Higher tar­iffs are yet to sweeten re­turn on cap­i­tal for ho­tel chains

Mint Asia ST - - Otherviews - VAT­SALA KAMAT


lan­guish­ing for a decade, lux­ury ho­tel chains are op­ti­mistic about im­proved room rates in 2019. A com­bi­na­tion of fac­tors, such as low room ad­di­tions and im­proved de­mand over the last three years, has led to an in­crease in room tar­iffs.

Ac­cord­ing to Crisil Ltd, pan-in­dia av­er­age room rates in fis­cal year 2019 are likely to be about ₹ 7,400-7,600 in the lux­ury seg­ment— about 6-8% higher than three years ago. While this is not great con­sid­er­ing the 28-30% drop over a decade un­til FY18, it sig­nals the abil­ity of these ho­tels to raise tar­iffs, af­ter a long lull.

Lim­ited room ad­di­tions in the last five-six years in the premium seg­ment helped bridge the de­mand-sup­ply gap that was the big­gest ob­sta­cle to rais­ing room rates. The 4% CAGR (com­pound an­nual growth rate) in sup­ply was out­paced by 6% de­mand growth.

The first six months of FY19 mir­rored a 200 ba­sis points in­crease in the oc­cu­pancy rates at 67% on a pan-in­dia ba­sis. A ba­sis point is 0.01%. Icra Ltd’s sam­ple for the in­dus­try wit­nessed strong up­trend in rev­enues dur­ing Q2 FY19, with quar­terly growth at a 28-quar­ter high. While the base im­pact (weak Q2 FY18 due to the goods and ser­vices tax roll-out, de­mon­e­ti­za­tion, liquor ban, etc.) has bumped up growth, the re­open­ing of a few ho­tels, and growth in re­al­iza­tions, ris­ing food and bev­er­ages in­come, and new open­ings have also sup­ported rev­enue growth.

Bro­ker­age firms ex­pect the im­prov­ing trend to con­tinue. “The busi­ness sen­ti­ment is ex­pected to im­prove with im­prov­ing eco­nomic con­di­tions, ease of do­ing busi­ness and steady in­crease in com­mer­cial ab­sorp­tion in top cities trans­lat­ing to more cor­po­rate travel,” ex­plains ROOM TO GROW Ho­tel oc­cu­pancy rates and av­er­age room rates are likely to steadily im­prove over the next few years as de­mand-sup­ply turns favourable. Rahul Prithi­ani, di­rec­tor at Crisil Re­search. So far in FY19, leisure des­ti­na­tions re­ported bet­ter op­er­at­ing prof­itabil­ity as the ru­pee de­pre­ci­a­tion may have favoured in­bound tourism. Im­proved oc­cu­pancy and rev­enue has al­ready set ho­tel stocks on fire. The In­dian Ho­tels Co. Ltd and EIH Ltd have ral­lied 25-30% on the Street since Septem­ber. Some such as Ho­tel Leelaven­tures Ltd are scout­ing for buy­ers to bail them out, af­ter be­ing caught in a debt quag­mire.

How­ever, from an in­vestor stand­point, the re­turn on cap­i­tal em­ployed is still not at­trac­tive and in low-sin­gle dig­its com­ing in below the cost of cap­i­tal in most cases. It would be a long haul to rake in prof­its as other op­er­at­ing costs are ris­ing too.

Given this sce­nario, un­less cash flows are suf­fi­cient to trim debt, these stocks are prone to volatil­ity. Their per­for­mance, there­fore, is linked to a myr­iad of do­mes­tic and in­ter­na­tional fac­tors such as for­eign ex­change move­ments, in­fla­tion and global macroe­co­nomic sce­nario.

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