• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

C. Raja Rajeshwari

If foreign tourist arrivals increase by another 15-20 per cent, then we would really be in a serious situation with no rooms to offer. And if an additional five million tourists were to travel to India, we would have to add at least 100,000 more guestrooms.

Mr Vivek Nair, president, FHRAI

Mr Vivek Nair, who recently took over as the president of the Federation of Hotel and Restaurants Association of India (FHRAI), has seen the ups and downs of the hotel industry through his association with Hotel Leela Ventures as its Vice-Chairman and Managing Director. In an interview with Business Line, he speaks about the unfolding picture in the industry and the challenges ahead.

Excerpts from the interview:

How is 2004 going to be for the hotel industry?

The industry's fortunes have changed significantly over the last one year; the period before this was impacted by the 9/11 attacks and the SARS scare. Because of peaceful times, foreign tourists are now willing to come to India.

Last year, we saw an upsurge in both foreign and domestic tourists. Foreign tourist arrivals have gone up by about 15-20 per cent; tourism earnings should be crossing Rs 17,000 crore this year compared with Rs 14,000 crore last year. This would provide a boost to the hotel industry.

At the same time, there are some challenges too. For instance, take Bangalore. While the market is strong, there has not been much additions to the number of rooms. From last October, inflows have been heavy, which has led to a situation of demand exceeding supply. Most hotels have been reporting 80-90 per cent occupancy and are, on occasions, turning away customers. So, there is a problem of plenty.

What is being done to avert such a situation?

Efforts are now being taken by many hoteliers to increase the number of rooms available. The reason why there is no fresh supply of hotel rooms at present is that the past three years (prior to FY04) have been tough for the hotel industry. Promoters or investors who wanted to set up hotels have been dissuaded by the depressed phase.

For about 15 years before 2003, we had about 6-8 per cent increase in supply annually. But in 2003, growth declined to about 2 per cent because of adverse market conditions. And if we start construction now, it would take at least 3-4 years before the supply hits the market.

With the sudden spurt in hotel construction, isn't there going to be a situation where there would be excess capacity, because of which room rates would be discounted again?

That would just be a temporary phenomenon. When new rooms are added , hoteliers have to discount to gain market share. But in 6-9 months, the rates would stabilise. Prices across hotels in a particular location may go down for some time, but would eventually pick up.

Mumbai, for instance faced a similar situation. About 4,000 rooms came up in about 20 hotels, but they are registering more than 90 per cent occupancy now. Despite such additions, there would still be no rooms to offer even if the demand picks up marginally.

Is the condition of demand outstripping supply seen only in Bangalore or is it prevalent in other metros too?

This situation is, at times, seen in Chennai and Hyderabad, too. Hyderabad, which used to be a soft market (about 50 per cent occupancy), is now recording, on an average, 90 per cent occupancy.

Average room rates have gone up by almost 30 per cent. Delhi and Mumbai are now seeing almost 100 per cent occupancy. If foreign tourist arrivals increase by another 15-20 per cent, then we would really be in a serious situation with no rooms to offer.

Would we reach such a situation despite the new additions planned?

Even if an additional five million tourists were to travel to India, we would have to add at least 100,000 more guestrooms. At a trimmed cost of Rs 8 lakh and Rs 1 crore per room for one-star and five-star deluxe hotels respectively, the minimum investment required would be about Rs 25,000 crore.

We do not have that kind of investment right now. Over the next 3-4years, this level of investment has to be made, which would be hard to meet unless foreign direct investment is attracted in a big way.

What we require now is support from the government in terms of land or lease space and tax benefits as given to other industries, so that hotels in India can be competitive. The industry is capital intensive and takes long to achieve cash break-even.

What are the key concerns faced by the industry?

Luxury tax levied by State governments is an issue. The reduction or abolition of this would help in lowering rates, thereby attracting more tourists. At present, the package offered by tour operators take into account the airfares and hotels charges.

Luxury and sales tax are then added to it. This makes the package expensive and the domestic tourist would rather go abroad where the package cost is attractive.

The reduction could make the packages attractive, as we are going to pass on the benefit to the customer. For instance, in Maharashtra, luxury tax was cut from 10 per cent to 6 per cent; this benefit has been passed on. In Goa, it is only 4 per cent in the off-season, down from a high of 15 per cent.

The States still levy sales tax of 15-39 per cent. We are asking the State governments to reduce the sales tax. They can make good the loss in revenues by the increase in business.

Better airports have been a long-time demand. The Government has agreed to to put up new airports and renovate existing ones through joint-ventures. Water supply issues are being taken with the local authorities. Overall, we have been seeking better infrastructure.

Studies show that a Rs 10-lakh investment creates about 20 jobs in the manufacturing sector, 43 in agriculture and as high as 83 jobs in the tourism sector. So, for every sop given, there would be more employment generated in tourism than in other industries.

Have there been signs of domestic travel picking up? Is the revival in the hotel industry only because of foreign tourists or have domestic tourists, too, helped?

There has been an increase in domestic travel. Hotel companies would have benefited more if the domestic traveller had not travelled abroad. About 4.5 million Indian tourists go abroad.

With the reduction in airfares and room rates, it is more attractive to travel abroad now as compared to a few years ago. They would rather prefer to go to Phuket rather than to Kerala or Mahabalipuram.

We are hoping that this trend would reverse and the demand during the so-called off-season (April to September) picks up. As of now, domestic travel has picked up only to certain tourist spots.

How has the performance of the mid-market segment been vis-à-vis the higher end market? There is also a boom in the mid-market supply, why is it so?

Overall, this segment's performance has been good, as not too many three- or four-star properties are being developed of late. The investors or promoters used to feel that the return on a five-star or a five-star deluxe is higher for the investment made.

But now, with demand picking up for mid-segment hotels, the thinking is changing.

The domestic traveller, not the up-market kind, would like to stay in a functional room when he travels.

Also, the Government's move in the last Budget to provide term loans for hotel projectsthat are three star and above at lower interest rates has helped to a large extent.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Quiz

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line