With the domestic economy seeing a slowdown and fewer foreign visitors in India, average room revenues (ARRs) for hotels, which doubled in the past two years, are starting to correct. Lower tariffs, however, don’t seem to be resulting in better occupancy rates, these too are coming off. The management at India’s leading hotel chain, Indian Hotels says the slowdown in other sectors of the economy is impacting occupancies.
While the extent of the fall in ARRs will vary across cities, Bangalore and Hyderabad could be the worst hit. Also, the kind of increases that are seen during the winter season can be ruled out. Occupancies for Indian Hotels (IHCL) in the June 2008 quarter are believed to have been lower than they were in June 2007 after remaining flat at 73 per cent in FY08. It’s possible they could taper off by about 8-10 per cent with occupancies stabilising at around 70 per cent.
Already, the top line growth for IHCL (stand-alone) and East India Hotels (EIH) has been just about 9 per cent in the June 2008 quarter, which is considered to be the lean season. While Hotel Leela did better with net sales growing at 24 per cent, the company is overly dependent on its Bangalore property. With ARRs coming off, both revenues and margins could be under pressure.
That could be true for other players too, because while revenue growth may slow down, costs continue to rise. Despite posting strong revenues in the June quarter, operating profit margins for Leela were down by nearly 500 basis points to 44 per cent due to a 45 per cent jump in staff costs.
Margins for EIH were flat at 30 per cent while IHCL’s margins fell 80 basis points to 31 per cent. Crisil estimates that the supply of hotel rooms will grow at 16 per cent compounded between FY07-12 while demand will grow at a slower pace of 12 per cent. That could clearly put pressure on the profits of hotel companies. Any delays in completing projects would, however, help cushion the impact.
While Hotel Leela trades at a price-earnings multiple of 10 times estimated FY09 earnings, IHCL trades at an expensive 12 times. EIH is much more expensive at 20 times.
