The hospitality industry is poised for stability in profit margins despite facing rising costs, according to a recent report by credit rating agency Icra Ltd. This forecast comes amidst expectations of robust revenue growth driven by various factors.
One of the key challenges facing hospitality companies is the escalation of refurbishment, maintenance, and employee expenses. These costs have been on the rise, posing a potential threat to profit margins. However, Icra’s report suggests that despite these challenges, the industry is expected to maintain stable gross profit margins in the fiscal years 2024 and 2025.
A significant contributing factor to this stability is the anticipated revenue growth in the industry. While there may be a slowdown in revenue growth to 7-9% in FY25 compared to the robust 14-16% growth expected in FY24, the industry remains buoyant. This optimism is supported by strong domestic tourism and increasing demand for meetings, incentives, conferences, and exhibitions (MICE) events.
Hotel occupancy rates are also expected to reach decadal highs, reaching 70-72% in both FY24 and FY25. This surge is fueled by sustained domestic leisure and spiritual travel, with tier-II cities emerging as key growth drivers. Additionally, demand for MICE activities, including weddings and business travel, is expected to remain robust, despite a temporary dip during general elections.
While foreign tourist arrivals (FTAs) have not yet returned to pre-pandemic levels, domestic tourism surge is expected to remain the primary growth engine in the short term. The resurgence of FTAs depends largely on the global macroeconomic situation.
Another positive indicator for the industry is the anticipated increase in average room rates (ARRs). ARRs are poised for a significant rise, reaching ₹7,800-8,000 in FY25, approaching peak levels witnessed before the global economic crisis in FY08. This upward trajectory is supported by a positive demand outlook, expected to grow at a compound annual growth rate (CAGR) of 4.5-5% over the medium term.
The credit profiles of hotel companies are also showing signs of improvement, with upgrades surpassing downgrades in FY23 and the first half of FY24. This positive trend is driven by increased earnings and cash flows, which are expected to strengthen the capital structure of these companies.
A controlled supply pipeline is another factor contributing to the industry’s growth. Most of the new supply comes from management contracts and operating leases, mitigating risks associated with asset ownership. Additionally, limited land availability in major cities is prompting a shift towards rebranding and property upgrades across premium micro-markets.
Cities like Mumbai and the National Capital Region (NCR) are expected to achieve occupancy rates exceeding 75% in FY24 and FY25. This growth is attributed to transient passengers, business travelers, and MICE events. Furthermore, the sharp rise in ARRs of premium hotels has led to a spillover of demand to mid-scale hotels.
Despite an increase in per-room construction costs compared to pre-pandemic levels, the supply outlook remains positive. With demand expected to outpace supply in the medium term, the hospitality industry is well-positioned for continued growth and profitability.
While the hospitality industry faces challenges such as rising costs, it remains resilient and poised for growth. With strong revenue prospects, improving credit profiles, and a controlled supply pipeline, the industry is expected to maintain stable profit margins and drive economic recovery in the coming years.
