Branded hotels are poised to witness nearly 20,000 room additions over this and next fiscal – a good 20% increase in supply. This follows 16,500 room additions seen over the previous two fiscals. Despite a sizeable addition to room inventory, occupancies are expected to remain steady, while average room rates (ARR) are expected to inch up as demand continues to outpace supply in majority of these locations.
Nearly 80-85% of the room additions will be done by hotel developers with own brands who plan to expand their operations primarily through an asset-light management contract route. As these brand owners will only charge management fee from hotel asset owners, their revenue growth will moderate slightly by 150-250 basis points over a strong 15% growth recorded last fiscal. The remaining additions will be done by hotel asset owners operating under external brands. These entities will continue to maintain their growth momentum of 13-14% next fiscal. Overall healthy cash flows, lower capital requirement and equity raises will ensure stable credit profiles for these companies.
These branded hotels (own and external) are typically operated by large hospitality corporations1 and form nearly half of the total room inventory2 in India. These hotels offer consistent experiences across various price points and styles. Our analysis is based on 55 entities operating around 48% of total branded rooms.
Says Mohit Makhija , Senior Director , Crisil Ratings, “Rising travel aspirations and improved air and road connectivity are driving growth in domestic tourism, with a 15-16% annual increase3 in tourists observed over the past two years. With this trend expected to continue, hotel players are focussing on leisure and spiritual destinations like Ayodhya, Lucknow, Udaipur, Jaipur, Amritsar, Gwalior etc. for expansion. Nearly two-thirds of the 20,000 new rooms are coming up in these tier 2 and 3 locations including an estimated ~20% through acquisitions. The remaining additions will be spread across six metros4, which are hubs for MICE (meetings, incentives,conferences and exhibitions) activities and will be experiencing commercial expansion, over the next two fiscals.”
With room addition being well-diversified focusing on spiritual and leisure locations, we expect, occupancies to remain stable at 74-75%. In-fact, occupancies in these locations have exceeded 85-90% during peak seasons, underscoring healthy underlying demand. Additionally, ARRs are also expected to increase by ~5-7% over the next two fiscal years as demand will continue to outpace supply. Notably, despite an increase in room supply by ~19% over fiscals 2023-2025, occupancies rose by ~600 basis points to 74% over the same period, while ARRs increased by about 30%, albeit on a lower base.
That said, asset-light expansion strategy adopted by hotel developers with own brands will help reduce the capital expenditure intensity, with capex-to-EBITDA ratio estimated to fall under 0.50 times by next fiscal, from ~0.62 times in the previous fiscal. Further, strong cash flows and sizeable equity raises of around Rs. 5,000 crore by asset owning hotel companies, will also reduce dependence on external debt for expansions.
Says Pallavi Singh, Associate Director, Crisil Ratings, “The equity raises and accruals will be sufficient to cater to nearly ~55-60% of total capex needs over the next two fiscals. Consequently, debt-to-EBIDTA level for asset owning hotel companies is expected to improve to below 3.3x times by next fiscal from ~4x times in the previous fiscal. On the other hand, asset-light expansion strategy will bring debt-to-EBDITA of brand owning hotel companies to below 1.4x by next fiscal from ~2x previous fiscal.”
In the road ahead, slump in economic activity impacting business travel or any prolonged flight disruptions impacting leisure travel will bear watching.
1 Like Marriott, Hilton, IHG, Lemon Tree, Taj, Oberoi etc.
2 Branded + Independent hotels (excluding lodges and alternative accommodations)
3 Data as per Ministry of Tourism
4 Mumbai Metropolitan Region, National Capital Region, Bengaluru, Hyderabad, Kolkata, Chennai
