INSUBCONTINENT EXCLUSIVE:
This has turned many companies in sector loss making, and overall return on invested capital has been lousy
This can be attributed to many reasons.
There was a sharp rise in average room rent (ARR) during 2002-2007 period
In metros like Delhi and Mumbai, it was difficult to get a five-star room for even Rs 20,000 per night in 2007
This led to a
massive investment in hotel properties across India, which resulted in supply rising faster than demand, and eventually drove
down utilisation levels and ARR in following decade.
Secondly, new digitial platforms like MakeMyTrip, GoIbibo, Yatra, ClearTrip became
popular and allowed easy price discovery, which drove down average ARR for larger chains as even smaller hotels started attracting a wider
Further more, in order to grow business, many of these digital platforms started offering big discounts to travellers, which impacted
pricing power of larger hotel chains.
Excessive taxation on industry made larger hotel chains suffer at cost of unorganised hotels, which
were willing to cut corners by not paying taxes and thus became more competitive for end user.
Looking back, it looks like a perfect storm
But finally, there is light at end of tunnel
A number of factors are driving this revival, and coming decade looks much better for industry as a whole.
Better road infrastructure,
rising disposable income, propensity to travel over weekends, e-visa facilitating foreign tourist arrivals, tax rationalisation are among
numerous factors driving demand for tourist and business travel.
Since there has not been much investment in hospitality industry in last
few years, supply of new inventory is very limited
According to an ICRA report, demand is expected to grow 9-10 per cent in next four years vs 4-5 per cent supply growth
This, in turn, will drive increase in ARR over next few years.
The long downturn has also lowered costs in hospitality industry, as tracked
by metrics like number of people employed and operating costs per room
In coming years, expected double-digit growth in ARR coupled with lower operating costs will drive profitability growth in industry, helping
them improve return ratios and deleverage balance sheets.
This sector, as a whole, looks like a good investing bet for next five years.
