The revenue per available room (RevPAR) outlook, for hotels across India in the premium category, will continue to remain stressed in fiscal 2020 (FY20). As per a senior ICRA Research executive, this is mainly owing to subdued demand environment in the country. While individual hotels have initiated price hikes, their ability to sell at higher rates will primarily depend on their capability to manage daily demand and occupancy.
Vinutaa Sriraman, assistant vice president - large corporate ratings, ICRA Ltd, said, “While demand has recovered marginally during October to November 2019 period, overall revenues for FY20 are likely to be flat at about 0% to 3%. The margin outlook for FY20 is also expected to be largely flat. ICRA also does not expect the larger hotel companies to embark on debt funded capital expenditure (capex) programme given the experience of the recent past.”
In terms of city wise performance, majority of the key markets witnessed a decline in RevPAR in the first half of FY20. In fact, Bengaluru was the only key market that witnessed improvement in RevPAR. With negligible premium category hotel room supply additions over the past several quarters, Mumbai has continued its position as a city with the highest occupancy of over 70%. However, the south Mumbai market has performed better compared to north Mumbai.
While the up-cycle would be delayed, Sriraman said, the healthy demand expected over the medium term is likely to facilitate improvement in average room rates (ARRs) and occupancy. “Among major markets, Mumbai continues to post high occupancies, as fresh hotel room additions have been slow over the last four years. Being a gateway city, Mumbai’s healthy demand prospects would drive RevPARs over the medium term,” she said during an analyst call.
In the National Capital Region (NCR), Delhi has about 63% of the NCR inventory while the remaining is spread across Noida, Gurugram and Faridabad. While Delhi can support higher ARRs, Gurugram, which has been struggling over the last few years owing to the Delhi International Airport Ltd (DIAL) Aero City supply, is showing signs of improvement. The micro market of Noida is likely to witness muted growth in occupancies and ARRs over the medium term due to anticipated increase in supply in FY21, FY23 and FY24.
“Monthly occupancies were growing for about 48 months on a year-on-year basis. However, occupancy in the first half of fiscal 2020 (H1 FY20) declined following the increase in airfare post the shutdown of Jet Airways. Adding to the woes were muted corporate performance, weak consumer sentiment and slowdown in foreign tourist arrivals (FTAs) and domestic travel due to extended election period in the first quarter of FY20.
Pan India average occupancy declined by 1% to approximately 63% in H1 of FY20 compared to 64% in the same period of fiscal 2019. Market wise, Mumbai, National Capital Region (NCR), Pune, Kolkata and Goa witnessed some moderation in occupancy in this period. ARRs, which largely remained flat for nearly three years up to the third quarter of fiscal 2016, started witnessing some traction beginning fourth quarter of FY16. The traction continued for the whole of FY17, FY18 and FY19.
“When demand slowdown impacted ARR in the first quarter of FY20, rates recovered marginally in the second quarter. As per ICRA estimates, ARR across India stood at Rs 5,400 for the first half of fiscal 2020 compared to Rs 5,500 in the same period last year. Current ARRs are lower by 30-35% from the peak levels witnessed in H1 of FY19. Corporate request for proposal (RFP) rates have been negotiated about 4% to 5% higher for the cycle starting January 2020. However, effective pass through of the same will depend on demand pick up,” said Sriraman.
The ARR movement is city specific. While most cities have witnessed a decline in ARR for H1FY20, cities like Mumbai and Bengaluru have reported growth. Impacted by lower occupancy and ARR, revenue per available room (RevPAR) declined by about 3% to 4% to close at about Rs 3,400 in the first half of the current fiscal. While the RevPAR was higher by Rs 500 than the all-time low of recorded in FY14 and FY15, it was still 30% lower than the peak in H1FY2009. Having said that, it was still equal to the peak RevPAR witnessed in FY11.
In NCR, there was a marked variation in performance across micro markets. With a large part of the business travel into Delhi being government related businesses, there was a decline in both ARR and occupancy in Delhi. On the other hand, Gurugram showed positive traction in both ARR and occupancy with inflow of corporate guests despite the auto sector slowdown. “The second quarter of fiscal 2020 will witness some pick up in government related travel in the Delhi region. Overall, pan India ARR and occupancy remained under pressure in H1 of FY20,” she said.
Demand drivers and their performance
Demand for the hospitality industry is multi-pronged and depends on foreign tourist arrivals, domestic leisure and business travel and MICE or meetings, incentives, conventions and exhibitions segment. Domestic guests account about 75% of the total demand while FTAs account for the balance. Business travellers account for about 60% to 65% of the demand, while leisure travellers account for the balance 35% to 40%. The ratio varies depending on the destination.
