According to a recent CRISIL Ratings analysis of branded hotel companies with 70,000 rooms across categories, the hospitality industry in India is poised for a healthy revenue growth of 11-13% in the next fiscal year. This follows a strong 15-17% growth in the current fiscal year. The anticipated growth is supported by steady domestic demand and an expected ramp-up in foreign traveler demand.
The strong demand dynamics, along with modest new supply, will keep the operating performance of the industry healthy over the near term.
CRISIL Ratings has noted that the robust operating performance bodes well for industry profitability, with earnings before interest, taxes, and depreciation (EBITDA) expected to maintain strong momentum throughout the current and upcoming fiscal periods.
This, coupled with restricted capital spending, will maintain robust credit profiles.
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According to Anand Kulkarni, director of CRISIL Ratings, the ongoing domestic travel demand, which has been a significant factor this fiscal year, is expected to continue into the next fiscal year.
“This momentum will be supported by healthy economic activity which drives business demand and continuing leisure travel demand which reinvigorated post the pandemic,” he said.
”While the demand will remain strong, the growth rate is expected to taper off next fiscal due to high base. Consequently, the average room rates (ARRs) are expected to grow 5-7% next fiscal against 10-12% this fiscal and the occupancy is expected to remain healthy at current levels of 73-74%,” he added.
CRISIL Ratings noted that an anticipated increase in inbound foreign travel demand will further boost hotel demand in the upcoming fiscal year.
In addition to the factors mentioned above, demand in the MICE (meetings, incentives, conventions, and events) segment is anticipated to stay robust, with corporations resuming their activities following the pandemic-induced pause.
CRISIL Ratings highlighted that besides demand, a favorable supply situation plays a crucial role in driving the industry’s strong performance.
According to Nitin Kansal, director at CRISIL Ratings, greenfield capital expenditure is projected to remain subdued, with new room additions expected to stay at 4-5% per fiscal over the next few years.
“While the demand rebound has boosted the industry sentiments, the cost dynamics still remain a constraining factor for new capex,” he said.
“High land costs, sizeable increase in construction costs, long gestation period coupled with cyclicality in the sector is resulting in cautious new capex in the sector. Therefore, brands may keep adding rooms through management contracts, which will limit their upfront capital costs,” he added.
CRISIL Ratings said the effect of conducive demand supply dynamics is also visible on the operating profitability of the industry.
“While costs are expected to inch up gradually, operating leverage will help maintain strong operating profitability, at 32-33% over the current and the next fiscal similar to last fiscal and 1,000 bps higher than the pre-pandemic level,” it stated.
“In this milieu, credit profiles of the hotel companies will continue to improve. For instance, interest coverage is expected to rise to 4.3 times and 5.5 times this and next fiscal which will be higher than 3.2 times last fiscal,” it added.
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