CRISIL SME Tracker: Small-city tag no drag for budget hotels

Budget hotels located in smaller cities have fared better than peers in larger cities on key metrics, a CRISIL analysis reveals. The analysis covered more than 250 rated micro and small enterprises (MSEs) operating budget hotels across two regional segments — metros and Tier-1 cities, and Tier-2 and smaller cities.

The average room rate (ARR) for the hotels analysed was Rs 2,500 per night for standard rooms, with marginal variance depending on the city. However, the average occupancy rate (AOR) in smaller cities was found to be 70 per cent — given lower room inventory and paucity of branded hotels — compared with 60 per cent in larger cities. 

So what is driving small town tourism? 

First, overall domestic tourism in India is growing at 12-15 per cent annually, driven by changes in people’s lifestyle, promotional activities by the government, and expansion of business, which is fuelling tourism for religious, leisure and business purposes in Tier-2 cities.

Second, the advent of online hotel room aggregators is reshaping the hospitality industry by making hotels more accessible to travellers across geographies. In the past five years, hotels have seen a shift in their reservation patterns from bookings through marketing channels such as agents, travel and tour operators to now receiving about 75 per cent of their room bookings from these online aggregators. 

All these have improved the AORs of budget hotels and also boosted their operating margins by more than half to 20 per cent in fiscal 2017, from 13 per cent in fiscal 2013. Indeed, hotels in smaller cities have logged a 400-basis-points higher operating margin, compared with players in metro and Tier-1 cities, largely on account of lower employee expenses.

Says T Raj Sekhar, Director - SME Ratings, CRISIL Limited, “Besides higher occupancy and profitability, budget hotels in smaller cities also have a relatively lower gearing of 1.5 times against two times for their larger-city counterparts. Their sustained healthy performance and improvement in connectivity to cities offers scope for lenders and investors to consider enhancing funding to creditworthy small-city budget hotels, and thereby boost investment in these regions.”