“The calendar year (CY) 2018 was a strong second year of international tourist arrival growth in continuation with a 7% growth witnessed in CY2017. This was higher than the 4% yearly average of CY2005 to 2016. For H1 CY19 the growth slowed to 4% due to economic headwinds and the already high base,” said Sriraman.
While Asia Pacific witnessed a 6% FTA growth during H1 of CY19, growth in arrivals into India stood at 3% and was lower than the Asia Pacific or global international tourist arrival (ITA) growth. Foreign tourist arrival, in year-to-date October CY2019 has been impacted by global trade wars and the economic slowdown.
The Pulwama attack in February 2019, the Indian general elections during April and May 2019, the second bout of Nipah virus in Kerala in June 2019, diversion of traffic to the Cricket World Cup in UK in May to July 2019, the Kashmir crisis and ensuing travel advisories in August 2019, Thomas Cook UK shut down in September 2019 and extended monsoon have further worsened the situation. In December 2019, USA and UK have issued reason travel advisory for women visiting India, which could further impact arrivals in the country. Bangladesh, USA and UK were the top three FTA source markets for India in October 2019.
The e-tourist visa (e-tv) scheme
Tourist arrivals, under the e-tv scheme, accounted for about 25.1% of the overall FTAs in India in year-to-date (YTD) October CY2019. The e-tv scheme, which started in November 2014, with about 43 countries has since been expanded to include over 165 countries. During YTD October CY19, travellers under the e-tv scheme grew at a healthy 20.9% on y-o-y basis, also lower than the 44.7% witnessed in YTD October CY2018. This is due to high base effect and slowing FTA growth.
Foreign exchange earnings (FEE)
FEE grew by about 2% in USD terms during YTD October CY2019 as against a 7.5% y-o-y growth, during YTD October CY2018. In Indian Rupee (INR) terms, the FEE growth was higher at about 6.1%. However, this was also lower than 11.3% for YTD October CY2018. Per traveller USD spend, witnessed a 1.2% decline, while in INR terms, it was higher by about 2.7% for YTD October CY2019.
Domestic passenger trafficIt grew by a modest 2.9% during YTD September CY2019 compared to a strong 21% y-o-y growth for the corresponding previous year. On year growth in domestic passenger traffic was in double digit every month since September 2014 until December 2018. April 2019, was the first month of decline since June 2013.
“Increase in airfares following the grounding of Jet Airways aircrafts in January 2019 and eventual shut down in April 2019, slowdown in domestic travel due to an extended election period of six to seven weeks, Nipah vitus alert for the second time and Kerala, muted corporate performance and consequent cut on discretionary travel spends, lower consumer confidence as indicated by the RBI current situation index, extended and excess rainfall in several cities like Mumbai and Goa, and water shortage in cities like Chennai have also impacted domestic travel,” she said.
Corporate performance
With second quarter FY2020, revenue growth entering a negative territory in almost four years, the uncertain business environment and cost-cutting initiative could have a bearing on travel related spends in the near term.
Supply dynamics
The supply growth pipeline in the Indian premium hotel segment is expected to be about 4.5% compounded annual growth rate (CAGR) during FY19 to FY24. With the pickup in supply announcements over the last few months, the incremental supply pipeline for FY20 to FY24 is now in line with the addition during FY14 to FY19. However, the growth rate is lower given the higher base.
According to ICRA research, total inventory to be commercialised over the next five years has increased from about 98,900 rooms in November 2018 to about 1,08,000 rooms in December 2019. This is an increase of about 9% in the last one year. Incremental supply is largely focused on Bengaluru, Mumbai and NCR, and is likely to be opened in FY23 and FY24.
“Part of the incremental supply is because of up-scaling and re-branding of midscale hotels into premium category rooms. Over the FY20 to FY24 period, about 3% to 4% of the incremental supply in the pipeline, is from brownfield expansion. A sizable part of the supply pipeline in FY20 and FY21, in the top eight cities tracked by ICRA are owned by real estate players. The supply pipeline in Goa and Kolkata are expected to come in FY20 and FY21 while incremental supply in Hyderabad, Mumbai and Bengaluru is spread over the years,” said Sriraman adding that large real estate developers like Prestige, Bhartiya City, Oberoi Realty and DB Group are aggressive on the hospitality sector.
Red flags
These have intensified currently. Demand weakness and supply uptake will continue to weigh-in, in the near-term performance and demand will be contingent on the overall economic revival.
