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Robust tourism numbers required to spice up the hotel sector

Only if growth in tourism and passenger traffic continues at the current pace and translate into revenue growth for hotels, it will be able to improve the operating performance

In the last couple of months, hotel revenues and profits have seen a slowdown. Although data on tourism and travel in the country exudes optimism, it shows that foreign tourist arrivals shot up by 18.1% year on year. This is a huge jump as compared to 8.6% growth in October 2016. There is an impressive growth of 15.8% year on year between January and October as compared to 9.6% in the same period last year. 

Even domestic air passenger growth in the month of October jumped to 20% plus, with revenue passenger kilometers rising substantially. This shows that the rise in domestic travel and inbound tourism together should culminate in performance by the hotel sector. Yet, the stocks of premium hotel chains are still languishing.

September was a seasonally weak quarter for hotels and did little to cheer the Street. The average rates of occupancy have moved up from two years ago but are still hovering below 70% for leisure and business travel destinations. The average room rates are also the same as that of last year.

EIH Ltd could not meet investor expectations with a low single digit operating margin and a net profit which was half that of the year ago. For Taj, domestic standalone revenue was down year on year, although the pain in international operations was much greater. Add to this fact that majority hotels are under a huge debt burden. The interest expense would keep eroding the profits.

The scenario in the hotel industry is far better than a year ago. This year saw a demand of 6.4% which outpaced the supply at 3.2%. The average occupancy has held out at marginally higher levels. Given this positive outlook, some hotel stocks like EIH have moved up from their lows. But they slackened again due to weak performance in the last two quarters.

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