I

ICRA Rating Feature

Indian Hotels Industry: Slow but Steady Recovery Under Way

Contacts OVERVIEW
The past two years have been a difficult period for the global and Indian
Anjan Ghosh
aghosh@icraindia.com hotels industries alike. A sharp decline in demand, overlaid by excess
+91-22-30470006 capacity resulting from supply additions, ended the last up-cycle (2004-
2008) in the Indian hotels industry in the second half (H2) of 2008-09. The
Subrata Ray
subrata@icraindia.com global economic slowdown and heightened security concerns in the
+91-22-30470027 aftermath of the Mumbai terrorist attack took a heavy toll on foreign traveller
Pavethra Ponniah dependent business destinations, especially those that had seen large
pavethrap@icraindia.com supply additions, like Bengaluru and Pune (Maharashtra). Similarly, high-
+91-44-45964314 cost leisure destinations dependent on foreign leisure tourists also suffered
low occupancies.

Overall, the industry is estimated to have posted a 10-15% decline in

revenues during fiscal 2009-10, largely because of an extremely weak H1.
This situation however started easing with the start of the peak hotel season
in third quarter (Q3) of 2009-10. Occupancies across properties revived
substantially in Q3, 2009-10 while average room realisations (ARRs) posted
a moderate growth (over Q2, 2009-10), although still remaining below the
levels of the corresponding quarter of the previous fiscal. Further
improvement in occupancies was witnessed in Q4, 2009-10 and Q1, 2010-

October 2010
11, but ARRs either declined or remained stagnant for most operators in the
absence of pricing power. The pace of advance bookings is a key indicator
of the industry’s future performance. While advance bookings started
making a comeback, reflecting the gradual return of the corporate traveller
amidst economic recovery, ARRs still remained sluggish.

Overall, while the demand outlook for both corporate and leisure travellers
appears strong at present, benefits from the anticipated uptrend are likely to
Website be moderated by the large room supply expected over the next two to three
www.icra.in years. While ICRA expects 2010-11 to be a relatively healthier year (as
compared with the weak 2009-10) for the industry with RevPAR rebounds
supported by economic recovery and event-specific demand triggers like the
Cricket World Cup, the large pipeline addition is expected to put a cap on
occupancies and pricing power in the industry, thereby prolonging the
recovery phase.

The performance of the hotels industry is influenced largely by the interplay

of two cycles: the supply cycle, characterised by investments in lumps and a
long construction phase; and the demand cycle, which is dependent on the
prevailing economic trends. Both the upcycle and the downcycle can get
prolonged by the supply factor: capacity shortages during an upcycle can

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 ICRA Rating Feature Indian Hotels Industry-Update

push up ARRs rapidly while excess capacity can hit occupancies severly during downturns.

Industry wide decline in performance during 2009-10: Following over five years of healthy revenues
and increasing accruals, the Indian Hotels Industry reported a continuous decline in revenues for two
consecutive years, 2008-09 and 2009-10. While the decline in 2008-09 was driven largely by falling
occupancies (ARRs posted a marginal drop), that in 2009-10 was prompted by a much steeper fall in both
occupancies and ARRs. Despite efforts at trimming operating costs in Food & Beverages (F&B),
consumables and administration; the fixed costs of corporate overheads, repairs, insurance, and taxes
weighed heavy on the industry, pushing down operating profits by over 10-40% across hotels in 2009-10.
Despite many of the players scaling down their capital expenditure plans and new entrants delaying
incremental supply, the capital structure of the domestic hotels industry as a whole deteriorated
significantly in 2009-10.

Table 1: Snapshot of Key Financials of Indian Hotel Majors (2009-10)

Parameters IHCL EIH Leela Taj GVK OHL EIHAL ROHL Kamat
(Consol) (Consol) (Consol) (Consol) (Consol) (Consol)
Net Sales 2,456.7 845.1 430.1 228.3 219.8 155.6 119.3 102.3
Decline in Sales (y-o-y) -4.9% -12.2% -4.9% -3.9% -8.9% -6.5% -14.9% -15.0%
Total income 2,533.2 1,013.8 436.2 229.2 223.7 155.6 120.6 107.8
OPBDIT 410.4 270.5 131.0 87.2 59.6 47.5 29.3 30.4
PAT & (137.0) 66.3 45.0 36.6 20.0 2.5 7.0 (9.4)
OPM 16.2% 26.7% 30.0% 38.0% 26.6% 30.5% 24.3% 28.2%
NPM @ -4.9% 7.0% 10.3% 16.0% 8.9% 1.6% 4.1% -8.7%
Decline in OPBDITA -28.8% -35.2% -20.1% -15.0% -24.0% -9.9% -34.6% -19.4%
Decline in PAT @ -58.1% -69.1% -31.0% -45.1% -66.6% -75.4% -64.8%
EIH (Consol): EIH Limited (Consolidated); EIHAL(Consol): EIH Associated Limited (Consolidated); IHCL
(Consol): Indian Hotels Company Limited (Consolidated); Kamat: Kamat hotels Limited; Leela: Hotel Leela
Ventures Limited; OHL(Consol): Oriental Hotels Limited (Consolidated); ROHL(Consol): Royal Orchid Hotels
Limited (Consolidated); Taj GVK: Taj GVK Hotels & Resorts Limited;
Note: Amounts in Rs. Crore; & Concern share excl. Minority interest; @ on PAT
Source: Published results of companies concerned

