Investing In India with Dr. Uday Lal Pai

Hospitality industry in India - good times ahead

By Dr. Uday Lal Pai
Exclusively for InvestorIdeas.com
posted August 21, 2006

Riding high on the steady growth of the technology and manufacturing sectors in the country, the hotel and hospitality industry in India is thriving, with healthy occupancy levels and consistent increase in demand.

Everywhere, the hotel sector remains vulnerable to extraneous events such as natural disasters and terrorist acts. But surprisingly, India has been an exception.

Mumbai was recently hit hard by serial blasts by Islamic terrorists. Just before that the unprecedented deluge in Mumbai has hit the earnings of the tourism industry. But that was just temporary phenomena.

"Hotels experience a sharp dip in arrivals because if it is a pure holiday destination and people like to avoid any place where their peace of mind is likely to be disturbed during a leisure trip. Interestingly, despite the sporadic incidents of terrorist activity in Kashmir, domestic holidaymakers still frequent the destination. Business travel to Mumbai appears to have been impacted very marginally since investment decisions and working relationships in any destination is always long-term and people do not exit in haste because of incidents like the strikes on Mumbai's suburban rail network. More importantly, the Indian economy is moving through one of its most robust phases, and it will take more than a few bizarre episodes to derail its progress," Girish Rao, Vice President, Corporate Communications & Business Development, The Leela Group recently stated.

The hospitality industry, on a robust growth path, has been impacted by serial bomb explosions on Mumbai's suburban railway network. Food and beverages business has been down by 15 percent and hotel room bookings have been affected by over 10 percent, says Sanjeev Shekhar, General Manager, Marine Plaza.

"Terrorism is a global issue. London and Madrid have also experienced it. There will not be any significant fall in the business of the hotel industry in the long run," a spokesperson of Oberoi Hotels said.

"As long as the Indian economy continues to boom, the hospitality sector will see profits. These blasts will not have a severe impact on this sector," Girish said.

The business travel segment has not experienced any serious dip, however leisure travel can get impacted a little, although there are no major reports of cancellation to key tourist destinations in India.

The travel and hospitality industry has largely profited from the fast growing economy of India. This has largely been due to the 3.5 million tourist arrivals in FY05 (22% growth) over the previous period.

The hotel scenario in India

There are about 20,000 hotels in India in the organized sector, accounting for about 500,000 hotel rooms. The Ministry of Tourism also approves and classifies hotels in star categories: 1-star, 2-star, 3-star, 4-star, 5-star and 5-star deluxe. In addition, there is a category of heritage hotels. Currently there are some 1,900 hotels approved and classified by the Ministry of Tourism, with a total of approximately 1,07,000 hotel rooms. The star-category hotels are considered superior in terms of facilities, services and reputation. Most attract an upscale clientele, including international tourists.

A study conducted by Crisil Research has forecast a surge in hotel room rates well beyond the current highs. It predicts demand for hotel rooms to grow at a compounded rate of 10 percent over the next five years. The report has also predicted good times for the hospitality industry over the next five years. The industry had been witnessing buoyancy, pushing room rents to unprecedented levels, in the last two years. However, with the economy on upswing and demand expected to be on the rise, the softening of the room rates could be only marginal.

According to Peter J. Leitgeb, President, Hotel Leela Ventures, the tariff levels could witness corrections after the new ventures eases the supply position. However, with the emerging affluent class within the country and foreign businesses focusing on India, the demand for premium deluxe hotels would continue with only a marginal softening in tariffs. The current strength in luxury hotels is estimated more than 100,000.

The five star hotel segment has grown the fastest during the last five years at a CAGR of 12%. Further this segment can be divided into 3 sub-segments Luxury, Business and Leisure. The growth in this segment indicates the genre of travelers coming into the country. Over the last few years the country has witnessed a large influx of business travelers in the country owing to relaxation of the government's stand on Foreign Direct Investments (FDI) for most of the sectors in the country.

Foreign tie-up and forthcoming projects

India is experiencing a flood of the world's leading hotel brands. Many international hotel chains either have or on the look out for setting up shop in the country. This clearly shows that India is on the international tourism radar, what the industry needs is the other hand for a handshake, this can be provided by the ruling government.

New brands such as Amanda, Satinwoods, Banana Tree, Hampn Inns, Scandium By Hilt and Mandarin Oriental are planning to enter the Indian hospitality industry in joint venture with various domestic hotel majors.

