Supply surge to dampen recovery in hotels' profits

Hotel chains such as Indian Hotels Co Ltd, EIH Ltd and Royal Orchid Hotels Ltd are increasing capacity and plans to raise tariffs by 8-15 percent as tourism demand revives in Asia's third largest economy.

But competition has been hotting up in the Indian hospitality sector with global majors such as Starwood Hotels & Resorts, Marriot International and Hyatt Hotels, also keen on tapping the market.

Due to this, Indian hotels are also losing their edge to effect any substantial rise in room rates, which in effect is putting a squeeze on EBITDA margins. "Because of the huge supply coming in, hoteliers are not able to increase the room rates to the extent they would have liked to and they are also below the pre-crisis levels of 2008," said Sridhar Chandrashekar, head of research at Crisil Ltd.

"At an EBITDA level hotel companies used to enjoy margins around 40 percent (in 2008). Now it will be slightly below 40 percent," he added. Indian Hotels Company, which operates the Taj chain, has announced its plan to raise room rates by October -- its first in nearly two years -- as rates lag occupancy.

EIH Ltd, owner Oberoi and Trident hotel chains in which Reliance Industries has a 14.8 percent stake, also plans to raise rentals by 8-10 percent from October. The rates are, however, unlikely to touch the levels witnessed before the two-year slowdown that crippled discretionary spending.

"Occupancies will run around 75 percent for December quarter. 2008 was the peak, and we are still slightly below that, both for ARRs (average room rates) and occupancies," said Himani Singh, sector analyst at brokerage Elara Securities.

Average room rates ranged around 9,900 rupees in 2008/09 for key Indian properties. Even by the end of this fiscal rates may reach 8,100-8,200 rupees, Crisil's Chandrashekar said.

BETTER THIRD QUARTER

"We expect the business condition to improve from the third quarter of the current financial year and that is when we plan to increase our room rentals," said EIH Chairman PRS Oberoi. But this may not be enough to restore the industry to the profitability they enjoyed in 2008, before the downturn and the militant attacks in November 2008 in Mumbai.

"2007/08 was an exceptional year for hotel firms as occupancies were at their peak. At that time the industry was also facing a supply constraint," said Kaustubh Pawaskar, analyst with Sharekhan. Profits have fallen steeply since then.

Indian Hotels' June-quarter net profit fell to 33.3 million rupees from 164.4 million rupees a year ago. EIH reported a net loss, while Asian Hotels (North) Ltd, owner of the Hyatt Regency, saw profit almost halve to 63.2 million rupees. "The profitability will improve in the second half. But comparing it to FY08 will be difficult," Pawaskar added.

"It's a tough industry to give an outlook but we expect business to be fairly strong this year," said Keshav Baljee President at Bangalore-based Royal Orchid, which plans to raise tariff by 10-15 percent from October. Crisil's Chandrashekar expects revpars (revenue per available room) to rise by 4-5 percent this fiscal pushing up sales.