Demand upturn supported by reviving economy and increasing foreign and domestic travel: In
terms of international visitors, India is still an underdeveloped market with around 51.1 lakh Foreign Tourist
Arrivals (FTAs) annually (against China’s over 500 lakh). However, FTA is still one of the key demand
drivers for India’s premium hotels. Apart from the popularity of Indian tourist destinations like Kerala, Goa,
and Rajasthan among overseas leisure travellers, the emergence of India as one the fastest growing
economies with significant business potential is expected to sustain growth in business travel, going
forward.

In calendar 2009, around 51.1 lakh tourists visited India, which marked a 3.3% decline over the previous
year. On the positive side though, following 13 consecutive months of declining or stagnating FTAs,
volumes in December 2009 finally re-entered the positive territory, growing by 21% over December 2008.
Again, for the period January to August 2010, FTA volumes witnessed a healthy 9.7% growth over the
previous year. With fears of an H1N1 epidemic subsiding and the impact of the 2008 terrorist attack
tapering off, the economic revival currently under way and event specific attractions (like the
Commonwealth Games, Cricket World Cup and the Formula a One races) are expected to support the
uptrend in FTAs. This augurs well for the premium hotels, which are heavily dependent on foreign tourists.

This trend of increasing tourists was also witnessed globally, with traveller volumes bottoming out in Q4,
2009. As against a decline of 10%, 7% and 2% in international tourist volumes during Q1, Q2 and Q3 of
calendar 2009 respectively, Q4, 2009 reported a 2% growth. Further, global tourist volumes are estimated
to have increased by 5.1% in Q1, 2010 and again by 8.7% in Q2, 2010, with business travellers being the

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ICRA Rating Feature Indian Hotels Industry—Update

key drivers. The global forecast for growth in traveller volumes stands at 3-4% for calendar 2010, as
against the 4.3% decline to 88 crore visitors reported the previous calendar.

Often underrated, the 65.0 crore strong domestic traveller segment is also strongly feeding the current
upturn in demand. In the past too, Indian hotels when faced with declining FTAs have sought to draw in
domestic travellers of both the business and leisure variety, offering large discounts and attractive deals.
Thus, in 2003 for instance, when the market was emerging from a downtrend, it was the domestic traveller
who provided the initial push to the rebound. With hotel tariffs in India declining during the recession,
domestic destinations have once again became a viable holiday option for the relatively cost conscious

Chart 1: Trends in Domestic air traveller volumes Chart 2: Trends in FTAs into India (2008-10)
136.8

6.8
120.3

140.0
113.0

116.4
Volumes in lakh passengers

125.3
6.3
111.2

108.4

120.0
99.8

5.8

FTA in lakh passengers

96.0

100.0
87.1

5.3
80.0 4.8
60.0 4.3

40.0 3.8

20.0 3.3

- 2.8
Q1 (Jan-
Q2 (April-
Mar) Q3 (July-
June) Q4 (Oct-Dec)
Sept)

2008 2009 2010 2008 2009 2010

Indian traveller. Additionally, with the economy turning around, Indian companies have also eased the
restrictions on corporate travel. Domestic airline travel in India grew by 7.8% in calendar 2009 and again by
21.7% during the period January-July 2010.

Sporting mega events a major crowd puller: Mega events, especially sporting tournaments, have the
potential to provide a strong fillip to both investments in the hotels industry and hotel performance. In this
context, 2010 and 2011 will see India host a number of international sporting events, including the
Commonwealth Games (CWG) and Formula One race in the National Capital Region (NCR), and the
Cricket World Cup across various locations within the country.