Hotel developers like ITC, EIH, Bharat Hotels, Viceroy, DLF, Unitech and Royal Palms are currently in negotiations with various hotel brands. ITC wants to extend its existing tie-up with the US-based Starwood Hotels beyond the latter's Sheraton brand and may bring other Starwood brands like W Hotels, Westin, Four Points and Aloft to India in ITC's new project.

Dubai based Kingdom Hotel Investments is looking at an investment $1 billion and is currently in talks with leading hotel companies in India and is looking out for land and hotel projects in the country.
InterGlobe Hotels has tied up with European player Accor to set up 12 hotels under the Ibis brand. UK-based hospitality chain Thistle and Guoman Hotels has tied up with Nijhawan Group as its sales and marketing representative in the country.
IHHR Hospitality Private Limited will open five business hotels in India over the next three years, and has embarked on a US$ 108 million investment plan to expand its footprint. The company would set up hotels - under the brand name Ista - in Hyderabad, Pune, Amritsar and Ahmedabad, besides one in Bangalore, its chairman Gautam Khanna said in Bangalore.
Unitech which is setting up two hotels in Delhi, has already formed a joint venture with Marriot International to run its three new hotels in India, which are expected to start operations by '08.
DLF sources said that Hilton International will be a minority stake holder in its hotel development company. The properties under DLF-Hilton joint venture would be managed and marketed by Hilton International.
Mumbai-based Royal Palms is in talks with Anando, Starwoods, and Singapore based Banyan Tree for its three new hotel projects coming up in various parts of India. The firm has already tied-up with the US-based Carlson Hospitality and brought the Park Plaza brand to India recently.
The UK-based hospitality chain Thistle and Guoman Hotels is keen to enter the Indian market. "We hope to make an announcement on investment in India by the end of the year. We plan to have a Guoman hotel in India, which is the upmarket luxury brand. We are open to examine all options including building a hotel ourselves," said the Area General Manager, Sanjay Nijhawan.
Courtyard Marriot plans five-star hotels in Hyderabad and Bangalore. It already opened a hotel in Chennai three months ago. The Hyderabad property is likely to be opened in July and the one in Bangalore by the first quarter of 2008, said John Toomey, Director of Marketing-India.
TUI, a global travel major which entered India last year, strengthened its presence by picking up Select Vacations, an outbound travel firm, earlier this year. Deal makers for private equity and VC funds are also taking a keen interest in the Indian travel space, especially in the online domain.
Thomas Cook India managing director Madhavan Menon said the company is scouting for acquisition opportunities in the foreign exchange and travel-related services space.
Australia's Flight Centre entered the Indian travel space after acquiring Friends Globe.

Most hotel chains in India are looking at expanding within the country as well as overseas. But they require huge investments for this. With real estate prices going through the roof and an all-time high investment cost, a management contract is the easiest way out.

A number of Indian players are looking at management contracts as a way to grow. These include groups like ITC, Taj and Oberoi to name a few.

Indian Hotels Company (IHCL), which runs the Taj chain of hotels, has entered into a 10-year management contract with Dubai-based property developer ETA Star for a luxury hotel and residential apartment complex in Dubai.

Indian Hotels will increase its presence in South Africa by developing one luxury hotel each in Johannesburg, Durban and Cape Town. The total cost of the projects, which will add 550 rooms to the hotel chain in the African continent, is estimated at $180 million. IHCL has formed a 50:50 joint venture with Tata Africa, Taj International (SA) Pty. The joint venture will invest in individual hotel projects with local developers.

Anil Dhirubhai Ambani Enterprise (ADAE), HSBC Asia and Kotak Mahindra UK together have acquired around 30 per cent stake in the Hyderabad-based hotel chain, Viceroy Hotels (VHL), for a consideration of US$ 25 million.

EIH Ltd, the flagship company of Oberoi Group said it plans to establish a presence in China's hospitality industry. The firm, which is in the process of establishing a $100-million hotel in Dubai, is also examining opportunities in London and New York as part of attempts to expand its global footprint and ride the boom in travel and hospitality industry.

Boom in tourism

The country's popularity as a tourist destination is on the rise, be it for business or leisure travel. In '05, the country earned US$ 6.9 billion from inbound foreign tourists, which is more than twice the US$ 3.1 billion earned in '02. This increase in the number of tourist arrivals in the country has not been able to uplift the country's standing in the world of tourist destinations.

