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C. Raja Rajeshwari

HOTEL stocks, which lost favour post 9/11, have a bright prospect over the next couple of years. The improvement in the domestic economy should help the process of recovery for the industry though global economic outlook continues to pose some cause for concern. But the worst seems to be over and as business confidence picks up, it could augur well for business travel to India, which is a market few MNCs would want to ignore. The expansion plans of a number of hotel companies indicate a positive long-term outlook.

In addition, leisure travel in India is set to boom with an increase in the disposable income of the domestic traveller and the marked efforts to sell the country as an international leisure destination.

The hotel industry has come a long way since the boom days of the early-to-mid 1990s, when the economy was opening up and business travel was on the rise. The dynamics of the industry has changed with the entry of new players, the rampant discounting, policy and infrastructure worries and edgy tourists. These are still at play but the industry players appear to be coping much better now.

A different ball game

Lately, three distinct patterns have been evident in the industry: MNCs seeking a presence, new domestic players looking to capitalise on the expected boom in traffic and consolidation by existing majors.

The rather unimpressive performance of the hotel industry in the past four years has not dampened MNCs such as Le Meridien and Intercontinental, to name just two, from setting up shop in India. According to a survey by the World Tourism Organisation (WTO), the number of tourist arrivals in India is expected to increase from the current 2.5 million to 5.9 million by 2010 and to 9 million by 2020.

Even if one views such numbers with scepticism, they do provide an idea of potential demand for hotels in the years ahead. Despite the growth potential, the risk profile of the industry is on the higher side owing to its vulnerability to global events. But this does not seem to be deterring the new players.

Through joint ventures, management contracts and equity stake, these MNCs have established a base to pursue further growth. This, coupled with the rapid capacity creation by domestic players, has thrown the demand-supply equilibrium haywire. MNCs, with their deep pockets, would be able to endure the difficulties posed by sluggish room rates and occupancy levels than most domestic entrants.

In keeping with the fancy of the 1990s, many construction/real-estate players set up hotels. This was led by the perception that hotels can be a profitable business with a short gestation period. But the basis on which these projects came up fell apart, as the Asian and Indian economies slowed down in the late 1990s.

The occupancy levels were never likely to match the expectations of the new entrants. As a result, the companies began embarking on a property-rationalisation exercise. The past few years has seen some consolidation with property either being sold-off or acquired. For instance, Hotel Corporation of India has disinvested its property in Mumbai and Bihar, and three more are on the block.

This consolidation of existing capacities in the hands of established players is good for the industry in terms of pricing power and in handling the problems of excess capacities.

Occupancy rates up, but...

To boost occupancy rates, the five-star and five-star deluxe hotels began offering sizeable discounts, lowering their tariffs to to that of the four-stars. But this hardly proved to be a solution, as the three-star and four-star hotel chains reacted by dropping their rack rates further through discounting.

The net effect from this discounting exercise has been an erosion of the revenue per available room. According to a report of Pannell Kerr Forster — a leading hotel consultant — the average occupancy rate in 2002 was higher by 1.5 per cent in Delhi's star hotels. However, the revenue per available room was lower by 7 per cent in 2002, indicating continuing pressures on room rates.

Such fall in revenues was, however, not witnessed in places where there has been a substantial increase in occupancies. For instance, the hotels in Goa and Bangalore had increased revenues per room, thanks to the leisure and business traveller.

The hotels in Bangalore and Hyderabad have been enjoying higher occupancies and ARRs (average room rates) because of the BPO (business process outsourcing) boom.

Perception — high-cost hotels

That the rack rates being offered by Indian hotel chains are high is a common refrain. According to an industry survey, most travel agents and company travel managers have said that Indian hotels were expensive compared to similar hotels abroad. Leisure travellers have the power to choose their destination, and expensive hotels in India might lose out on their customers. But a business traveller has no choice and his needs may dictate travel to India and to a particular city.

The rack rates may be high but hotels have, through discounting, tried to lower the effective rates to lure the business segment. A $260 room could go for as low as $60. Most hotels feel that discounts are essential and different customers and customer groups may need to be given varying levels of discounts.

While the companies use their discrimination in discounting, it would be irksome to the traveller if he has to pay a high price even after a big discount. These differentials only make it more important for the potential clientele to have a transparent picture of what is on offer. There is all-round pressure on hotels to rationalise rack rates and standardise discount policies.

Banking on tourism...

There is a direct relationship between increases in tourist arrivals and the revenues of the industry. The discounting seen in the industry is because the demand has not grown much in the past few years. Hence, hoteliers are falling over each other to grab the tourist business, by offering heavy discounts. Only during periods when the size of the tourist pie increased have discounts declined and ARRs increased. For instance, in February 2002, India had 2.4 lakh tourists; and the ARRs peaked at Rs 4,414 across all five-stars.

The fall in tourist levels in 2002 compared to 2001 was to some extent taken care by wooing the domestic traveller. This kept the pressure on occupancies at bay. Positive as this was for the industry, the companies did lose out on foreign exchange earnings. In 2002, there was a 4.9 per cent fall in the forex earnings. For instance, in 2001-02,Indian Hotels saw its foreign earnings drop 17 per cent to Rs 294.18 crore. .

The travel advisories against SARS-affected countries and the launch of `Incredible India' campaign has augured well for the industry in the past six months. `Incredible India' is the integrated global campaign launched by the Ministry of Tourism, which aims at positioning India as the "safe tourism destination of choice for discerning travellers."

Better outlook

The tourist arrivals for January-March 2003 have increased by 12.4 per cent compared to the previous year. In addition, for the quarter April-June, which is usually a subdued period for the industry, occupancies have increased vis-à-vis the same period of 2002. This suggests that hotel companies may report improved revenues and profits in fiscal 2004.

The prospects of the industry look encouraging in the medium term. But much depends on the socio-political and economic stability. ARRs would remain flat in the near term, making hotels affordable. For the leisure boom to translate into healthy numbers, there has to be a cohesive and relentless effort from the various parties involved — the governments, travel agencies, airlines and hotels. There may then be room for cheer for the industry and its investors.

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