Hotel industry stocks have under-performed the Sensex in the last five years. These stocks declined 35 per cent while the Sensex has gained 32 per cent in this period.

This is surprising at a time when other consumer themes have been quite fancied by the stock market.

Net sales for seven listed hospitality companies have been growing at a meagre 3.2 per cent on a compounded annual growth basis between 2006-07 and 2011-12.

The analysis considered East India Hotels (EIH), EIH Associates, Hotel Leela Ventures, Indian Hotels, Kamat Hotels, Oriental Hotels and Taj GVK Hotels which constitute 74 per cent of the industry by revenue.

Slowdown in arrivals

After a boom period that lasted until 2008, the credit crisis triggered a slowdown in tourist arrivals into India. Total tourist arrivals stood at 50 lakh in 2007, but grew at just 3.5 per cent CAGR to stand at 62 lakhs by 2011.

This apart, spending by tourists on hospitality also tapered down in this period. This coincided with a sharp increase in the number of rooms, as large hospitality companies made big investments in expansion.

The number of rooms offered rose from 1, 30,997 to 1, 63,038 per cent between 2007 and 2011, an increase of 25 per cent.

Prior to 2008, the industry had also used cheap credit to invest in capacity expansion in the premium segment. They were concentrating on this segment as margins were high.

But post-2007, growth in the premium segment slowed, while off-take of budget and mid-priced rooms picked up. Average room rent for Indian Hotels, for instance, was Rs 9,469 in FY 12, while it was Rs 9,234 in FY07. So, in real terms, ARR declined.

The positive news

While sales growth turned sluggish, net profits fell by 12.9 per cent a year in the same period.

Combined profits fell from Rs 785 crore in FY 2007 to Rs 343 crore in FY 2012. It had dipped even lower in 2008-09 and recovered a little thereafter.

On the positive side, revenues from food and beverages increased from Rs 288 crore to Rs 437 crore a CAGR of 7.1 per cent, contributing about 10 per cent to the top line in FY 2012.

Operating expenses for the group increased from Rs 297 cr to Rs 504 cr, a CAGR of 9.1 per cent over the five year period, much higher than revenue growth.

Higher oil and fuel costs contributed to the woes of hotel industry, increasing from Rs 208 crore in 2007 to Rs 345 crore in 2012. Employee costs were also a major drag.

Triggered by inflation, they increased from Rs 609 crore to Rs 1135 crore a 10.9 per cent growth every year.

Hotels, however, managed to keep their other expenses under check. Their sales and administrative costs increased from Rs 682 crore to Rs 813 crore at a meagre 3 per cent.

At the net level, interest costs were the major problem, increasing exponentially from Rs 198 crore in FY 2007 to Rs 600 crore in 2012, up almost three times.

Though debt equity ratio has been decreasing and is at a decent level of 1.19 on an aggregate basis, some of the players in the industry are staggering under the burden of high leverage. Hotel Leela Ventures, for instance, has a debt equity ratio of 3.98, and is trying to de-leverage by selling off assets; it sold its Kovalam property for Rs 500 crore in 2011.

Outlook

However the outlook is turning a little better for this industry.

According to the latest hotels.com hotel price index report, average room rates in India rose 12 per cent to Rs 4,696 in the first half of 2012.

Data released by Ministry of Tourism showed that foreign tourist arrivals in India rose 6.6 per cent to 3.76 million between January and July this year.

This is an improvement over 2011 when 6.29 million tourists visited India. But currency fluctuations and uncertainties in the global economy could affect tourist arrivals.

Managing competition from foreign players will be the key to the success for Indian hotel industry.

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