Hospitality Sector Analysis

Hospitality Sector Analysis | 2013

Hospitality Sector Analysis2013Ayush AgarwalSpecial Situation Advisors (India) Pvt. Ltd.

Table of ContentsExecutive Summary2Brief of the sector3List of services forming part of the Hospitality sector4Sub-sectors4Growth History5Performance Indicators6ADR, RevPAR & OC of Indian Hotel Industry6Future Outlook7New Avenues of Growth8Key Players in the Market9Challenges for the sector10Hospitality Sector SWOT Analysis11Various reasons for stress in the industry11Measures taken/planned by Central & State Government12Hospitality sector in the news12RBI allows hospitality sector to avail benefits under ECB12As per RBI notification dated 20 Nov 201212Industry Associations & their details13

Executive Summary

Brief of the sectorThe Indian Hospitality industry [footnoteRef:2]contributes around 2.2 per cent of Indias GDP. The industry is expected to reach INR 230 billion (US$ 5.2 billion*) by 2015, growing at a robust CAGR of 12.2 per cent. India will be investing around INR 448 billion (US$ 10.1 billion*) in the hospitality industry in the next five years, according to a report The Indian Hotel Industry Report - 2011 Edition by CYGNUS Business Consulting & Research Firm. [2: Hospitality is a broad concept. For the purpose of report Hotel and Restaurant sector is considered as Hospitality Industry]

The direct contribution of Travel & Tourism to GDP was 1.9 per cent of total GDP in 2011[footnoteRef:3], and is expected to grow at 8.1 per cent per annum (pa) to INR 3,414.8 billion (US$ 77.0 billion*) (2.0 per cent of GDP) in 2021. [3: http://www.hospitalityindia.com/hospitality-industry-in-india.htm accessed on 4th may 2013]

The share of India in international tourist arrivals in 2010 was 0.61%, which is 0.02% improvement over 2009. Indias rank improved to 40th in 2010, from 41st in 2009.Indias tourism sector is the 3rd largest foreign exchange earner.

*Source: http://indiabudget.nic.in/es2011-12/echap-10.pdf

List of services forming part of the Hospitality sectorHospitality sector includes lodging,restaurants,event planning,theme parks,transportation,cruise line, and additional fields within thetourism industry.

Sub-sectors

Growth HistoryHotel & Restaurant Industry have noticed a robust growth in the past decade with CAGR of 8.44% from 2004-05 to 2009-10 & registered a growth of 7.7% in 2010-11[footnoteRef:4] [4: Source-The Federation of Hotels and Restaurants Association of India website accessed on 4th may 2013]

The tourism and hospitality sectors direct contribution to GDP in 2011 was USD35.2 billion and is expected to rise to USD40.4 billion in 2012. Over the period 2006-12, direct contribution is expected to register a CAGR of 14.6 per cent. In addition to a direct component, tourisms total contribution to GDP also comprises indirect and induced ones. Total contribution to GDP increased to USD117.7 billion in 2011 from USD99.3 billion in 2009; the figure is expected to reach USD134.7 billion in 2012.

Performance Indicators

The key performance indicator in the hotel industry are Occupancy Rate(OC), Average Daily Rate (ADR) & Room revenue per room available (RevPAR). The meaning and details about the indicator are as below:Occupancy Rate (OR): Rooms sold divided by rooms available multiplied by 100.Average Daily Rate (ADR): Room revenue divided by rooms sold. Revenue per Available Room (RevPAR): Room revenue divided by rooms availableADR, RevPAR & OC of Indian Hotel Industry

2005-062006-072007-082008-092009-102010-11

Average Daily Rate544470717989783764266800

RevPAR389250495496472641774624

Occupancy Rate71.571.468.860.36568

Table 1 Source: HVS Consulting and Valuation Services Report

Future OutlookIn the latest release by India Brand Equity Foundation (IBEF)[footnoteRef:5] in its March 2013 report, IBEF highlights Advantage India points which will fuel the growth in Indias inbound tourism sector [5: India Brand Equity Foundation(IBEF) is ansemi-government organisation that collects, collates and disseminates accurate, comprehensive and current information on various sectors in India]

As per an analysis by the Economy Survey of India and Technopak (2008), the Indian hotel industry is estimated at US$ 17 billion; 70% (US$ 11.85 billion) contribution comes from the unorganized sector andthe remaining 30% (US$ 5.08 billion) comes from the organized sector. The foremost contribution of the organized hotel industry comes from 5-star hotels. Despite a dip in the year 2009, an upward trend in growth of the overall hotel sector is expected, whereby the industry is expected to grow to US$ 36 billion by 2018[footnoteRef:6]. [6: Dissecting the Indian hospitality Industry report by Technopak Advisors]

There has been a consistent increase in the number of hotel rooms in recent years; growth of 5% in the last 3 to 4 years. However, this rate of increase is still not enough to meet the rising demand; further investment is required in this sector to meet this demand

New Avenues of Growth

MICE: Meetings, Incentives, Conventions and Events - are a new concept which many hospitality companies including travel trade are adapting to. The inbound MICE segment is growing at 15 to20% annually. Countries like Singapore and Malaysia have grown exponentially in the MICE market. India gets close to 0.96% share of the worlds meetings which although miniscule, has ample room forgrowth.

Mall-hotel a win-win scenario: For the Commonwealth games in 2010, government is expected to provide 10,000 budget rooms while the requirement would be for 40,000-50,000 rooms in the budgetcategory. In this scenario, the mall-hotel arrangement is a win-win situation for both hoteliers and developers. Smaller hotels in malls would lead to lesser investment due to decrease in real estate cost and smaller inventory.

