With the hospitality sector bouncing back owing to higher occupancies and revenue, analysts predict a good last quarter results for the industry. Long haunted by the downturn and 26/11, hospitality players now have reason to smile with higher occupancy rates due to the World Cup, a surge in the number of foreign tourists and positive macro economic indicators.
ICICI Securities has predicted that hospitality majors would report a 15-16% growth in revenues and EBITDA margins for the fourth quarter, though analysts project overall growth of the hotel sector for this fiscal to be less than 15%.
The going looks good in every aspect, be it an approximately 15% growth in domestic air traffic or foreign tourists? arrival, which has witnessed a growth of about 11% in the January-March period this year against the corresponding period last year.
The number of foreign tourists during January-March 2011 stood at 17.37 lakh compared to 15.63 lakh last fiscal. ?Both business destinations and leisure hotspots have registered good occupancies. The hotel sector has seen a good pick up this year, though average room rates are still soft. Next year. we expect a robust growth, especially with a rebound in the IT sector (IT companies’ spend on travel is sizeable),? said Rashesh Shah, an analyst with ICICI Securities.
As per estimates, during the World Cup season, hotels in key cities witnessed average occupancies of 80-85%. ITC Fortune Hotels president Suresh Kumar said hotels have witnessed a 10-12% growth. ?This year has been better than the last one. Even though occupancies would continue to improve, average room rates are likely to remain under pressure as a lot of new supply is coming in,? he said.
Overall, higher input costs and high cost of borrowing are looming large on the hospitality sector. ?Rising input cost won?t have much of an impact since occupancies have increased. However, the rising interest rates will impact bottomlines of hotels that have high debt on their books, such as the Leela and Kamat Hotels,? said Kaustabh Pawaskar, analyst with brokerage firm Sharekhan.
Pankaj Arora, managing director of Protiviti Consulting, agrees that hospitality companies that are highly leveraged won?t have healthy balance sheets because interest rates are going up.
Two significant movements happened in the hotel sector this quarter, which analysts say will have a positive impact on listed companies. In mid-March, East India Hotels (EIH), which operates Oberoi and Trident brands of hotels, completed its rights issue to raise R1,178.86 crore. Around the same time, Singapore-based PE firm Omega TC holding invested around R150 crore in Roots Corporation, a 100% subsidiary of Indian Hotels Company (IHCL), in tranches.
As a result of the investment, Omega will have a minority stake in Roots Corporation. In addition, it will also acquire compulsorily convertible preference shares from some existing stakeholders for an aggregate amount of R70 crore.
Omega also has the option to invest additional R100 crore in Roots Corporation by March 2014. The move, analysts say, will help IHCL in de-leveraging its books. The total debt on Roots Corporation?s books stood at about R134 crore in fiscal 2010. Of the total money that EIH has raised through the rights issue, around R600-700 crore will be using for reducing the debt.