Premium hotels revenue likely to surge 80% in fiscal year 2023-24: Report

Premium hotels are expected to log in strong growth across operating parameters, especially on the revenue side, which is expected to surge 80 per cent this fiscal and a further 15-20 per cent next, buoyed by the continued recovery across categories, as per a report.

Hotels are getting higher bookings across leisure, corporate, MICE (meetings, incentives, conferences, and exhibitions), and international travels, leading to a decadal-high occupancy for premium hotels, a Crisil Market Intelligence report said.

The report is very bullish on the revenue growth of the premium segment owing to better operational parameters, primarily due to higher demand, increase in room rates and employee rationalisation

The revenue of premium hotels is expected to surge 80 per cent in fiscal 2023, and a further 15-20 per cent in fiscal 2024, according to the report.

Rising demand has the average room rates (ARRs) hitting the pre-pandemic levels, leading to record high operating margins, which is also supported by a lower employee-to-room ratio.

According to Pushan Sharma, a director at Crisil Market Intelligence, the average room rate (ARR) of premium hotels rose by 13 per cent in fiscal 2022 and is expected to jump 19-21 per cent this fiscal to a decadal high of Rs 7,500-10,000.

The occupancy level, which was at 50 per cent in fiscal 2022, will also touch a decadal high of 67-72 per cent this fiscal, in sharp contrast to fiscal 2021, when ARR plunged to 20-25 per cent and occupancy halved to 31 per cent following the pandemic, he added.

The growth in ARR and occupancy this fiscal is largely due to the improving domestic demand, including revenge travel, leisure, corporate, and MICE events. Demand for stays is increasing as a form of revenge travel, with the blending of business and leisure also seen.

Foreign tourist arrivals, though, are yet to reach the pre-pandemic level. The tourism ministry data shows that foreign tourist arrivals in the first nine months of the fiscal were 54 lakh or only 70 per cent of the pre-pandemic level. But, international passenger arrival is expected to recover to the pre-pandemic level in fiscal 2024.

Notably, the current recovery is largely K-shaped. While premium hotels are expected to report decadal high ARRs and occupancy rates, budget hotels are expected to see an ARR trend of 20 per cent higher than the pre-pandemic level, but occupancies are badly lagging.

This is similar to what is being seen in other discretionary sectors, such as the automobile industry, where the premium segment is doing better, with sales of cars priced above Rs 10 lakh being much better than those priced below Rs 10 lakh.

That said, the rate of growth is unlikely to be uniform across premium hotel segments. Leisure destinations are expected to log a higher occupancy level of 70-75 per cent while for business destinations this will be 65-70 per cent.

Hotels, which had reduced their employee-to-room ratio to 20-30 per cent between fiscals 2020 and 2022, have carried forward the cost rationalisation even after demand revival. This, along with improving ARRs and occupancy levels, is projected to sharply improve the industry's margins in fiscal 2023 and 2024.

According to Elizabeth Master, an associate director at the agency, owing to better operational parameters, the revenue of premium hotels is expected to surge 80 per cent in fiscal 2023, and a further 15-20 per cent in fiscal 2024.

The employee cost, which was 32 as a percentage of net sales in fiscal 2022, is projected at 21-22 per cent this fiscal. These factors will translate into a new high operating margin of 29-31 per cent for fiscal 2023 and 2024.

On the supply side, which was deferred due to the pandemic, the agency expects it to increase 10-12 per cent year-on-year, with limited supply additions of 3-4 per cent in fiscal 2024.