(The writer is a Mumbai-based independent business journalist and has extensively covered diversified consumer businesses over the last two decades. He can be reached at hello@ashishktiwari.com)
Vinutaa Sriraman, assistant vice president - large corporate ratings, ICRA Ltd, said, “While demand has recovered marginally during October to November 2019 period, overall revenues for FY20 are likely to be flat at about 0% to 3%. The margin outlook for FY20 is also expected to be largely flat. ICRA also does not expect the larger hotel companies to embark on debt funded capital expenditure (capex) programme given the experience of the recent past.”
In terms of city wise performance, majority of the key markets witnessed a decline in RevPAR in the first half of FY20. In fact, Bengaluru was the only key market that witnessed improvement in RevPAR. With negligible premium category hotel room supply additions over the past several quarters, Mumbai has continued its position as a city with the highest occupancy of over 70%. However, the south Mumbai market has performed better compared to north Mumbai.
While the up-cycle would be delayed, Sriraman said, the healthy demand expected over the medium term is likely to facilitate improvement in average room rates (ARRs) and occupancy. “Among major markets, Mumbai continues to post high occupancies, as fresh hotel room additions have been slow over the last four years. Being a gateway city, Mumbai’s healthy demand prospects would drive RevPARs over the medium term,” she said during an analyst call.
In the National Capital Region (NCR), Delhi has about 63% of the NCR inventory while the remaining is spread across Noida, Gurugram and Faridabad. While Delhi can support higher ARRs, Gurugram, which has been struggling over the last few years owing to the Delhi International Airport Ltd (DIAL) Aero City supply, is showing signs of improvement. The micro market of Noida is likely to witness muted growth in occupancies and ARRs over the medium term due to anticipated increase in supply in FY21, FY23 and FY24.
“Monthly occupancies were growing for about 48 months on a year-on-year basis. However, occupancy in the first half of fiscal 2020 (H1 FY20) declined following the increase in airfare post the shutdown of Jet Airways. Adding to the woes were muted corporate performance, weak consumer sentiment and slowdown in foreign tourist arrivals (FTAs) and domestic travel due to extended election period in the first quarter of FY20.
Pan India average occupancy declined by 1% to approximately 63% in H1 of FY20 compared to 64% in the same period of fiscal 2019. Market wise, Mumbai, National Capital Region (NCR), Pune, Kolkata and Goa witnessed some moderation in occupancy in this period. ARRs, which largely remained flat for nearly three years up to the third quarter of fiscal 2016, started witnessing some traction beginning fourth quarter of FY16. The traction continued for the whole of FY17, FY18 and FY19.
“When demand slowdown impacted ARR in the first quarter of FY20, rates recovered marginally in the second quarter. As per ICRA estimates, ARR across India stood at Rs 5,400 for the first half of fiscal 2020 compared to Rs 5,500 in the same period last year. Current ARRs are lower by 30-35% from the peak levels witnessed in H1 of FY19. Corporate request for proposal (RFP) rates have been negotiated about 4% to 5% higher for the cycle starting January 2020. However, effective pass through of the same will depend on demand pick up,” said Sriraman.
The ARR movement is city specific. While most cities have witnessed a decline in ARR for H1FY20, cities like Mumbai and Bengaluru have reported growth. Impacted by lower occupancy and ARR, revenue per available room (RevPAR) declined by about 3% to 4% to close at about Rs 3,400 in the first half of the current fiscal. While the RevPAR was higher by Rs 500 than the all-time low of recorded in FY14 and FY15, it was still 30% lower than the peak in H1FY2009. Having said that, it was still equal to the peak RevPAR witnessed in FY11.
In NCR, there was a marked variation in performance across micro markets. With a large part of the business travel into Delhi being government related businesses, there was a decline in both ARR and occupancy in Delhi. On the other hand, Gurugram showed positive traction in both ARR and occupancy with inflow of corporate guests despite the auto sector slowdown. “The second quarter of fiscal 2020 will witness some pick up in government related travel in the Delhi region. Overall, pan India ARR and occupancy remained under pressure in H1 of FY20,” she said.
Demand drivers and their performance
Demand for the hospitality industry is multi-pronged and depends on foreign tourist arrivals, domestic leisure and business travel and MICE or meetings, incentives, conventions and exhibitions segment. Domestic guests account about 75% of the total demand while FTAs account for the balance. Business travellers account for about 60% to 65% of the demand, while leisure travellers account for the balance 35% to 40%. The ratio varies depending on the destination.