According to the latest balance of payments figures released by the Reserve Bank of India, '05 was the year of fastest growth in forex inflows from foreign travel, during which inflows went up 36%. International tourist arrivals rose 13.2% in '05 to 3.9m, the highest ever, and the government expects arrivals in '06 to grow by 15%.

In the first five months of this calendar year, foreign tourist arrivals increased by 14.5 percent to 1.87 million, as compared to 1.632 million in the corresponding period last year. Against 2005, foreign exchange earning has also shown a similar jump of 14.5 percent in these five months. From $2.28 billion in 2005, foreign exchange earnings went up to $2.61 billion.

This augurs well for other sectors related to hospitality industry. For instance, Tourists tired of waiting their turn to ride aboard the Palace on Wheels, one of the world's most luxurious trains which is fully booked until 2009, may get a chance to travel on its twin this year, a tourism ministry official has said. "Talks are going on with the Railway officials. We can expect the second Palace on Wheels by this year," Union tourism secretary Vinod Zutschi said. Details have been worked out by the Rajasthan Tourism Development Corporation, he said

M Narayanan, Chairman and Managing Director, Tourism Finance Corporation of India said that by 2010, 20 million jobs are likely to be created in the tourism sector and by 2007 the industry would be a $80 billion one.

According to the 2002 estimates of the World Tourism Organisation (WTO), international tourist inflow in India by 2020 would be 10 million, which means the tourist influx has to grow at a CAGR of 6.5% for the next 14 years. This makes the country the fastest growing tourist destinations in the world. As of FY05, the increase in the tourist arrivals is well inline with the WTO estimates. Foreign tourist arrivals in India have been hovering around 2.5 million for the last five years. The WTO and other knowledgeable experts are predicting that India , together with China and other countries in the Asia-Pacific region, may achieve an average growth of 12% per annum in tourism for many years to come.

Apart from international tourists, there is a huge domestic tourist market in India, including business and leisure travelers. This is estimated at some 300 million tourists or tourist trips a year, which may also include those traveling for social and religious purposes. The industry expects a boom in tourism in the domestic sector in India, and a growth of 10% to 15% over the next few years. A growth in tourism will certainly lead to a boom in hotels and restaurants.

High demand

India requires 240,000 hotel rooms across categories in the next few years to cater to growth in arrivals, according to Ashwini Kakkar, Chairman, World Travel and Tourism Council, India Initiative. He said that this was a tremendous opportunity for public private partnerships (PPP) to create the necessary infrastructure for tourism in the country.

The industry, despite being an important component of the economy, contributed only 2% of the GDP in 2003/04. According to recent estimates of the WTTC Indian tourism demand will grow at 8.8% over the next ten years (from 2005-15), which would place India as the second most rapidly growing tourism market in the world. This is expected to result in a growth of 7.1% in total travel and tourism GDP and an increase of 0.9% in travel and tourism employment.

Currently, over 142 luxury hotel projects are coming up in India with an investment of $1.6 billion. The country is witnessing a spurt in hotels as India is facing a severe shortage of quality hotel rooms because of increased business activity and a spurt in leisure travel by the country's burgeoning middle class, as well as international tourists.

The Crisil Research study has predicted a rise in demand for hotel rooms in metros and developing cities. Occupancy rates are expected to increase from the current 74 percent to 76 percent and 77 per cent in 2006-07 and 2007-08, respectively. Average room rates (ARR) will, therefore, go up by 20 per cent and 10 per cent in 2006-07 and 2007-08, respectively.

Hospitality and tourism will be 'the next big waves' that will hit India, says Sunil Bharti Mittal, Chairman and group Managing Director of Bharti Enterprises. "Hospitality and tourism will be the next big waves that will hit India in a very dramatic manner because there are going to be so many spin-off industries that will arise out of these verticals", Mittal said.

"Demand for hotel rooms will grow at a compounded rate of 10 percent over the next five years. Room Supply Additions, the lead indicator of the hotel industry's competitive landscape is not very encouraging though. Room availability factor is only expected to grow at a moderate rate of 5 per cent over the next two years," said Sudhir K. Nair, Head, Crisil Research.

Disclaimer
Dr. Uday Lal Pai is an independent columnist for this web site. Dr. Uday Lal Pai may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article. Dr. Uday Lal Pai is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.

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