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Occupancy in hotels improves but the key for margin is higher room rate

The growth rates in hotels could be improved through a rise in the average room rates which have been stymied for a long time. It is expected that the revenue earned per average room rate for premium hotels will gain traction between 2018 and 2020.

The ingredients for better future earnings in premium hotel chains are in place. What could improve the growth rates though is a sharp increase in the average room rates. The hallmark of improving prospects for the premium hotels into the country has remained strong since December. Except for a few seasonal dips, the monthly foreign tourists grew in double digits on a year on year for majority of the year.

July is usually week, but it portrayed a 4.7% year on year rise which was preceded by a strong 23.5%, 19.5% and 22.5% increase in April, May and June. Apart from that, the occupancy rates have gone up to around 63% in the premium category hotels, although it is higher for the budget properties. Propelling the occupancy rates is higher demand for rooms. This comes from foreign tourists and improving domestic travel. The use of hotels for meetings, incentives, conferences and exhibitions is the new mix that helps demand in the absence of leisure travel.

There is no denying the fact that demonetization and GST has pulled back domestic travel which has hurt many hotels temporarily. Yet, the revenue growth for June was subdued, but the hotels managed to maintain operating margins by reducing costs. Further, with big names in the industry cutting back the expansion plans, the occupancy rate in the coming quarters should improve.

Analysts peg occupancy rates at 67-70% in the next three years which is up by about 400 basis points from the current level. The room tariffs should also rise at a better pace than the 2-3% seen in the last year. This in turn will improve the revenue earned per available room which is a key ingredient in the determination of operating margins of hotels.

It is known that the profits of leading premium hotels like Indian Hotels Co. Ltd, EIH Ltd and Leelaventure Ltd plunged with each passing quarter between 2012 and 2015 as room rates failed to improve with falling occupancy rates due to overcapacity. This has also had an impact on the stock prices of the premium chain of hotels. In spite of the single digit revenue growth across the sector, cost cutting and sustained room rates translated into a year on year growth in June.

With higher GDP forecasts for the next five years and limited rooms under construction, the hotel industry will be able to generate a higher margin with higher occupancy rates and higher room rates.

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