‘Good reason to believe an up-cycle is in the offing’:: Business Line

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Leading hospitality consultancy HVS is bullish on the hotel sector in India. We asked Achin Khanna, Managing Director, Consulting & Valuation practice at HVS South Asia, for his views. Edited excerpts:

What makes you confident that the cycle in the Indian hotel industry is about to turn?

The hospitality sector is inherently cyclical. The preceding years were victim to a demand-supply imbalance.

The impact on hotel performances was deepened by the weakness in national and global economic sentiments.

These challenges are now addressable. While room night demand is growing at a healthy pace, new room supply is likely to grow in single digit percentages over the next five years. Also, both political and economic stability is helping with a sentiment change as far as business in India is concerned.

There is, therefore, good reason to believe that an up-cycle is in the offing.

Will over-leveraged players have to sell assets or sell out, if the cycle does not turn soon?

Certain hotels that have already outlived their corporate debt restructuring (CDR) cycles and are unable to exit their non-performing asset (NPA) status will undoubtedly be under pressure to raise funds.

While I do not foresee a wave of such transactions, I do agree that banks may end up forcing certain distress sales in the months or years to come.

Will players with an upscale and luxury focus feel the heat due to a demand shift to the budget and mid-market segments?

There is a market for the luxury and upscale hotels and while the mid-scale and budget hotels are clearly the lion’s share when it comes to proposed supply, I do not believe that the luxury hotel space is necessarily the victim here.

There are challenges that the luxury product must find ways to address.

Primary among them is to command room rates commensurate with the product and service offering.

A very small number of luxury hotels in India are able to manage year-round average room rate that exceeds $200 (about ₹12,000) per night, for instance.

While operating costs are on the rise and competition is likely to increase, luxury hotels will have to find means to earn more revenue if they intend to retain profitability levels of the past.

That said, I reiterate that the problem is not as acute as some may believe.

What are the challenges in management contracts?

The management contract model is the most acceptable model across the globe. The Indian hotel industry has embraced this model and it is working very well for all stakeholders. Like any business model, however, the management contract model will bring with it certain challenges. Several brands and/or management companies have entered India in the last decade.

As their pipeline grows in the years ahead, the brands may need to constantly reinvent themselves to ensure their acceptance by an audience that is largely domestic.

Various Indian hotel developers are first-time owners and their understanding of this model is, therefore, often nascent. As the creases get ironed out, this will certainly be the predominant model in India, going forward.

Isn’t the domestic market much bigger for the hotel industry than the foreign tourist segment?

Domestic movements are more than 800 million annually. Foreign tourist arrivals crossed the seven-million mark last year.

That said, about 75 per cent of overall room nights consumed in the branded hotel space were domestic last year, which means that close to 25 per cent of the demand is still foreign. Additionally, while the domestic visitor is extremely important for the sector to succeed and grow, I do believe that foreign arrivals will grow in strong numbers over the next few years.

How important is the MICE segment

MICE has gradually been being growing across various major Indian markets as an important contributor to hotel revenues.

The MICE business also brings volumes as opposed to transient business that may pay a higher rate, but does not always promise higher occupancies. In India, social events such as weddings and parties are an equally strong contributor to the growth of the MICE segment.

The organised hotel industry in India has in excess of 100,000 keys now. Are there estimates on the size of the unorganised section?

Frankly, a fair estimate may not be easy to make. That said, our view is that anywhere between 1,50,000 and 2,00,000 additional rooms may exist in the unorganised/unstructured and informal formats across the nation.