Hotels to report 7-9% growth in ’25

Indian hotel industry expected to report 7-9% revenue growth in FY2025, says a report by Investment Information and Credit Rating Agency (ICRA). It predicts hotel occupancy to be at decadal highs in FY2025, while average room rates moving towards the peak of FY2008.

TT Bureau

The Indian hotel industry is expected to report a 7-9 per cent revenue growth in FY2025, over the 14-16 per cent growth expected in FY2024, predicts international credit rating agency ICRA. Sustenance of domestic leisure travel, demand from Meetings, Incentives, Conferences, and Exhibitions (M!CE), including weddings and business travel, are likely to drive demand in FY2025. Spiritual tourism and tier II cities are also expected to contribute meaningfully in FY2025. Domestic tourism has been the prime demand driver in FY2024 and is likely to remain so in the near term. Foreign Tourist Arrivals (FTA) are yet to recover to pre-COVID levels and the improvement would depend on the global macroeconomic environment.

ICRA estimates pan-India premium hotel occupancy at decadal highs of 70-72 per cent in FY2024 and FY2025, after recovering to 68-70 per cent in FY2023. Pan-India premium hotel average room rates (ARRs) are expected to go up to `7,200-7,400 in FY2024 and rise further to `7,800-8,000 in FY2025. The RevPAR is expected to be at an 8-12 per cent discount to the FY2008 peak in FY2024 and subsequently converge towards the FY2008 peak in FY2025. However, the spike in ARR in some hotels and specific pockets has been higher than the average levels, with a few outliers even crossing the FY2008 peak in FY2024.

The demand outlook over the medium term remains healthy, supported by a confluence of factors, including improvement in infrastructure and air connectivity, favourable demographics, and anticipated growth in large-scale M!CE events with the opening of multiple new convention centres in the last few years, among others. The healthy demand amid relatively lower supply would lead to higher ARRs. Several hotels are also undergoing renovation, refurbishment, and upgradation, and these are likely to support the ARRs further going forward. Larger players would also benefit from revenues/ share of profits generated from hotel expansions through management contracts and operating leases.

Vinutaa S, Vice President and Sector Head – Corporate Ratings, ICRA, said: “Demand is expected to remain strong across markets in FY2025 as consumer sentiments continue to be healthy and corporate performance is stable. Hotel-specific demand would, however, depend on location, competition, and other property-related dynamics.”

She added: “Domestic tourism would be the prime driver, with FTA improvement depending on the global macroeconomic environment. Mumbai and NCR, being gateway cities, are likely to report occupancy north of 75 per cent in FY2024 and FY2025, benefiting from transient passengers, business travellers and M!CE events. The ARRs would witness a healthy YoY increase in FY2024 and FY2025 across markets. This sharp rise in ARRs of premium hotels also resulted in the spillover of demand to mid-scale hotels.”

Sustenance of a large part of the cost-rationalization measures undertaken during the COVID period, along with operating leverage benefits, has resulted in the sharp expansion in margins compared to pre-COVID levels. The staff-to-room ratio remains 15-20 per cent lower than the pre-COVID levels. Companies have increased their usage of renewable power while pass-through of the cost inflation and strict control on fixed cost increase have also supported margins. Asset-light expansions have been margin-accretive for larger hotel chains. ICRA’s sample comprising 12 large hotel companies is expected to report strong operating margins of 31-33 per cent for FY2024 and FY2025, against 33 per cent for FY2023 and 20-22 per cent pre-Covid.

However, within the sample, it is likely to be a mixed bag, depending to a certain extent on renovations and increase in employee expenses amidst growing demand. De-leveraging of balance sheets has led to lower interest costs and would support net margins. ICRA expects the uptick in earnings and cash flows to support the capital structure going forward. Debt metrics are expected to be better than pre-COVID levels in FY2024 and are likely to improve further in FY2025.

Highlights of the report

• Supply, which is expected to grow at a CAGR of 4.5-5 per cent over the medium term, would lag demand, supporting an upcycle
• Margins are expected to remain flattish for FY2024 and FY2025 on YoY basis, aided by healthy revenue growth despite increase in some cost heads, including refurbishment/ maintenance and employee cost
• Healthy business accruals have led to improvement in credit profile in several companies, resulting in upgrades exceeding downgrades in FY2023 and YTD FY2024