Hotel industry continues to face a muted revenue growth, stagnated profitability and elevated credit risk in FY15, driven by lower demand growth and supply-side pressures, an India Ratings & Research (Ind-Ra) report said.
The agency expects major hotel companies to register revenue growth of 5 to 10 per cent in FY15 due to sluggish demand in the near term. This is in line with the trend in 9MFY14 and FY13, where weak macroeconomic conditions led to muted growth in business travellers and foreign tourist arrivals.
Corporate travellers are key demand drivers for hotels as they account for around 60 per cent of guests.
Ind-Ra also expects profitability for major companies to remain stagnant at around 20 per cent as the demand slowdown has stressed occupancy and average room rate (ARRs), limiting the ability of hotel companies to pass on an increase in input costs.
Ind-Ra's analysis indicates that profitability of hotel companies declined by 1-3 percentage points in both 9MFY14 and FY13 primarily due to inflationary pressures, mainly higher food and fuel costs, and inability of companies to pass on such pressures due to weak demand.
According to Ind-Ra's analysis, credit metrics of hotel companies have showed a downward trend since FY08. Several companies which have implemented aggressive debt-led capex in the past are finding it difficult to manage their overleveraged balance sheets and have thus cut back on expansion plans and resorted to assets sales.
However, given their already stretched credit metrics and limited capex plans, Ind-Ra does not expect any further deterioration in FY15.
Increased stabilisation period is worsening the condition of already stressed newer properties. Consequently, they are primarily dependent upon sponsors to repay their debt.
Incremental borrowing by hotel companies continued to decline in FY13, indicating both that investors are cautious and banks are selective in lending. Incremental lending to the sector dropped to Rs 31 billion in FY13, almost two-thirds of FY11 levels.
Rising stress levels have also resulted in a sharp increase in the number of hotel projects being stalled, which is estimated to be around Rs 143 billion over FY12-FY14.
However, despite the muted outlook of the sector, non-premium and budget hotels are likely to face relatively less cyclical stress in FY15. This is because non-premium hotels cater mostly to domestic travellers - a segment which has continued to grow strongly despite the slowdown.
Thus, the non-premium hotel segment is likely to witness higher investments due to the higher growth expectations. In addition, certain regional markets will continue to see improved performance of hotels, driven by favorable demand-supply dynamics.