Hotels may see slower revenue growth in FY25, keep up restriction on capex: Crisil

Branded hotels are expected to report lower revenue growth rate in FY25 versus FY24. Image of Samhi Hotels.

After a joyride on spurt in travel demand, the hospitality sector is likely to see a slowdown in revenue growth in fiscal 2024-25 because of high base effect.

Ratings agency Crisil has estimated an 11-13 percent topline growth for hotels in FY25 from 15-17 percent this year.

Domestic demand will continue to be the key driver next fiscal, said Anand Kulkarni, director at Crisil Ratings. “This momentum will be supported by healthy economic activity which drives business demand and continuing leisure travel demand which reinvigorated after the pandemic. While the demand will remain strong, the growth rate is expected to taper off next fiscal due to high base."

The average room rates (ARRs) are expected to grow 5-7 percent next fiscal against 10-12 percent in FY24 and the occupancy is expected to remain healthy at current levels of 73-74 percent.

Factors that will fuel the demand for hotels in FY25 include a steady domestic demand, ramp up in foreign traveller demand and a modest new supply will keep the operating performance of the industry healthy over the near term.

Foreign tourist arrivals are expected to be at 9.5-9.8 million persons this fiscal against 7.9 million last fiscal and 10.6 million in fiscal 2019, the report noted.

On the other hand, demand in the MICE (meetings, incentives, conventions and events) segment is expected to remain healthy as corporates have resumed their activities after the pandemic-induced hiatus.

In addition to demand, favourable supply situation is one of the critical drivers of the strong performance of the industry.

However, the supply growth of rooms will remain restricted. “Greenfield capex is expected to remain muted with the new room addition remaining at 4-5 percent per fiscal over the next couple of years. While the demand rebound has boosted the industry sentiments, the cost dynamics still remain a constraining factor for new capex. High land costs, sizeable increase in construction costs, long gestation period coupled with cyclicality in the sector are resulting in a cautious approach when it comes to adding capex to the sector. Therefore, brands may keep adding rooms through management contracts, which will limit their upfront capital costs,” said Nitin Kansal, another director at Crisil Ratings.

The healthy operating performance will augur well for the industry profitability where the earnings before interest, taxes and depreciation (Ebitda) will continue the strong momentum over the current and the next fiscal, said the report which has analysed branded hotel companies with around 70,000 rooms across categories.

The analysts noted that the effect of conducive demand supply dynamics is visible on the operating profitability of the industry.

The ARR-driven revenue growth translates into better profitability, given that operating costs do not increase proportionately. Plus, hotels had taken several cost efficiency measures, such as better manpower planning and optimisation in food and beverage expenses, in the past two fiscals.

While costs are expected to inch up gradually, operating leverage will help maintain strong operating profitability at 32-33 percent over the current and the next fiscal similar to last fiscal, the analysts said.