Key Players in the Market

CompanyType of property Brands

Indian HotelsLuxury, mid-segment and budgetTaj, Gateway, Vivanta and Ginger

ITC WelcomgroupLuxury, budget and heritage hotelsLuxury Collection, Sheraton, Fortune and WelcomHeritage

EIHBusiness hotels, leisure hotels and cruisesOberoi and Trident

CarlsonLuxury, business hotels, economy and CruisesRadisson, Park Plaza, Country Inns & Suites, Park Inn

Inter ContinentalLuxury, mid-segment and business HotelsInterContinental, Crown Plaza, Holiday Inn, Holiday Inn Express, Hotel

Challenges for the sectorI. Regulatory Challengesa. No Uniformity in Taxes & High Tax StructuresII. External challengesa) Economic Slowdownb) Negative Impact of Terrorismc) High Cost of Landd) Cost of Debt & restricted access to foreign debtIII. Internal Challengesa) Skilled manpower shortageThe hotel sector is labor-intensive with an average employee-to-room ratio of 1.8: 1 in India, compared to 1.5: 1 globally. However there exist a huge gap in manpower availability, especially so with the budget hotel segment.

Hospitality Sector SWOT Analysis

Various reasons for stress in the industryi. High TaxesHigh and multiple taxes are imposed on the hotel and restaurant industry by the government. Apart from the normal service tax and VAT by the state and central government, Luxury tax is also added on 3 star hotels and above with ranges from 8 to 15 percent depending upon the state in which the property is situated. This when compared to the international standards is very high.ii. High capital intensive industry and long payback period of typically 9-15 yearsGenerally, Hotel projects have long gestation period and investment are locked for 9-15 years. In India, banks are conservative and hence do not grant such long term loans. Often projects do not achieve the projected cashflows and fast repayment of loan causes stress on the business. iii. Sudden changes in tax policies of the governmentIndian economy is unstable and there are often sudden changes in the policies which severly affect the hotel industry. Many a time the changes are brought into effect retrospectively and hence leaving very little scope for the business to dodge the effects.

Measures taken/planned by Central & State Government

To encourage the tourism sector, the government in recent times, has taken some measures which will benefit the sector. In FY09, Rs.520 crore for development of tourism infrastructure was allocated. This figure is higher by Rs.97 crore as compared to what was allocated in the previous year. However, it is only 1% of the total government spending. RBI has allowed ECB upto US$ 100 m in January 2009, which would help in raising funds for hotel projects. The Centre and States are also working out a PPP (Public-Private-Partnership) model to increase hotel capacity.

Hospitality sector in the newsBelow are the recent news and changes in the policies affecting the hospitality sector in IndiaRBI allows hospitality sector to avail benefits under ECBRBI allows projects costing upward of Rs.250 crore irrespective of their geographic location to borrow via External Commercial Borrowing (ECB) route in Jan 2013[endnoteRef:2] [2: 1 http://news.indiamart.com/story/rbi-allows-hospitality-sector-avail-benefits-under-ecb-174573.html accessed on 6th May 2013]

As per RBI notification dated 20 Nov 2012Three-star or higher category classified hotels located outside cities with population of more than 1 million is included in Social and Commercial Infrastructure of Infrastructure lendingi

Industry Associations & their detailsNoAssociationAddress & ContactHead people of the association

1Hotel Association of India

B 212-214Som Dutt Chamber-IBhikaji Cama PlaceNew Delhi-110 066, IndiaTel :+91-11-2617 1110/14Fax :+91-11-2617 1115info@hotelassociationofindia.com,hai@hotelassociationofindia.comMr. Nakul AnandPresident(Executive Director, ITC Limited)Mr. Raymond N. BicksonVice President(MD, The Indian Hotels Company Limited)

2Federation of Hotels & Restaurants Associations of India (FHRAI)B-82, 8th Floor, Himalaya House, 23, K. G. Marg, New Delhi-110 001Telephone: 011 40780780Fax:011 40780777Shyam Suri, Secretary General

3Hotels & Restaurants Associations (Western India)Candy House, 1st Floor, Mandlik Road,Colaba, Mumbai - 400 001.Tel. No. : 022-22855937Fax : 022-22817132.President of Honour - Mr. Ajit B. Kerkar(ChairmanTulip Star Hotels Ltd.)

4Hotels & Restaurants Association (Eastern India)

5Hotel & Restaurant Association of Northern India406/ 75-76, Manisha Building, Nehru Place, New Delhi 110019Tel: +91-11-26468103 / +91-11-26433590, Telefax: +91-11-26236201, Email:feedback@hrani.net.in,hrani.1950@gmail.com,Ms. Renu Thapliyal - Assistant Secretary General

6Hotel & Restaurant Association of HaryanaRegd. Office: C/o Hotel Jewel's, Jewel Chowk, NH-1, Karnal 132001. Phone: +91-184-2266996 / +91-184-4098888, Fax: +91-184-2266345

7Hotel & Restaurant Association of RajasthanE-385, Lalkothi Scheme, Behind New Vidhan Sabha, Jaipur, Rajasthan.Phone: 0141 - 2741568, Fax: 0141 2741569

8National Restaurant Association of India

4th floor, Phase-1, PHD House, 4/2 Siri Institutional Area, August Kranti Marg, New Delhi 110016Tel: +91-11-4100 0967, Fax: +91-11-2653 6053,Shilpi Varshney - Marketing and Communications

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