Belt-tightening to squeeze hotel revenues

Revenue growth of Indian hotel companies is likely to remain muted in the near term due to continued sluggishness in corporate spending amid weak economic growth, according to ratings and research firm India Ratings.

The firm said in a note on Monday that growth in the hospitality sector would be hit because around two-thirds of the guests in hotels (except heritage hotels) are corporate and business travellers.

“Among hotel segments, premium hotels are more negatively impacted by a global economic downturn as they depend more on foreign travellers, particularly business travellers.

In the 2008-2012 period, high-end hotel companies witnessed slow growth due to a slowdown in key foreign markets and cost pressures on corporates, triggering a cut in their travel spending,” the firm said.

It noted that weak demand has limited the ability of these hotel companies to pass on cost increases, with wages and power costs increasing over one-and-a-half times during the same period.

Noting that local demand-supply dynamics are likely to be key in executing upcoming projects, the firm noted that the possibility of over-supply, particularly in the premium category hotels, in certain key markets such as NCR, Chennai, and Bangalore, in the near-to-mid term is likely to result in delays or shelving of projects.

EBITDA margins of premium hotels are not expected to return to pre-fiscal 2009 levels. “EBITDA margins are likely to remain in the range of 20%-25%, given the muted revenue growth outlook along with rising input costs and oversupply in certain markets,” the firm said.

However, the financial performance of non-premium and budget hotels is less likely to be affected by a continued global economic slowdown. As per India Ratings’ analysis and industry estimates, domestic travellers (both business and leisure) prefer to stay in non-premium and budget segment hotels. Domestic leisure travel and tourism, in particular, are more resilient to factors such as economic slowdown and terrorist attacks, the ratings firm said.

During fiscals 2008-2011, credit metrics (debt/EBITDA and interest cover) of hospitality sector companies deteriorated due to a decline in their operating performance along with an increase in interest costs.

Anticipating better demand prospects, many hotel companies borrowed funds during the same period for future projects. This has been reflected in incremental bank lending to the sector growing over five times from fiscals 2009-2011, thereby, stretching the balance-sheets of sector companies further.

However, incremental lending to the sector declined in fiscal 2012 to Rs 3,589 crore from Rs 8,319 crore in fiscla 2011, indicating a drop in sector capex during the year.
“The decline in lending could be largely attributed to the deferring of capex plans by corporates primarily due to an increase in borrowing costs in India amid the prevailing economic slowdown,” India Ratings said.

It expects the trend to continue in the near term as the Indian hospitality sector will continue to delay capex plans amid high interest rates and subdued demand prospects.