ICRA estimates Q3, 2014-15 revenues to grow by 5-6% while growth for 2014-15 is expected to be in the range of 7-9%, largely driven by incremental rooms and Food and Beverage income. Growth is expected to accelerate to 9-12% over the next two years. Average Room Rates (ARRs) are expected to be largely flat while occupancies are estimated to improve by 2-4% during 2014-15. Industry occupancy levels have witnessed improvement in the current fiscal however the same has been geographically concentrated in pockets like Mumbai. However, there continues to be lack of traction in Average Room Rates (ARRs)-even in markets like Mumbai, which has been maintaining a steady Rs.100-200 discount on y-o-y basis.
Domestic demand has showcased a growth of over 10% driven by both business and leisure travellers during 2014-15. However, falling global economic sentiments have affected inbound travel and with a booking window of 8-12 months for Western leisure travel, the impact is expected to be felt in 2015-16 as well. The drop in oil prices has also impacted inbound travel, particularly witnessed in the marked drop in Russian tourists visiting Goa’s sunny beaches to escape the frigid winter conditions back home. However, ICRA expects easing visa and policy norms to support inbound travel into India even as a weaker global economy curtails traveller budget. Foreign Tourist Arrivals growth increased from 5.9% in CY2013 to 7.1% during CY2014.
As per ICRA Research, India has over 29,000 premium rooms under construction- to be launched over the next six years. Though there is a general perception of supply growth having eased, inventory accretion across the 12 key cities that ICRA’s premium room database tracks estimates a 10% increase for 2014-15, closely following the 11% addition experienced in 2013-14.
As a result of this supply demand mismatch, industry players have been resorting to significant belt tightening by keeping a check on key cost drivers like payroll expenses which have gone up only by an estimated 4% over the last three fiscals. Hotel operators have also heightened their focus on the F&B segment, revenues of which have been consistently increasing even as ARRs and room revenues have fallen.
The report covers a feature on the various taxes that the industry is subjected to, by the Government of India and respective State Governments and the implications of the same. The analysis concludes that effective indirect taxation is the highest in Tamil Nadu at 23.3%, while lowest in Goa at 16.9%. The key determinant of the differential and onerous tax regime is the luxury tax component. Double taxation with the Centre and State levying taxes on the same services/products is also an issue for the industry. However, the expected implementation of Goods and Services Tax (GST) in April 2016 will negate the double taxation effect apart from providing administrative ease for the industry players.
The report covers a feature on the Mumbai premium hotel market where demand has been witnessing strong growth driven by business travel and weddings/conferences. Occupancies for premium hotels in the city improved substantially in 2014-15 due to limited to negligible supply addition over the past two years. However, sizeable inventory is expected to be introduced into the market over the next four years, starting with the 583 key JW Marriot at Sahar in early 2015, followed by the 238 room Ritz Carlton near the Bandra-Worli-Sealink, which is expected to impact operational parameters. This has kept the market on a wait-and-watch mode, with rates flat for the time being.
