Hospitality companies’ gross profit margins are expected to remain stable year-on-year through FY24 and FY25, owing to rising refurbishment, maintenance, and employee expenses, according to a report by credit rating agency Icra Ltd.
However, robust revenue growth is expected to offset these cost pressures, ensuring a healthy financial performance for the industry, Icra added.
Icra anticipates a slowdown in revenue growth to 7-9% in FY25, following a robust 14-16% growth in FY24. But despite that, according to the report, the industry is set for a robust FY25, buoyed by strong domestic tourism and rising demand for meetings, incentives, conferences, and exhibitions (MICE), besides a controlled supply pipeline.
Hotel occupancy rates are also expected to reach decadal highs, hitting 70-72% in both financial years, fuelled by sustained domestic leisure and spiritual travel, with tier-II cities emerging as growth drivers.
Additionally, demand for MICE activities, including weddings and business travel, is expected to remain robust despite a temporary dip during the general elections in April, it said.
While foreign tourist arrivals (FTAs) have not yet bounced back to pre-covid levels, its resurgence hinges on the global macroeconomic situation. For the short term, domestic tourism surge is expected to remain the primary growth engine.
According to Icra, average room rates (ARRs) are poised for a significant increase, reaching ₹7,800-8,000 in FY25, edging closer to the peak levels witnessed in FY08 before the global economic crisis. This upward trajectory will be supported by the positive demand outlook which is expected to grow at a compound annual growth rate (CAGR) of 4.5-5% over the medium term.
Hotel companies’ credit profiles are also seeing improvements, with upgrades surpassing downgrades in FY23 and in the first half of FY24. This positive trend is driven by the increase in earnings and cash flows, which is expected to bolster the capital structure, it said.
A key factor aiding the industry’s growth is a controlled supply pipeline. Much of the new supply stems from management contracts and operating leases, mitigating risks linked to asset ownership. Moreover, limited land availability in metros and larger cities is prompting a shift towards rebranding and property upgrades across premium micro-markets, the report said.
Besides, new greenfield projects are primarily coming up in the suburbs, it added.
Vinutaa S., vice president and sector head of corporate ratings at Icra, said Mumbai and NCR,as gateway cities, are expected to achieve occupancy rates exceeding 75% in FY24 and FY25. This growth is attributed to transient passengers, business travelers, and MICE events, she said. “The ARRs or average room rates would witness a healthy year-on-year increase in the two years across markets. This sharp rise in ARRs of premium hotels also resulted in the spillover of demand to mid-scale hotels.”
The report highlighted that while per-room construction costs have increased by 20-25% compared to pre-covid levels, the supply outlook remains positive. With demand expected to outpace supply in the medium term, the industry is well-positioned for continued growth and profitability, Icra said.
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Published: 20 Feb 2024, 06:56 PM IST