Profitability in hotel segment set to rise: Report

Higher average room rates (ARR) and hotel room occupancy will lift profitability of the domestic hotel industry, with Ebitda margins likely to increase to around 34% this fiscal against the 24% growth seen in FY20, the pre-pandemic year, according to Crisil Ratings. Ebitda is earnings before interest, taxes, depreciation, and amortization.

Revenue will also increase 23% over the pre-pandemic level, riding on a strong recovery in business travel and continued traction in leisure travel, said the subsidiary of the capital markets company Crisil Limited.

The business performance, coupled with limited capital spends, will improve the credit profiles of players, the company said it took into account an analysis of hotels with an aggregate of 40,000 rooms across categories.

It expects occupancy to rise to 73% this fiscal. It was 68% in FY20, while average room rate (ARR) should increase 8-10%.

Mohit Makhija, senior director at the ratings firm said, “Leisure travel had gained traction post the delta wave in 2021, while business travel has started picking up steadily after the much milder Omicron wave in January 2022. This has been fuelling demand in the MICE (meetings, incentives, conventions and events) segment. The improvement in international business travel in the second half of this fiscal will strengthen the industry performance.“

 The gap between demand and supply will aid the improvement in average room rates. Developers had held back on capex amid the pandemic-induced uncertainties. While the sharp rebound in demand may spur an increase in capex, supply will take a while to catch up because of the long gestation period for setting up a greenfield hotel, which could favour existing hotels, it added.

Meanwhile, organised players are increasing their footprint in an asset-light way. Several standalone hotels couldn’t sail through the challenges during the last two years. Some of them have been shut down permanently, while others are exploring opportunities to collaborate with organised players. The branded and organised players have been utilising the opportunity to expand their footprint in a market that is expected to grow well, the agency said.

In the wake of the pandemic, hotels had recalibrated their costs by taking a hard look at their fixed costs and efficiencies, many of which have led to permanent savings in operating costs. The measures include reassessing employee headcount using automation and better peak-hour manpower planning. Additionally, steps such as eliminating high-cost, low-preference items from food and beverage menus and ensuring efficiency.Anand Kulkarni, director at CRISIL Ratings, added, “Strong revenue growth and cost optimisation measures will boost profitability of organised players this fiscal. Furthermore, asset-light expansion augurs well for their balance sheets. While the credit profiles were stressed in the last two fiscals, this fiscal will bring a material improvement, with interest coverage estimated at 4 times against 2.6 times in FY20 and the debt to EBITDA ratio seen improving to 1.7 times from 3.4 times.»

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