More room for hotels to grow

The past few years have seen hotels in India benefit from a rise in Indian as well as overseas business visitors and tourists. So occupancies in key metro markets are up, average room revenues (ARR) are rising and there’s no sign of a let up in arrivals.

The past two quarters have been good, and it can only get better because the second half is usually a better season for the industry. In the September ’06 quarter, revenues for large hotel companies rose 22-30%, while profits grew between 75 and 100%.

Average room revenues (ARR) have remained high in all key markets, especially the five metros. Bangalore continued to have ARRs as high as Rs 13,000 per night. ARRs in North Mumbai now average around Rs 7,500 against Rs 5,400 a year ago while Delhi’s rose to Rs 8,200 from Rs 6,000 a year ago. Most companies have declared over 30% increases in ARR in this quarter, which is not a peak period.

The outlook for demand seems bright, with India being a popular destination. Average occupancies in metros, around 67% during ’07, indicate that. The hotel industry’s reliance on foreign tourists for higher margins is gradually declining as more Indians are staying at high-end hotels.

WTTC, the tourism body, forecasts an 8% increase in domestic tourism, and on a base of 300m, that’s about 24m persons. In anticipation, room inventory is being added across India with the metros seeing the largest chunk of construction. All large hotels are planning significant room addition.

But occupancy levels can be negatively impacted by supply coming in, as happened in Hyderabad and Delhi; both cities saw over 250 rooms being added in quick succession in ’06; that dropped occupancies between 3-5% to hover around 70%. Occupancy rates are likely to fall as new rooms enter the market post-’08.

ARRs too could decline when room availability improves. If arrivals remain as strong, the fall will not be significant but a demand slowdown can have an adverse impact.