Valuations of hospitality companies are impacted by factors like location and revenue per room
The economic slowdown and the terror attacks in Mumbai in November 2008 came down heavily on Indian hotel companies. One affected corporate travel and the other hit their leisure margins, too. Following the terror attacks, hotels saw a drop of 50 per cent in volumes and have yet to return to the 2007 highs.
In 2007, hotel rates and occupancies touched unreasonably high levels, say analysts.
Tourist arrivals grew by 16 per cent on a year on year basis in the first eight months; these dropped to 10 per cent growth in 2008. By October 2008, the increase was hardly two per cent as compared to 2007. As a result, hotels were offering packages and discounts of 30-50 per cent as compared to the previous year.
Indian hotels are organised only in the 5-star and 4-star categories. From 3-star category onwards, the sector is largely unorganised. Though there are hundreds of players in this space, only a handful are listed. Indian Hotels Company operating the Taj Group, East India Hotels operating the Oberoi brand, The Leela and ITC Hotels are listed players in the 5-star space. The others are Kamat Hotels and Bangalore-based Royal Orchid, functional both in the 5-star and 4-star space, and Asian Hotels.
Hotels cater to two types of tourists and are divided into leisure and business hotels. A leisure hotel typically is located in a holiday destination and caters to foreign and domestic tourists. Example: Taj Mahal Palace and Tower, The Leela, The Oberoi.
Whereas, the business hotel caters mainly to corporate clients in business cities. Example: Kamat Group's Vits.
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This business' growth is dependent on three major factors - occupancy, room rate and location. The major disadvantage for the sector is that it is highly capital-intensive and runs a cyclical business. And, the Reserve Bank of India counts the sector under real estate. Since banks consider real estate lending risky, lending for hotel projects has been attracting a high rate of interest.
Analysts say hotels stocks are not very lucrative from a retail investor's point of view and not traded heavily. "We take a couple of calls at times, only in the top stocks. These stocks do not have much to offer to a retail investor," said an analyst.
However, for those interested in hospitality stocks, here are few indicators that can help take a final call.
ECONOMIC CONDITIONS
In a buoyant economy, both business and leisure travel happen in good volumes. Inbound foreign tourists account for half a hotel's revenue in the peak season from September to January, especially in the New Year week. Hotels earn well despite giving discount packages for different tenures for various properties. A good number of trips happen last minute, too, and last-minute rates can be exorbitant. However, when the tide turns, the travel industry takes the hit first, denting the hotel business.
NUMBER OF ROOMS
A 5-star hotel, typically, has 200-250 rooms per property and a 4-star and 3-star hotel has a minimum of 50-60 rooms. Earlier, a 5-star property was suppose to have a minimum of 100-120 rooms. This increase in the minimum room number is primarily due to increase in land cost.
"The growth in the number of rooms should be in proportion to the balance sheet. Then it will be called healthy expansion," said an analyst.
AVERAGE ROOM RATE
This factor varies from city to city and is highly dependent on location of the hotel. For instance, Taj Mahal Palace and Tower was selling basic rooms for Rs 8,000-9,000 in the downturn, which were priced at a minimum of Rs 16,000 in 2007 "and had also gone to Rs 35,000-40,000 at one point," said an analyst. These rooms are now selling at an average of Rs 12,000.
Hotel rooms in Goa are otherwise sold for Rs 8,000-9,000, but, during December-end, for as high as Rs 30,000.
Room rates are a function of brand, season and location of the property, say experts.
OCCUPANCY
In the peak holiday season, September to January, hotels see an average occupancy of 70-75 per cent. And, in the lean season, a minimum of 50 per cent occupancy is considered healthy. However, 50 per cent occupancy in the lean season is mostly seen in business destinations like metro cities. In other cities, occupancy might go below this mark.
"The inbound traffic was up 20 per cent in December 2009 as against a year back. This uptrend constitutes around 60-70 per cent of the demand for premium rooms," said the analyst.
LOCATION
This factor is prime for the kind of guests each hotel caters to. A leisure hotel in a business city may not fetch as many guests as in a leisure destination like Goa or Kerala. Similarly, business hotels in tourist destinations may see corporate travellers mostly on a seasonal basis.