Moneycontrol Pro Panorama | Will supply additions sour long-term profits of hotels?

The big bucks that drive profits in the upscale and luxury hotels are from in-bound tourism. (Representative image)

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If the Q2 FY2025 results of K Raheja-owned Chalet Hotels declared last evening are a measure of the hospitality sector’s performance for the quarter, investors should be optimistic on the prospects ahead. While it posted a loss due to higher tax expenses, the robust 10 percent year-on-year (YoY) increase in the average daily rates (ADR) for rooms with occupancy levels at 74 percent points to strong demand.

Other leading hotel chains such as the Indian Hotels Company Ltd (IHCL) and EIH are yet to announce results. However, the underlying narrative of strong demand for rooms in the quarter under consideration and improved prospects in the next two quarters of FY2025 are a given. Consensus among brokerages points to a reasonable 8-9 percent YoY growth in revenue per available room (RevPAR) growth for this fiscal Q2 FY25E.

But as in any sector, robust and sustained demand fuels investments in capacity additions, in this case, hotel rooms. A Jefferies Report spells out that IHCL signed 35 and opened 12 new hotels in H1 FY25; the total portfolio is now at 345 hotels, with a pipeline of 115 hotels. Mid-sized chains such as Chalet Hotels and SAMHI Hotels too are reporting higher signings, even as international chains such as Wyndham Hotels & Resorts and Dusit Hotels and Resorts are stepping up their India presence.

Over the next five years, the industry is expected to add approximately 55,000 rooms, with supply registering a compound annual growth rate (CAGR) of 4.5-5.5 percent, states a report by CareEdge Ratings.

The moot question is, will this cool off the rising trend in occupancy rates and RevPAR, both of which are critical to a hotel sector’s profitability. September did see a slowdown in the industry’s RevPAR growth as daily rates across India stuttered.

Dive deeper into the occupancy mix of large hotel chains and one will find that domestic travel is expanding both in leisure and business segments. However, the big bucks that drive profits in the upscale and luxury hotels are from in-bound tourism. This is not sufficient to spice up earnings yet. In the first half of 2024, India’s foreign tourist arrivals (FTAs) rose by 9.1 percent YoY. This was lower than around 10 percent YoY noted in same period in 2019, which was the last full year before the COVID-19 pandemic.

This Chart of the Day that shows rising room addition in the midscale/economy segment also highlights that the pan-India increase in average room rate has increased in the past two years in US dollar terms, but it is still 50 percent lower than that of FY2008. Although this builds optimism about the room for hotels to raise tariffs, it also indicates the importance of FTAs to hotels’ RevPAR and profitability.

Indeed, the September quarter results of hotel companies (yet to be announced) may not see any outliers with mere moderate expansion in revenue and profit margins, reckons a report by Elara Capital. But higher supply in the long term could make the demand-supply equation unfavourable to long-term profits of the sector.

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