Hospitality sector should outperform broader indices

The Union Budget's focus on tourism could give a fillip to share prices of listed hotels and tour operators

The Budget and its provisions will have been discussed more or less threadbare by the time you read this. One of the broad themes is the focus on encouraging foreign investors.

FDI limits have been raised in insurance and defence. Clarifications have also been issued on various tax treatments for overseas investors. The amendments of 2012 which apply retrospectively to the Income Tax Act 1961 have not been removed. But there are assurances that a committee will consider all aspects carefully before invoking these measures in any fresh cases.

Well and good. Let's also hope that FDI flows into India increase through this fiscal year and this results in lots of new business activity. As it happens, the quantum of new FDI flows cannot ever be easily estimated since it depends on so many variables linked to the world economy.

It is possible to guess one thing with some certainty: business traffic into India should increase by a significant amount. Foreign businessmen will come to India to assess prospects in their specific sectors of interest, even if they don't increase actual commitments right now. Typically every FDI deal of any size involves multiple trips before the commitments are finally made. This increase in traffic should benefit the tourism sector and its associated businesses such as the hospitality industry.

The Budget also pays some specific attention to the tourism industry, which should be fairly happy. The introduction of e-visas at nine airports should cut down on hassles for travellers. There is also a service tax exemption on offer for tour operators, who take foreign tourists abroad.

An allocation of Rs 500 crore has been laid out for developing five tourist circuits around specific themes. There are also allocations for a National Mission on Pilgrimage Rejuvenation and Spiritual Augmentation Drive (PRASAD) and a National Heritage City Development and Augmentation Yojana (HRIDAY). Apart from the catchy acronyms, the concrete measures under these missions will need to be assessed.

Business tourism should grow regardless and business tourism is generally higher-end. It is also not seasonal in its impact. While winter generally sees the advent of more tourists on holiday, business persons travel whenever they need to and they pay full fares and stay in upmarket locales.

India gets less than seven million foreign tourists every year and it is ranked 41st in terms of inbound tourists according to the United National World Tourism Organisation. However, it is ranked 16th in terms of forex receipts from tourism. This reflects the fact that a substantial portion of foreign visitors to India actually come on business.

In the next 3-5 years, India wants to receive 12 million foreign tourists. Apart from the foreign arrivals, there would be more in the way of domestic business traffic as well, if the business cycle picks up.

The tourism-hospitality industry is extremely sensitive to the business cycle. It has seen bad times in the previous two or three fiscals. Hotels with low occupancy have been forced into giving major discounts on room rates. Margins have suffered in food and beverages. Aviation traffic has also been muted. All this could change for the better.

It's a good investment story and it sounds logical. But it is also too early to say if there will be a big bounce of the order that the tourism industry is hoping for. Ideally, the industry would have also hoped for tax breaks on its considerable net forex earnings. There was also some lobbying for wider service tax exemptions or discounts. Even if those measures have not come through, this Budget actually tries to do something positive.

Tourism has seen comfortable double-digit revenue growth for several years in succession whenever the economy has been upbeat. It has always had decent margins as well. It suffered the worst recession of the decade in fiscal 2013-14.

A turnaround in the industry fortunes could mean valuation upgrades for listed stocks. This year could also see a strong recovery in terms of both profits and incomes. The share prices of listed hotels and tour operators could outperform the broader market.