In capital-intensive sectors with long payback periods, investors often follow lead indicators that determine growth in times to come.
For luxury hotel chains, a few such indicators have led investors to believe that the sector, which has been in the dumps for long, is poised for a turnaround in profitability.
A presentation by Indian Hotels Co. Ltd says that during the nine months ended December 2017, demand for luxury hotel rooms on a pan-India basis grew 5.6% year-on- year, while supply grew at a slower 3.2%. Data also shows that demand growth has been outpacing supply in luxury hotels since fiscal year 2014 (FY14) and the margin is getting wider.
The steady increase in foreign tourist arrivals over many months and a simultaneous increase in domestic airline passenger traffic are other indicators of better times for hotel firms.
Slowly but surely, the sector is coming out of the supply glut that dragged it into a near- debt trap after the global economic recession in FY09. As hotels revisited and stalled expansion plans, supply accretion slowed down.
As a result, occupancy rates, another lead indicator, rose to an impressive 65-66% from the 58% low it hit a few years ago. Even the revenue earned per average room expanded by a significant 4% year-on-year for the nine months ended December 2017. Such improvement reflects stable demand for rooms that, in turn, leads to higher room tariffs, the key to better profits.
That said, the bane of the hotel sector is the high debt and resulting interest costs that cause significant cash burn during dull times. Investors have been put off by the mounting losses on account of higher depreciation and interest costs even in the case of hotels that post operating profits.
Barring a handful of mid-sized hotel chains, most of them in the listed universe are saddled with debt in the aftermath of the FY09 crisis.
The Street too has been discerning. Stocks of firms such as Oriental Hotels Ltd, EIH Ltd and EIH Associated Hotels Ltd with a relatively smaller debt burden have appreciated by 76%, 56% and 46%, respectively, against Hotel Leelaventure Ltd and Indian Hotels that have been sluggish.
However, some of them posted a decent performance in the December quarter, turning from loss to profit even at the net level. Analysts believe that there is room for stocks of larger hotel chains to appreciate, given that management initiatives to clean up the balance sheets and reorient the hotel portfolios with higher focus on profits than mere revenue, will begin to pay off in the near term.
It’s important that the improvement is sustained. According to global hospitality consultant HVS, the degree to which room rates have grown is marginal, and the next 48-60 months are crucial to see how the demand-supply equation pans out.livemint