Hotel industry to grow in FY23 on demand recovery and asset-light expansion, says CRISIL Ratings

The Indian hotel industry is expected to register a significant improvement in profitability in the current fiscal aided by higher average room rate (ARR) and occupancy, according to a report by CRISIL Ratings. Profitability as represented by earnings before interest, tax, depreciation and amortisation (EBITDA) margin, is expected to be about 34% in FY23, compared with 24% in pre-pandemic year (FY20), the report added.

The report said that revenue is likely to rise about 23% over the pre-pandemic level, on the back of robust recovery in business travel and continued traction in leisure travel.

“Leisure travel had gained traction post the Delta wave last fiscal, while business travel has started picking up steadily after a much milder Omicron wave in Jan 2022,” said Mohit Makhija, Senior Director, CRISIL Ratings.The pick up in business and leisure travel is creating demand for meetings, incentives, conventions and events segments, Makhija added.

CRISIL Ratings noted that improvement in international business travel in the second half of this fiscal will strengthen the industry performance. Makhija, further, said that occupancy will rise to about 73% this fiscal compared to 68% in FY20), while average room rate (ARR) should increase 8-10%.

CRISIL Ratings said that strong business performance along with limited capital spend, will improve the credit profiles of firms in the hotel industry. The above estimates is according to CRISIL Ratings analysis of hotels with an aggregate of about 40,000 rooms across categories.

Further, the gap between demand and supply will aid the improvement in ARR. While the sharp demand recovery is expected to increase capital expenditure, supply will take a some time to meet the rising demand because of the long gestation period for setting up a greenfield hotel and that scenario is likely to favour existing hotels.

Cost Control Measures

CRISIL Ratings stated that the organised players in the hotel industry are increasing their footprint in an asset-light way and increasing their capacity by entering into hotel management contracts for existing standalone properties. This move is likely to limit the companies’ upfront capital costs and keep leverage in control.

Besides, several standalone hotels couldn’t keep their operations running during the last two years due to the pandemic and some of them have also shut down permanently. However, other hotels are exploring opportunities to collaborate with organised players. The branded and organised players have been utilising this opportunity to expand their footprint in a market that is expected to grow well.

Moreover, as the hotel industry was severely hit by the pandemic, several companies had recalibrated their costs and took measure to improve their fixed and operating costs. The measures included reassessing employee headcount using automation and better peak-hour manpower planning. In addition, hotels eliminated high-cost, low-preference items from food and beverage menus and ensured efficiency improvement to keep utility expenses under control.

CRISIL Ratings’ Director, Anand Kulkarni, said, “Strong revenue growth and cost optimisation measures will boost profitability of organised players this fiscal. While the credit profiles were stressed in the last two fiscals, this fiscal will bring a material improvement, with interest coverage estimated at about 4 times against about 2.6 times in fiscal 2020.” He further said that the debt to Ebitda ratio was seen improving to about 1.7 times from about 3.4 times.