Higher average room rates (ARR) and hotel room occupancy will drive up the profitability of the domestic hotel industry, with EBITDA margins expected to expand to around 34% this fiscal as against the 24% growth seen in FY20, according to Crisil. There is a possibility. rating. Ebitda is earnings before interest, taxes, depreciation and amortization.
The subsidiary of capital markets company Crisil Ltd said revenue would also grow by 23% over pre-pandemic levels, riding a strong recovery in business travel and continued traction in leisure travel.
The performance of the business with limited capital expenditure will improve the credit profile of the players, the company said, taking into account the analysis of hotels with a total of 40,000 rooms across categories.
It is expected that the occupancy will increase to 73% in the current financial year. It was 68% in FY20, while the average room rate (ARR) should increase by 8-10%.
Mohit Makhija, senior director at the ratings firm, said, “Leisure travel gained traction in 2021 following the Delta wave, while business travel has started picking up following the much larger Omicron wave in January 2022. This is driving the demand in MICE. (Meetings, Incentives, Conferences and Events) Vol. Improvement in international business travel in the second half of the current financial year will strengthen the performance of the industry.”
The gap between demand and supply will help improve average room rates. Developers had put capex on hold amid the uncertainties induced by the pandemic. While the sharp jump in demand may spur an increase in capex, it will take some time for supply to catch up due to the longer gestation period for setting up greenfield hotels, which may favor existing hotels.
Meanwhile, organized players are increasing their footprint in an asset-light manner. Many standalone hotels could not meet the challenges during the last two years. Some of them have closed down permanently, while others are looking for opportunities to collaborate with organized players. The agency said branded and organized players are using the opportunity to expand their footprint in the market, which is expected to grow well.
In the wake of the pandemic, hotels had restructured their costs by keeping a close eye on their fixed costs and efficiencies, many of which have resulted in permanent savings in operating costs. The measures include re-evaluating workforce strength using automation and better peak-hour manpower planning. Additionally, steps such as eliminating high-cost, low-preference items from the food and beverage menu and ensuring efficiency. Anand Kulkarni, director, Crisil Ratings, said, “Strong revenue growth and cost optimization measures will boost the profitability of organized players in this financial year. Besides, the asset-light expansion bodes well for their balance sheet. While the credit profile was stressed in the last two financial years, this financial year will bring about a material improvement with an estimated interest coverage of 4x as against 2.6x in FY20 and an improvement in EBITDA ratio from 3.4x to 1.7x.
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