Premium hotel inventory addition is expected to lag demand and grow at a CAGR of 3.5-4% over the next five years: ICRA

Notwithstanding the potential impact on demand with further Covid waves, if any, ICRA expects the industry’s revenues and margins to return to pre-Covid levels in FY2023. The demand recovery has been better than expected in the last few months, aided by domestic leisure/transient travel, pent-up demand from MICE (including weddings), and gradual recovery in business travel and foreign tourist arrivals (FTAs). H2 FY2023 is expected to be better than H1 FY2023, with the sustenance of the leisure, transient, and MICE demand and further pickup in business travel and FTAs.

ICRA expects pan-India premium hotel occupancy to be 68-70% for FY2023, while the ARR is expected to hover around Rs. 5,600-5,800. The YTD October 2022 occupancy stood at 62-64% while the ARR for 7M FY2023 was only at an 8-10% discount to pre-Covid levels and stood at Rs. 5,000-5,200. A few high-end hotels and leisure destinations witnessed ARR spike to higher than pre-Covid levels over the last 6-9 months. The improved operating leverage, along with the sustenance of cost-optimisation measures, will support margins and cashflows for hotel companies.

Vinutaa S, Vice President and Sector Head – Corporate Ratings, ICRA, said, “The healthy demand uptick has resulted in a pick-up in new supply announcements over the last 4-5 months. Further, construction activity in projects stalled post-Covid-19 has also commenced recently. However, the hotel supply pipeline is expected to grow only at a 5-year CAGR of 3.5-4%, adding approximately 15,500 rooms to the pan-India premium inventory of ~94,800 rooms across 12 key cities in India. This will facilitate an upcycle, as demand improves over the medium term while supply will lag demand with a cautious expansion approach by hoteliers and the absence of any major announcements during the covid period. The current inventory growth is significantly lower than the growth of approximately 18% witnessed during FY2009-2013, after the global financial crisis.”

In its recently published report, ICRA opines that the incremental premium supply is concentrated in select markets, with Mumbai and Bangalore accounting for a bulk of the upcoming inventory. There are sizeable supply announcements in tier-II leisure and religious destinations as well. Further, the incremental supply pipeline is relatively higher in FY2023 (primarily pertaining to projects which had begun construction earlier and were shelved for 12-18 months during the covid period) and FY2026 (those signings announced in the last few months). The report also suggests that rebranding has also been prevalent and that a significant part of the pipeline is also expected to be through management contracts and operating leases.

Also, not many mergers and acquisitions were witnessed, and very few hotels were shut down permanently during the Covid period, as ECLGS provided the necessary liquidity support. Nevertheless, some projects by players with weak financial profiles and those in some micro-markets where demand pick-up has been slower have been shelved.