Similar large sporting events in the past, for instance the Beijing Olympics in August 2008, have thrown up
several interesting lessons for the hotels industry. Many host cities including Beijing have experienced a
pre-event lull in the month leading up to the occasion, with business travel being put off and leisure travel
being delayed to coincide with the event. Again, almost all host cities see a large capacity build-up in
anticipation of a demand surge during the event and sustained buoyancy thereafter. Beijing saw a large
increase in room supply (over 10% year-on-year(y-o-y) in certain months) that was targeted at the
Olympics (part of this supply actually trickled in post-Olympics). Similarly, the nine cities in South Africa
hosting the 2010 FIFA World Cup added large incremental inventory (over 1,500 rooms) to accommodate
an estimated 4.0 lakh tourists. In India, the NCR also added significant room inventory ahead of the
October 2010 Commonwealth Games.

As for room tariffs, during the Olympic month of August 2008, ARRs in Beijing hotels trebled to peak at
over US$450 but corrected sharply thereafter, while in June 2010, ARRs in host cities such as Cape Town
and Johannesburg went up by 150%. While it is expected that ARRs during any mega event will increase
sharply, exorbitantly high room tariffs and failure to make post-event corrections can lead to the destination
being branded “prohibitively expensive” (thereby denying it the opportunity to gain from a long-term
favourable legacy effect) and to tourist exodus immediately after the event.

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ICRA Rating Feature Indian Hotels Industry—Update

On the eve of these sporting events in India, the key factors to be watched, from the hotels industry
perspective, include the actual supply of rooms during the event, the delayed supply coming in post-
Games, and the ability of the industry to retain visitors after the event, by encouraging tourism to
neighbouring locations like Agra, Bharatpur, Jaipur, Jodhpur, Ranthambhore, and Udaipur in Rajasthan
and thereby increasing the length of stay (LOS). While large sporting events have the potential to attract
crowds in the short run, maintaining a reasonable post-event occupancy is of critical importance.

The issue of inventory apart, the demand for rooms, even during the event, may be affected by exogenous
factors like security concerns and displacement of regular business in anticipation of a large increase in
travel and accommodation costs. The Ministry of Tourism expected to see around 1.0 lakh tourists visit
India for the Commonwealth Games; however the current trends indicate much weaker attendance. Initial
negative publicity regarding infrastructure for the CW Games, flood situation in North India and security
concerns heightened by travel advisories from various governments appears to have impacted the final
turnout.

Strong supply pipeline likely to mute industry revival: The Asia/Pacific region has entered the current
phase of revival with a large active development pipeline of over 46,000 rooms (across hotel categories);
China and India command bulk of this pipeline. The current under development pipeline is however
substantially lower than the peak pipeline witnessed in different global geographies in mid-2008. The credit
crunch that had hit the financial markets during 2008-10 severely impacted new investments, causing many
projects to get delayed or deferred. On the other hand, this deferment/delay was a positive for the industry,
especially during a period of low demand. In the Indian context, the hotels industry has been relatively
more resilient to pipeline reductions as compared with the developed countries.

Currently, both in terms of absolute investments in capital and growth in investments in the hospitality
industry, Indian ranks among the top ten countries globally. Bulk of the incremental supply in the Indian
hotels industry is coming up in the premium segment and from the stable of international brands. To a large
extent, the high land and debt costs, besides the low Floor Space Index (FSI), have prompted most
developers to opt for premium hotels to achieve viability. On the other hand, if as anticipated, the domestic
middle-class traveller were to form an important part of the future customer base, weaning them away from
unbranded guesthouses will require competitively priced hotels spread across the budget and economy
segments.

The NCR, with an estimated incremental supply of around 7,400 rooms (74% of which are under active
construction), across price points ranging from economy to premium, has the largest supply pipeline in
India at present. Of this supply pipeline, around 4,000-5,000 rooms are in the premium segment alone and
are expected to be commercialised before 2014. This is as against the NCR’s current supply of around
8,750 premium rooms. While some of this incremental inventory was targeted at the October 2010
Commonwealth Games, the supply of around 13 premium hotels is coming up in the Delhi Aerocity (around
the new international airport) during 2012-14. Mumbai, Bengaluru and Pune with over 3,500 additional
premium rooms each are not far behind in the supply pipeline. In percentage terms (on existing base), the
largest proposed addition is expected in Pune (over 200%) followed by those of Ahmedabad, Hyderabad
and Chennai, over the next four years. Bengaluru, Pune and Hyderabad have already witnessed the
opening of various new hotels (700-1,000 rooms each) during the past 12-18 months and are still sitting on
a large inventory that is in the final stages of construction. Chennai too is expected to double its existing
inventory (estimated at 2,150 rooms) in the next three years.

