FIIs take a break, check out of large-cap hotels

MUMBAI: Foreign institutional investors (FIIs) have pruned their stakes in key hotel companies such as EIH (member of the Oberoi group), Kamat Hotels, Leelaventures and Viceroy, while marginally increasing their stake in Indian Hotels and Taj GVK in the January-March 2007 quarter. Market players attribute this in part to the fact that traditionally February and March are lean months, when large-cap hotel stocks are deemed unattractive.

However, analysts expect to see a turnaround in sentiment during the peak season, from April till the onset of the monsoon, when the domestic hotel majors are expected to witness higher occupancy and room rates. It is during this time that most hotel companies jack up room rates to get better margins. Strong tourist inflows, business as well as leisure, is expected to fuel demand for hotel rooms in the next few months thereby triggering expansion plans, indicating a positive long-term outlook, believe analysts. Most hotels increased their rooms rates (average room rates) in the range of 20-40% in the past few months, with occupancy levels ranging between 74% and 78% in prime business locations across the country.

With the demand staying strong and no new supply coming up in the next two years (demand-supply mismatch of 50,000 rooms), room rates are expected to go up further, according to industry sources. However, Delhi is expected to see a fresh wave of expansion, with the Commonwealth Games scheduled to take place in 2010.

With real estate prices peaking in the recent past, hotel companies have been changing their business plans to include more premium hotels instead of budget hotels. “Higher room rates for 5-star deluxe hotels, kind of, offsets high real estate prices,” say analysts. The buoyant economy, and growth in the aviation and real estate sectors are expected to fuel leisure demand for hotels across star categories in majority of markets, sources added. Foreign tourist travel had gone up by approximately 15% last year.

Hotels continue to record better growth rates in tier II markets, compared to tier I markets. Cities like Pune, Hyderabad, Bangalore, Jaipur and Goa have recorded higher occupancy rates — in the range of 77-84% in the January-March 2007 period — compared to their metro city counterparts like Mumbai, Delhi, Chennai and Kolkata. The demand from new businesses like IT, retail and BPO, and the shift of several businesses from metros has spurred premium segment hotel growth in these cities. The latest Crisil estimates, indicate that the hotel industry, which includes global players, will invest about Rs 9,000-9,500 crore over the next five years to add fresh capacities in the premium segment.