No Signs of Revival in the Hotel Industry - India Ratings

New Delhi, May 5, 2014: India Ratings & Research (Ind-Ra) expects hotel companies to continue to face muted revenue growth, stagnated profitability and elevated credit risk in FY15 driven by lower demand growth and supply-side pressures.
The agency expects major hotel companies to register revenue growth of 5%-10% in FY15 due to sluggish demand in the near term. This is in line with the trend observed in 9MFY14 and FY13, where a weak macroeconomic condition led to muted growth in business travellers and foreign tourist arrivals. Corporate travellers are key demand drivers for hotels as they account for around 60% of guests (source: Federation of Hotel & Restaurant Associations of India’s survey 2012-2013).
Ind-Ra also expects profitability for major companies to remain stagnant at around 20% as the demand slowdown has stressed occupancy and average room rate (ARRs) across major cities, limiting the ability of hotel companies to pass on an increase in input costs. Ind-Ra’s analysis indicates that profitability of hotel companies declined by 100bp-300bp in both 9MFY14 and FY13 primarily due to inflationary pressures, mainly higher food and fuel costs, and inability of companies to pass on such pressures due to weak demand.
According to Ind-Ra’s analysis, credit metrics of hotel companies have showed a downward trend since FY08. There has been even sharper deterioration of credit metrics over FY11-FY13 with median interest coverage declining to 1.7x in FY13 (FY11: 3.8x) and debt/EBITDA increasing to 7.1x (2.5x).  Several companies which have implemented aggressive debt-led capex in the past are finding it difficult to manage their overleveraged balance sheets and have thus cut back on expansion plans and resorted to assets sales. However, given their already stretched credit metrics and limited capex plans, Ind-Ra does not expect any further deterioration in FY15.
Increased stabilisation period is worsening the condition of already stressed newer properties. Consequently, they are primarily dependent upon sponsors to repay their debt.
Incremental borrowing by hotel companies continued to decline in FY13, indicating both that investors are cautious and banks are selective in lending. Incremental lending to the sector dropped to INR31bn in FY13, almost two-thirds of FY11 levels. Rising stress levels have also resulted in a sharp increase in the number of hotel projects being stalled (estimated to be around INR143bn over FY12-FY14).
However, despite the muted outlook of the sector, non-premium and budget hotels are likely to face relatively less cyclical stress in FY15. This is because non-premium hotels cater mostly to domestic travellers – a segment which has continued to grow strongly despite the slowdown. Thus, the non-premium hotel segment is likely to witness higher investments due to the higher growth expectations. In addition, certain regional markets will continue to see improved performance of hotels, driven by favorable demand-supply dynamics.
(Source: Manager - Corporate Communications and Investor Relations, India Ratings & Research A Fitch Group Company.)