India’s hospitality sector is expected to post 9-12 per cent revenue growth in FY26, aided by steady demand across segments, according to an ICRA report. The report highlighted that the growth outlook remains strong despite a high base. Apart from surging demand, several other factors are also at play
Higher room rate to aid margins
The rating agency’s report highlighted that the pan-India premium hotel occupancy is estimated at 72-74 per cent in FY26, compared with 71-73 per cent in the first 11 months of the current fiscal year.
The Average room rates (ARRs) for the hospitality sector are projected to increase to Rs 8,200-8,500 per night in the current fiscal year, up from Rs 8,000-8,200 in FY2025, aided by sustained demand conditions and healthy pricing power.
As for average room inventory growth in the year, the premium room inventory across 12 key cities is expected to grow at 5-6 per cent annually over FY25-FY26, trailing the estimated demand growth of 8-9 per cent.
Key demand drivers
ICRA report said that the demand-supply imbalance is likely to persist over the next 2-3 years, supporting occupancy levels and rate growth.
According to the report, demand drivers have diversified materially and now span corporate travel, weddings and social events, MICE activities, concerts, sports events, religious tourism, and leisure-led travel to tier II and III cities.
The report added that the diversification by the hospitality sector has reduced the vulnerability to global and cyclical shocks.
A key operational factor highlighted by the report is that the hotel companies are increasingly adopting asset-light expansion models through management contracts and franchise arrangements. These models generate fee-based income with lower capital intensity, improve return on capital employed, and support stronger free cash flow generation.
Margin growth in FY26
The report stated that the operating margins for the premium hotel segment are expected to be at 34–36 per cent in FY26, broadly in line with the estimated 35.8 per cent in FY25 and materially higher than the 20–22 per cent levels observed in the pre-Covid period.
The report showed that margins are supported by operating leverage, cost rationalisation initiatives, and an improved revenue mix.
Conclusion
The report stated that the Indian hospitality sector is expected to sustain healthy operating performance in FY26. As per the report, the demand in the hospitality sector is growing at 8-9 per cent annually on a compounded basis, outpacing the supply CAGR of 5-6 per cent. This demand-supply imbalance is expected to continue for the next 2-3 years.