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Operating margins of hotels decline despite revenue growth: ICRA report

Friday, September 2, 2016, 13:00 Hrs  [IST]
HBI Staff |New Delhi

As per the latest report of ICRA, an investment information and Credit Rating Agency, the operating margins of hotels in India continued to decline despite marginal growth in ARRs and RevPARs in Quarter one of the current financial year. Revenue for ICRA’s industry sample grew by a muted 3% during Q1 FY2017, despite the pickup in Revenue per available room (RevPARs). Operating margins were marginally lower than Q1FY2016 levels given the muted revenues and increase in sticky costs like employee expenses; operating margins came in weak at 12.0% during Q1FY2017 (12.3% Q1FY2016).

The pan India occupancy in hotels continued to be above 60%, with marginally higher Average Room Rates (ARRs) of Rs. 5,300 during Q1 FY2017 This trend is expected to strengthen during FY2017 across several markets, barring Kolkata. Bengaluru with significant premium supply in the near term, the report says. Hotels in Delhi and Gurgaon are expected to face continued competition from the aerocity area hotels, which are mopping up crew and Meetings, incentives, conferencing, exhibitions (MICE) traffic coming to the NCR.

Given the expected traction in ARRs in several markets, ICRA research expects revenue growth to increase to 7% in FY2017. However, no significant improvement is expected in margins for the sample during FY2017. ICRA’s premium room inventory database (12 key cities) across the country indicates above 8% compounded annual growth in supply during the period FY2017-FY2020; the expected growth is in line with the rate of supply addition witnessed over the past three years (7% CAGR over FY2014-FY2016).

ICRA supply analysis has highlighted few key markets like Bengaluru with high front ended supply. FTA growth picked up strongly to 8.9% during H1 CY2016, from the muted 3.7% growth during H1 CY2015.

Focussed initiatives and various structural reforms undertaken by the Government of India helped attract FTA into India. Domestic Tourist Visits (DTV) grew by 11.7% during CY2015, following a similar 11.9% during CY2014.

ICRA research estimates demand growth of over 10% across most cities in India during FY2017. Going by the recent trends in foreign tourist arrivals into the country and forex earnings growth, as well as the improving domestic macro-economic data, ICRA research expects modest ARR growth to return during FY2017, which coupled with the traction in occupancies will drive RevPAR growth of 6%-7% during FY2017.

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