“The calendar year (CY) 2018 was a strong second year of international tourist arrival growth in continuation with a 7% growth witnessed in CY2017. This was higher than the 4% yearly average of CY2005 to 2016. For H1 CY19 the growth slowed to 4% due to economic headwinds and the already high base,” said Sriraman.
While Asia Pacific witnessed a 6% FTA growth during H1 of CY19, growth in arrivals into India stood at 3% and was lower than the Asia Pacific or global international tourist arrival (ITA) growth. Foreign tourist arrival, in year-to-date October CY2019 has been impacted by global trade wars and the economic slowdown.
The Pulwama attack in February 2019, the Indian general elections during April and May 2019, the second bout of Nipah virus in Kerala in June 2019, diversion of traffic to the Cricket World Cup in UK in May to July 2019, the Kashmir crisis and ensuing travel advisories in August 2019, Thomas Cook UK shut down in September 2019 and extended monsoon have further worsened the situation. In December 2019, USA and UK have issued reason travel advisory for women visiting India, which could further impact arrivals in the country. Bangladesh, USA and UK were the top three FTA source markets for India in October 2019.
The e-tourist visa (e-tv) scheme
Tourist arrivals, under the e-tv scheme, accounted for about 25.1% of the overall FTAs in India in year-to-date (YTD) October CY2019. The e-tv scheme, which started in November 2014, with about 43 countries has since been expanded to include over 165 countries. During YTD October CY19, travellers under the e-tv scheme grew at a healthy 20.9% on y-o-y basis, also lower than the 44.7% witnessed in YTD October CY2018. This is due to high base effect and slowing FTA growth.
Foreign exchange earnings (FEE)
FEE grew by about 2% in USD terms during YTD October CY2019 as against a 7.5% y-o-y growth, during YTD October CY2018. In Indian Rupee (INR) terms, the FEE growth was higher at about 6.1%. However, this was also lower than 11.3% for YTD October CY2018. Per traveller USD spend, witnessed a 1.2% decline, while in INR terms, it was higher by about 2.7% for YTD October CY2019.
Domestic passenger trafficIt grew by a modest 2.9% during YTD September CY2019 compared to a strong 21% y-o-y growth for the corresponding previous year. On year growth in domestic passenger traffic was in double digit every month since September 2014 until December 2018. April 2019, was the first month of decline since June 2013.
“Increase in airfares following the grounding of Jet Airways aircrafts in January 2019 and eventual shut down in April 2019, slowdown in domestic travel due to an extended election period of six to seven weeks, Nipah vitus alert for the second time and Kerala, muted corporate performance and consequent cut on discretionary travel spends, lower consumer confidence as indicated by the RBI current situation index, extended and excess rainfall in several cities like Mumbai and Goa, and water shortage in cities like Chennai have also impacted domestic travel,” she said.
Corporate performance
With second quarter FY2020, revenue growth entering a negative territory in almost four years, the uncertain business environment and cost-cutting initiative could have a bearing on travel related spends in the near term.
Supply dynamics
The supply growth pipeline in the Indian premium hotel segment is expected to be about 4.5% compounded annual growth rate (CAGR) during FY19 to FY24. With the pickup in supply announcements over the last few months, the incremental supply pipeline for FY20 to FY24 is now in line with the addition during FY14 to FY19. However, the growth rate is lower given the higher base.
According to ICRA research, total inventory to be commercialised over the next five years has increased from about 98,900 rooms in November 2018 to about 1,08,000 rooms in December 2019. This is an increase of about 9% in the last one year. Incremental supply is largely focused on Bengaluru, Mumbai and NCR, and is likely to be opened in FY23 and FY24.
“Part of the incremental supply is because of up-scaling and re-branding of midscale hotels into premium category rooms. Over the FY20 to FY24 period, about 3% to 4% of the incremental supply in the pipeline, is from brownfield expansion. A sizable part of the supply pipeline in FY20 and FY21, in the top eight cities tracked by ICRA are owned by real estate players. The supply pipeline in Goa and Kolkata are expected to come in FY20 and FY21 while incremental supply in Hyderabad, Mumbai and Bengaluru is spread over the years,” said Sriraman adding that large real estate developers like Prestige, Bhartiya City, Oberoi Realty and DB Group are aggressive on the hospitality sector.
Red flags
These have intensified currently. Demand weakness and supply uptake will continue to weigh-in, in the near-term performance and demand will be contingent on the overall economic revival.
(The writer is a Mumbai-based independent business journalist and has extensively covered diversified consumer businesses over the last two decades. He can be reached at hello@ashishktiwari.com)