Bulk of the new supply coming up in India is being added by international brands like Carlson, Four
Seasons, Hyatt, Marriott, Hilton, Intercontinental, Westin, and Accor. The international brands targeting
India for their expansion plans are not only seeking to serve foreign travellers into India, but are also
striving to build a strong brand among Indian travellers. Outbound Indian travellers are one of the fastest
growing international traveller segments. Among the domestic companies, ITC Limited (ITC), Hotel Leela
Ventures and Indian Hotels Company, among others have plans to add hotels.

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ICRA Rating Feature Indian Hotels Industry—Update

Despite the large pipeline, which is second only to that of China in the Asia-Pacific region, over a longer
time horizon, India would remain an under serviced market. This along with the country’s large and growing
affluent population, over 65% of which is less than 25 years old, makes India an attractive destination for
hotel companies. The global hotels industry has an estimated supply of around 184 lakh rooms, growing at
a compounded annual growth rate (CAGR) of around 2-3%. The world’s largest economy, the USA,
accounts for around 24% of the global supply of rooms. China, the world’s second largest economy (GDP
of US$5 trillion/ ~US$8.8 trillion at Purchasing Power Parity (PPP)), has around 16 lakh hotel rooms. In
comparison, India (GDP of around US$1.3 trillion/ ~ US$3.5 trillion PPP) has only around 1.25-1.5 lakh
hotel rooms, which is small even after factoring in the smaller size of the economy. Against this, the
Manhattan region in the USA alone has 70,500 rooms. While part of the disparity in room supply is
attributable to per capita income variances across regions, on the whole, India suffers from a low supply of
branded rooms.

Occupancy led recovery currently underway in India: Globally, almost all the major regions are
currently showing an occupancy-led recovery, with Asia-Pacific in the lead: 22.7% growth in RevPARs (for
the period January- July 2010). For this period however, India continues to be marginally ARR negative as
compared to the corresponding period in the previous year (Calender 2009), while China and Singapore
have been reporting recovery in ARRs. Largely, most regions, including the USA and Europe, have posted
improvements, largely on the strength of a revival in occupancy during the past few months.

With the start of the downturn in the Indian hotels industry in H2, 2008-09, domestic occupancies were the
first to be impacted as traveller volumes contracted. However, bulk of the premium hotels maintained rates,
albeit at the cost of occupancy. Overall, 2008-09 saw RevPARs declining by around 10-15% with
occupancies falling. However, with the beginning of the lean season in Q1, 2009-10, hotels offered deep
discounts on room tariffs in a bid to shore up occupancies as the underlying demand remained weak; Y-o-Y
RevPARs declined by 30-40% during this period. Occupancies started moving upward in Q3, 2009-10,
leading to a RevPAR improvement as compared to the previous quarter. With the start of the peak season,
the industry had some respite in Q3, 2009-10. While still way below the Q3, 2008-09 levels, ARRs reported
an improvement in Q3, 2009-10 while occupancies moved closer to the previous year’s levels. Q4, 2009-10
proved a mixed bag with many properties reporting higher RevPARs (on the strength of higher
occupancies).

A typical recovery cycle in the hotels industry starts with the revival of demand. Higher demand pushes up
occupancies to a point at which hotels are comfortable with yield management through tariff hikes. The
surge in occupancies over the past few months marks a healthy trend, and indicates a demand recovery,
which should hold, provided there are no major exogenous shocks. A longer booking window and the
return of group business will provide strength to the ARR recovery, which is expected over the next three to
four quarters. Stronger demand would also enable hotels to unbundle some of the incentives provided
earlier to attract longer stays. However, an occupancy-led recovery (which will need to be serviced with
higher costs from reinstated staffing, amenities and services), without a supporting revival in ARRs, could
impact profits in the immediate term.

Outlook
While the Indian Hotels industry is currently on the path of an occupancy-led recovery, ARR growth
remains a challenge in most markets. Announced plans by hotel majors domestically and globally alike
entail pushing for higher (10-15%) negotiated corporate rates at the start of the next season. However, in
ICRA’s view, with the incremental supply of rooms getting absorbed slowly, growth in ARRs would be
muted, which in turn would prolong the recovery period, especially in markets like Mumbai, Pune,
Bengaluru, NCR and Hyderabad. ICRA does not expect ARRs in the Indian Hotels industry to revert to past
peaks over the medium term. On the positive side, this could spell a healthy structural shift in the Indian
hotels industry towards more sustainable pricing, making the market a better price-value proposition.

