INDIAN HOTELS INDUSTRY

Summary The Indian hotels industry is still in the nascent stages of recovery and is yet to make the transition from an occupancy-led cycle to one supported by rising average room realizations (ARRs) We believe sustained demand and a relatively longer booking window point to the return of some pricing power during the current year. However, supply pressures in some cities are likely to negate the impact of the same and also prevent any steep increases in room tariffs.

Weak macroeconomic signals emanating from the USA and Europe, expectations of the domestic corporate sector reporting a lacklustre performance in fiscal 2011-12 (year to March 31, 2012), rising interest rates, increase in food and fuel costs, and unrest in West Asia continue to cloud the near-term prospects for the Indian hotels industry The longer-term prospects of the industry however remain robust, given that it can absorb significant capacity additions in a scenario of robust economic growth; besides, the industry’s room inventory remains low by global standards Overview The global hotels industry appears to be now on a path of slow recovery, having coming out of two exceptionally bad years (2009-10).

While the main recovery leaders are the emerging countries in the Asia-Pacific region, the developed luxury hotel markets of the USA and Europe have also reported signs of demand recovery during the past 12 months.

In India, the demand - or occupancy - led recovery that started with the return of domestic travellers late in calendar 2010, received a boost with foreign tourist arrivals (FTAs) picking up in the subsequent months. The latter half of 2010-11 saw the industry push for higher tariffs, although pricing recovery for the whole of 2010-11 stood at a tepid 5-8%. From our analysis of demand, supply and industry profits, and considering the fact that the previous recovery cycles lasted six to eight years, ICRA believes that the current recovery is still in a nascent stage and yet to make the transition from an occupancy-led up-cycle to a more convincing ARR-led recovery.

The market requires further improvement in occupancy and confidence to be able to gain real pricing power. Overall, ICRA expects the Indian hotels industry to post a modest recovery in performance during the next three quarters, aided by high single-digit ARR growth.

One of the key risks to recovery come from demand dampeners, namely, expectations of relatively mute corporate performance in fiscal 2011-12 (which could slow down corporate spending), increase in interest rates, rise in fuel and food prices (which would impact disposable incomes), and subdued macroeconomic signals from the developed markets. For recovery to be sustained, it must be supported by gains in the underlying economy. Additionally on the supply front, heavy supplies in markets like the National Capital Region (NCR), Hyderabad, Pune, Bangalore and Chennai are expected to suppress pricing power. Know More Rajasthan hotels