By Gaurav SudIndias hotel industry has been through a cyclical low over past decade.
This has turned many companies in sector loss making, and overall return on invested capital has been lousy.
This can be attributed to many reasons.There was a sharp rise in average room rent (ARR) during 2002-2007 period.
In metros like Delhi and Mumbai, it was difficult to get a five-star room for even Rs 20,000 per night in 2007.
This led to amassive investment in hotel properties across India, which resulted in supply rising faster than demand, and eventually drove down utilisation levels and ARR in following decade.Secondly, new digitial platforms like MakeMyTrip, GoIbibo, Yatra, ClearTrip became popular and allowed easy price discovery, which drove down average ARR for larger chains as even smaller hotels started attracting a wider audience.
Further more, in order to grow business, many of these digital platforms started offering big discounts to travellers, which impacted pricing power of larger hotel chains.Excessive taxation on industry made larger hotel chains suffer at cost of unorganised hotels, which were willing to cut corners by not paying taxes and thus became more competitive for end user.Looking back, it looks like a perfect storm for hospitality industry.
But finally, there is light at end of tunnel.
A number of factors are driving this revival, and coming decade looks much better for industry as a whole.Better road infrastructure, rising disposable income, propensity to travel over weekends, e-visa facilitating foreign tourist arrivals, tax rationalisation are among numerous factors driving demand for tourist and business travel.Since there has not been much investment in hospitality industry in last few years, supply of new inventory is very limited.
According to an ICRA report, demand is expected to grow 9-10 per cent in next four years vs 4-5 per cent supply growth.
This, in turn, will drive increase in ARR over next few years.The long downturn has also lowered costs in hospitality industry, as tracked by metrics like number of people employed and operating costs per room.
In coming years, expected double-digit growth in ARR coupled with lower operating costs will drive profitability growth in industry, helping them improve return ratios and deleverage balance sheets.This sector, as a whole, looks like a good investing bet for next five years.