The hospitality industry in India has witnessed a sharp rebound post pandemic with demand expected to outpace supply over next 3-4 years, stated a report by Yes Securities. This upcycle, unlike the previous ones, should allow the hospitality companies to capitalise on incremental growth opportunities given the robust balance sheets of key branded players with strong pipelines. “We believe the hotel industry is in a long term upcycle supported by structural shift in consumer preferences, rising aspirational purchases and increasing wallet share of travel spends. Strong economic outlook for India suggests that demand for corporate and MICE activity should remain robust over the medium term. Further, foreign tourist arrivals (FTAs) are yet to fully pick-up while domestic spiritual tourism has huge headroom for growth,” the analysis report by Yes Securities stated.
The upcycle is going to benefit companies which can provide niche consumer experiences, though with prudent cost management, swift ramp-up and immaculate execution.
Demand vs supply
The post pandemic period witnessed a sharp rise in demand for the hospitality industry which was met with constrained supply leading to surge in occupancies and average room rates (ARRs) and per Yes Securities, the trend is likely to continue over the next 3 years , even though the increase is expected to be more gradual. “At an industry level, over FY24-29E, demand is expected to grow at a CAGR of 10.4 per cent vs supply CAGR of ~9 per cent. Further, supply in key markets, where chain-affiliated hotels have major presence, is expected to grow at meagre 5.3 per cent over FY24-29E vs demand growth of 8.5 per cent in these markets. Thus, growth in ARRs and occupancy should continue,” evaluated the brokerage firm.
Considering the past cycles, Yes Securities added, one can infer that higher demand growth vs supply should translate to gradual increase in ARRs and occupancy levels and thus, higher RevPAR.
Travel and experiences to gain higher wallet share
India has one of the highest proportions of young population with a median age of around 28 years, causing a structural shift in the spending patterns of consumers with sudden surge in aspirational spending supported by rising disposable income. Further, with the increase in affluent households and number of middle-income households expected to reach 300 million by 2030, and also the trend of extravagant weddings, the wallet share of luxury and upscale hotels both in top cities and leisure locations is expected to rise.
Future supply to rise further
Over FY24-27E, Yes Securities said, projected supply in markets outside top 8 cities and leisure destinations is expected to grow at 12 per cent CAGR, which translates to 60 per cent of new supply expected outside top 10 destinations. This, it added, is in-line with the demand in other markets which is expected to register around 12 per cent CAGR over FY24-27E, outpacing demand growth of 9.2 per cent in top 8 cities. Additionally, spiritual tourism market size is also expected to reach $130 billion by 2032 from $60 billion in 2023, at 10 per cent CAGR.
This new supply should result in expansion of total addressable market (TAM) of the Indian hospitality industry and, per Yes Securities, should enable capture of higher wallet share of affluent households in Tier-2 and Tier-3 cities as well as spiritual destinations. Further, branded hotel chains are also increasingly focusing on improving their footprint in these non-core markets, primarily through managed routes, allowing faster scale-up.
Headroom for growth in MICE and corporate events
With the rise in demand of Meetings, Incentives, Conferences and Exhibitions (MICE) aided by robust economic activity and corporate activity, the headroom for growth in demand has increased further up. New convention centers in key markets like Mumbai, New Delhi and Jaipur will catalyse demand in those markets. Yes Securities said, “The convention centres will also generate additional MICE demand at upper tier hotels that have sizeable function spaces and will encourage an element of leisure travel by inbound visitors and inter-regional domestic travellers thereby adding to hotel demand and other local spends. Similar trend was witnessed in recent large events like G20 summit and Cricket world cup hosted in India, where demand improved materially on the back of few key events.”
Key strategies that can help reap benefits of upcycle…
How will cost management help?
A number of key branded players in the segment have undertaken cost-saving initiatives on multiple fronts. This was catalyzed during the pandemic, and as a result, escalation in costs per occupied room over FY19-24 has been even lower than inflation in many cases. “For example, Indian Hotels witnessed growth in F&B costs at mere 2 per cent CAGR over FY19-24 while manpower costs per room grew at only 1 per cent CAGR. Manpower costs/room grew at 1 per cent CAGR for Lemon Tree hotels and EIH as well over FY19-24. This has been achieved by improved adoption of technology, automation and optimization of workforce and other resources,” Yes Securities elaborated while maintaining that this has structurally improved the margins for industry players driven by constant focus on cost management.
Asset light strategy is the way to go
Branded players are now increasingly adopting asset light strategies for growth. Expansion through managed routes allows companies to scale-up rapidly, without compromising the quality of the balance sheet. This way, Yes Securities said, players can focus on their core competencies such as operational expertise, resource optimization, providing digital platforms and leveraging brand equity instead of focusing on property development. Players like Indian Hotels, Lemon Tree and EIH are increasingly adopting asset light strategy by leveraging their respective brands.
Robust balance sheet offers much needed cushion
Companies have managed to utilize strong free cash flows from the previous 2-3 years to significantly pare down gross debt. Companies like IHCL now hold a net cash surplus, stated Yes Securities. Further, adoption of asset light strategy for growth has resulted in lesser burden on the balance sheet for future expansion.
Diversification for better growth
According to the report, branded players are increasingly diversifying their presence across segments as well as geographies. For example, IHCL has successfully diversified into the Midscale segment through the Ginger brand while Lemon Tree is expanding into the Luxury segment through its brand Aurika and into the Midscale / Economy segment through Keys brand.
Companies are also diversifying their presence in terms of geographies, both domestically as well as internationally. Besides this, companies are also focusing on increasing non-room revenue by building brands in F&B segments, Membership Clubs and flight catering.