Branded hotels are expected to post double-digit revenue growth of 13-14 per cent this fiscal and 11-12 per cent in the next, stated a report by CRISIL Ratings. This, it added, will be fuelled by demand outpacing supply. While domestic leisure and business travel will continue to be the primary demand drivers, growing traction in the MICE (meetings, incentives, conventions and exhibitions) segment and pickup in foreign tourist arrivals will provide an additional fillip. The growth comes on the back of a strong 17 per cent growth reported during the last fiscal.
The pace of room additions is expected to also pick up further majorly through the asset-light management contract route, in line with an increase since last fiscal. This, CRISIL Ratings said, will help meet increasing demand. As a result, supply will increase by a cumulative 20 per cent over this fiscal and the next.
Operating margin is expected to improve by 100-150 basis points (bps) this fiscal and sustain at similar levels in the next, with benefits of operating leverage kicking in and other cost optimisation measures undertaken. Further, strong cash flows, asset-light expansion and sizeable equity raising will keep debt levels under check, thereby strengthening credit profiles.
CRISIL Ratings analysed 52 branded hotel companies, accounting for around 43 per cent of total rooms, to release the findings.
Mohit Makhija, Senior Director, CRISIL Ratings, said, “The domestic leisure segment will continue to drive growth on the back of rising travel aspirations and better regional connectivity. Further, a positive economic outlook and the government’s ‘Meet in India’ initiative to promote corporate events will support the business and MICE segments. Foreign tourist arrivals are also expected to surpass the pre-pandemic levels this fiscal. These factors will drive up the average room rates (ARRs) of branded hotels by 6-7 per cent this fiscal on an already high base. That said, growth in ARRs is expected to moderate to 3-4 per cent next fiscal as significant room capacities come up.”
The CRISIL Ratings report also said that the number of branded-hotel rooms is expected to rise by 8-9 per cent this fiscal and 11-12 per cent in the next, with leisure and non-metro destinations accounting for approximately 65 per cent of additions. And the top seven metros will account for around 25 per cent of additions. The balance additions are expected in up-and-coming spiritual tourism destinations.
Pallavi Singh, Associate Director, CRISIL Ratings, said, “The hotel industry is expanding more into non-metros and emerging leisure destinations as travellers seek more choices and infrastructure in these regions improve. Further, as 60-65 per cent of room additions — over this fiscal and the next — are being done through an asset light route, it eliminates the need for large upfront investment and helps navigate business cyclicality better. Balance expansion will be through asset heavy route and in destinations with established demand and attractive potential for growth.”
Despite these significant room additions, the report maintained that the occupancy levels are expected to remain strong at 74-75 per cent next fiscal, declining a modest 50 bps after increasing 100-150 bps this fiscal. This will allow hotels to benefit from operating leverage which coupled with effective cost management – including higher adoption of technology and manpower rationalization to move to a leaner fixed cost structure – will lead to earnings before interest, tax, depreciation and amortisation (Ebitda) margin expand by 100-150 bps to 33-34 per cent this fiscal and the next.
Strong cash flows, sizeable equity raises – accounting for 25 per cent of previous fiscal’s net worth – and an asset light expansion strategy, involving minimal capital expenditure requirements, will further strengthen the credit profiles of hotel players with gearing expected at 0.30-0.35x in fiscal 2026, a sharp improvement from 0.68x in fiscal 2024.
Also, debt to Ebitda is expected to improve to ~1.5x-1.7x by next fiscal from more than 2x last fiscal.
CRISIL concluded that a decline in business travel due to an economic downturn and in leisure travel owing to a surge in airfares will bear watching. Further, deterioration in leverage due to room additions will be monitorable.