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ICRA Rating Feature Indian Hotels Industry—Update

Overall, H2, 2010-11 should see improvement over both H2, 2009-10 and H1, 2010-11. Improving ARRs is
expected to play a key role in supporting industry wide higher profits. The overall financial profile of most of
the players, especially those with a large diversified presence and conservative leverage, is expected to
improve over the medium term, supported by higher RevPARs and profits.

While bulk of the incremental supply currently targets the premium segment, large potential demand
remains in the price conscious domestic customer segment. Large supply gap exists in the branded budget
and economy product segment. However, high land costs and inadequate Floor Space Index (FSI) remains
a challenge for this segment.

The longer term outlook on the Indian hotels industry remains positive, considering the country’s growing
population in the middle income bracket, its emergence as an economic powerhouse, the increase in
affluence levels, continued investments in infrastructure (a longer term effect of hosting mega-sporting
events) and the large demand-supply gap. With incremental supply coming from the stable of reputed
international majors, largely through management contracts, India should see an increase in penetration of
branded rooms. As for supply issues, although some regulatory efforts have been made to increase the
FSI, the inherent issues of high land cost, high luxury taxes, manpower shortage and inadequacy of
supporting infrastructure continue to add to the costs for the industry.

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ICRA Rating Feature Indian Hotels Industry—Update

ANNEXURE 1:ICRA-Rated Entities in the Indian Hotels Industry

Company Long/Medium Term Short Term Outlook

Alcon Resorts Holdings Limited LBB+ Stable
Amethyst Hospitality Private Limited LBB- Stable
Apeejay Surrendra Park Hotels Limited LA+ Stable
Aria Hotels and Consultancy Services Private Limited LBBB- Stable
Asian Hotels (West) Limited LBBB+ Stable
BD & P Hotels (India) Private Limited LB
City Heart Hotels Private Limited LB
Cosmos Premises Private Limited LBBB+(SO) Stable
Country Club India Limited LA+
Daaj Hotels and Resorts Private Limited LBB
Dev Fun Point Reality Private Limited LB+
Divine Infracom Private Limited LBB-
Eros Resorts & Hotels Limited LBBB- A3 Stable
G V Estates & Hotels Private Limited LB
Golden Jubilee Hotels Limited LBB+ A4+ Stable
Greenland Hospitality Private Limited LB+
Hotel Excelsior Limited LA-
Hotel Raj Park Private Limited LBB Stable
Hotel TipTop International Private Limited LBB- Stable
Icon Hospitality Private Limited LBBB Stable
IHHR Hospitality Private Limited LBBB+
Indian Hotels Company Limited LAA+ A1+ Stable
Innmar Tourism and Hotels Private Limited LBB Stable
Interglobe Hotels Private Limited LBBB-
JSK Hotels Private Limited LBBB- A3
Kandhari Hotels Private Limited LBB+ A4+ Stable
Ksheer Sagar Developers Private Limited LBBB+(SO) Stable
L&T Bangalore Airport Hotel Limited LBBB- Stable
Maruti Comforts and Inn Private Limited LBBB- Stable
Middle East Hotel Company Private Limited LBB+ Stable
Muthoot Hotels and Infrastructure Ventures Private Limited LBB+ A4+
Muthoot Hotels Private Limited LBB+ A4+
Nama Hotels Private Limited LBBB+(SO) Stable
Neesa Leisure Limited LBBB+ A2 Stable
Nehru Place Hotels Limited LA-
Nitesh Residency Hotels Private Limited LBB
Oriental Hotels Limited LAA-/MAA- A1+ Stable
R S Kalyaani Hotels Private Limited LBB- Stable
Roots Corporation Limited LBBB+
Royal Orchid Ahmedabad Private Limited LBBB+(SO) Stable
Royal Orchid Hotels Limited LBBB+ Stable
Satya Prakash Hotels Private Limited LBB+ Stable
Sawhney Builders Private Limited LC

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ICRA Rating Feature Indian Hotels Industry—Update

Company Long/Medium Term Short Term Outlook

Seven India Hospitality Private Limited LBB
Shipra Hotels Limited LBB Stable
Shirdi Country Inns Private Limited LB
Shree Naman Hotels Private Limited LBB+
Siesta Hospitality Services Limited LBBB- Stable
St Laurn Hotels Limited LB+ A5
Starex Developers Private Limited LBB
Sunair Hotels Limited LBBB+ A2+ Stable
TAJ GVK Hotels & Resorts Limited LAA- A1+ Stable
Techpark Hotels Private Limited LBBB-
Wave Hospitality Private Limited LBB+ Stable
As on October 05, 2010

ICRA Limited
An Associate of Moody’s Investors Service

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553 9231

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