Indian hotel ind Q2 margins may hit 5-yr low of 8%: ICRA

Rating agency says the outlook for the Indian hotel industry during 2013-14 remains negative

Rating agency ICRA today said it expects the Indian hotel industry's margins to slide to a 5-year low of up to 8% in the second quarter of this fiscal due to decline in revenue per available room, weak July-September and inflation in consumable costs.

"We expect industry-wide margins for the current quarter (Q2FY14) to ebb down to a 5-year low of 7-8% on the back of decline in RevPAR, seasonally weak July-September quarter and inflation in consumable costs," ICRA said in a release.

With uncertain demand conditions and further supply additions, the outlook for the Indian hotel industry during 2013-14 remains negative, according to ICRA.

The down-cycle in the Indian hotel industry has stretched to five years (barring a brief pick-up in 2010-11), compared to past hotel industry cycles globally, which has 1-2 years of lows, preceded by 5-6 years of highs.

"We expect 2013-14 to be another difficult year for the hotel industry in India," ICRA noted.

The industry-wide margins have nearly halved over the last five years to 18% as on 2012-13, from a high of 37% in 2007-08, due to the industry reporting a CAGR of mere 4% in revenues.

"Our analysis of 8 key cities in the country indicates an inventory of 50,600 rooms in the premium space, with bulk of it being located in two gateway cities of Mumbai and NCR," ICRA said, adding, the inventory levels in the 8 cities for 2013-14, would go up by 16%, with most of the rise coming from Mumbai, NCR and Bengaluru.

ICRA, although, expects the Indian hotel industry to benefit in the future from structural reforms like better infrastructure, improved law and order situation (encouraging foreign tourist arrivals) and it would, however, need to remain focused on cost control by trimming frills and cutting non-essential expenditure to improve profitability.

The rating agency expects 3-4% growth in foreign tourist arrivals (FTA), which is way below CAGR of 6.1% over last 7 years, on the back of weak domestic demand and bleak global economic scenario.

The FTA in India continues to be slow, growing by mere 2.8% for the first 7 months up to July 2013, compared to 8% during the corresponding period last year.

ICRA expects higher in-bound travel and an uptick in domestic travel owing to rupee depreciation.

The hotel industry in India, it said, has resorted to several steps to tide over the weakness, which includes deferment or cancellation of capex, restructuring of debt, infusion of funds through equity dilution or sale of non-core assets and project modifications.