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Check in! Things fall in place for this industry to deliver big growth

Some projections show the sector is likely to witness an annual growth rate of over 7%.

Jul 11, 2018, 11.53 AM IST
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An Icra report said an increase in demand for rooms coupled with muted supply addition would continue to support recovery of the industry till 2021-22.
India’s hotel industry is finally on the cusp of writing a turnaround story. Improving occupancy and pricing power are fast changing the fortunes of hotel firms.

Some projections show the sector is likely to witness an impressive annual growth rate of over 7 per cent over next 10 years as the travel and tourism sector expands at a rapid pace.

This throws up an opportunity for investors on Dalal Street to ride a growth story at an early stage.

As many as 10 companies from the sector had already more than doubled investor wealth in last five years. WTTC Economic Impact report of 2018 says the travel and tourism sector’s total contribution to India’s GDP stood at $234 billion in 2017 and is expected to touch $492 billion by 2028.

An Icra report said an increase in demand for rooms coupled with muted supply addition would continue to support recovery of the industry till 2021-22.

“The hospitality sector was ramping up nicely before 2008, but decelerated during 2008-15 due to weakness in the global economy, poor infrastructure and policy paralysis at the central government level. All of that resulted in a drop in foreign tourist arrivals (FTA). Today, the sector has not just recovered from the slump but is once again beginning to register robust growth – and that seems very sustainable over the coming years,” says Shobhit Agarwal, MD & CEO, ANAROCK Capital.

Shares of Royal Orchid Hotels have rallied the most in last five years at 670 per cent, followed by Taj GVK Hotels (up 267 per cent), EIH Associated Hotels (up 234 per cent), Asian Hotels (West) (up 225 per cent), EIH Ltd (up 206 per cent) and Orient Hotels (up 181 per cent).

Other hotel majors including The Indian Hotels Company, Jindal Hotels, Sayaji Hotels and Asian Hotels (North) have risen between 110 per cent and 180 per cent during 2013-2018.

Icra expects 5-6 per cent growth in revenue per available rooms (RevPARs), driven by an improvement in accounting rate of return (ARR) during FY19.

Ambit Capital says a turnaround is in the offing for the industry, as a drop in room inventory supply is expected to improve occupancy and pricing power.

There are expectations that rising domestic and business-related travel would further push growth of these companies in the coming years.

According to reports by WTTC and TravelPort, India ranked 11th globally in business travel spending and registered a growth rate of 16.2 per cent during 2011-16. The same report confirmed that business tourism spending in India reached $8.2 billion in 2008, the highest since 1995.

However, this figure fell to $5.2 billion in 2011 due to an overall slowdown in the economy, and the hospitality sector took a big knock due to this decline.

Financials of select hotel firms have shown significant improvement over the past five years.

EIH’s net profit jumped to Rs 179.20 crore in FY18 from just Rs 41.80 crore in FY13. Mahindra Holidays & Resorts increased its bottom line to Rs 132.40 crore from Rs 90.90 crore during the same period. Indian Hotels turned around to report a net profit of Rs 100.90 crore in FY18 after posting losses of Rs 430.20 crore in FY13, Rs 553.90 crore in FY14, Rs 378.10 crore in FY15, Rs 231.10 crore in FY16 and Rs 63.20 crore in FY17.

Elara Capital in June gave a ‘buy’ rating on Indian Hotels with a target price of Rs 163 and an ‘accumulate’ rating on Mahindra Holidays & Resort India with a target price of Rs 376.

Increasing disposable income and aggressive price wars among low-cost airline carriers too are likely to boost domestic travel. Agarwal of ANAROCK Capital said domestic tourism spending is showing a linear rise from $82.6 billion in 2005 to $186 billion in 2017 and is expected to touch $405 billion by 2028.

Business spending grew two-fold from 2011 to $11.6 billion in 2017, indicating a rapid recovery from the downtrend. “We are now looking at a potential growth figure of $24.4 billion by 2028,” said Agarwal.

Icra says pan-India demand growth was around 6-6.5 per cent for FY18, which slower than the previous year and below expectations, but continued to outpace the supply growth across markets in FY18.

Demand is expected to remain healthy. Domestic tourist visits grew around 11-13 per cent during CY2017, in line with the trends seen in CY2015 and CY2016.

FTA growth picked up strongly by 15.6 per cent during CY2017 against 9.7 per cent growth seen in CY2016. Icra expects it to grow 10 per cent in CY2018.

The sector has been buzzing this year with developments like the listing of Lemon Tree Hotels on bourses and reports that US-based hospitality major Choice Hotels International is looking to expand the operation of a subsidiary in India.

Shares of Lemon Tree Hotels traded at Rs 78 on July 11 against the issue price of Rs 56.
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