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Hospitality Industry- An insight

June 13, 2011 Overview As per an analysis done by retail consultancy Technopak, at the end of 2010 the Indian hotel industrys worth was estimated around US$ 17 billion. Of the total revenue, nearly 70 per cent is being contributed by the unorganized sector and the remaining 30 per cent (US$ 5 billion approx.) comes from the organized sector. The hotel industry is estimated to grow at a CAGR (Compounded Annual Growth Rate) of around 15 per cent over the next five years. The share of hotel and restaurant sector in the overall economy is still below 2 per cent. For the last five years the total contribution of the hospitality sector has remained stagnant. Although the overall share increased from 1.46 per cent in 2004-05 to 1.69 per cent in 2007-08, but then after the phase of economic meltdown in US the total share again decreased to 1.45 per cent in 2009-10. According to Economic Survey of 2010-11 the average annual growth rate of hotel and restaurant sector has been 8.8 per cent for the period during 2005-06 and 200910. However, last two years have not been quite pleasant for the sector as growth faltered badly. Till five years ago, the sector was registering a growth of around 15 per cent but slowdown in the economy has affected the growth prospects of the sector badly and the growth rate has dropped into single digit level. The sector registered negative growth (-3.41 per cent) in 200809 over the year 200708, which was due to the adverse global economic conditions in this year. But, the sector is back in the positive growth territory and clocked a growth of 2.2 per cent in 2009-10. Annual growth rate (in per cent) Year Hotels & Restaurants Source: Economic Survey 2010-11 The hotel and tourism industrys contribution to the Indian economy by way of foreign direct investments (FDI) inflows were pegged at US$ 2.35 billion from April 2000 to February 2011, according to the Department of Industrial Policy and Promotion (DIPP). But, there has been a rush of international hotel chains towards India since the latter half of 2010. A lot of major hotels have announced their plans to expand their footprints in India. Thus domestic hospitality sector is expected to see investments of over US$ 11 billion by 2012, with 40 international brands making their presence in the country in the next few years. Number of Greenfield projects Year 2007 2008 2009 Source: UNCTAD, World Investment Report 2010 Highlights Number 297 553 370 2005-06 17.5 2006-07 14.4 2007-08 13.1 2008-09 -3.1 2009-10 2.2

Tourist inflows to continue

World Travel & Tourism Council (WTTC) expects travel and tourism (T&T) demand in India to grow above 8 per cent annually till 2019, the highest growth, thereby making India second highest tourist destination after China.

Structural problems aplenty

Although rapid rise in personal disposable income and changing lifestyle of younger generation augurs well for the hospitality sector but high land prices, low FSI, plethora of taxes, and low incentive from government are some key hurdles for hotel companies in India.

International hotel chains eyeing India

To tap the growing opportunity, nearly 25 major international hotel companies like Accor, Marriott, Claridges, Shangri-la, and Carlson Hospitality are looking to enter India, either independently or in collaboration with domestic partners. Sector Status Several studies have highlighted the demand-supply gap in hotel rooms in India. Most of them have estimated a gap of 150,000 hotel rooms. A greater need is being felt in the mid-market and budget hotels segment in which a shortfall of around 100,000 rooms is estimated. Since the construction of hotels is capital intensive with a long gestation period, the Government is making efforts to stimulate investments in this sector and speed up the approval process to attract private sector investments. It is estimated that the room demand in the premium segment hotels in 10 major cities in India increased by around 5 per cent since the past one year. The room demand in India is expected to grow by approximately 10 per cent over the next five years. The World Travel and Tourism Council, India, data says, India ranks 18th in business travel and will be among the top 5 in this decade. With such growth, sources estimate, demand is going to exceed supply by at least 100 per cent in coming years. Number of Hotels 2010 Hotel categories 5 star deluxe/5 star 4 Star 3 Star 2 Star 1 Star Heritage Uncategorized Total Source- FHRAI Although, organized sector contributes only one-third of revenue of the overall revenue of the industry but several well known hotel chains have lined up aggressive expanding plans for India. The foremost contribution of the organized hotel industry comes from 5-star hotels. Despite a dip in the year 2009, average growth rate of 8 per cent augurs well for the hotel industry. Industry is adding about 60,000 quality rooms, currently in different stages of planning and development and No. of Hotels 165 770 505 495 260 70 7,078 8,707 No. of Rooms 43,965 134 20 30,100 22,950 10,900 4,200 1,32,885

should be ready by 2012. An upward trend in growth of the overall hotel sector is expected in the next few years, whereby the industry is expected to grow to US$ 36 billion by 2018. Operating performance The hotel industry in India is recovering from the blows it suffered in the year 2008, first due to financial meltdown in America in September and later due to terrorists attack on the two 5-Star hotels Taj and Oberoi in Mumbai. The onset of the global economic slowdown had a greater impact on the profitability of the sector determined by the occupancy rate. The occupancy rate came down from 69 per cent in 2007-08 to 60 per cent in 2008-09. It was hovering above 71 per cent before the incidents. Average room rates (ARRs) saw a marginal decline of about 2 per cent during that time. As the occupancy rates were badly hit, overall revenue per room (RevPAR) fell by 14 per cent, in 2008-09. The swine flu outbreak in 2009 further eroded the profitability. ARRs fell 25 per cent and ORs plunged to 53 per cent in the first half of 2009-10. By then, hotels were doling out generous discounts in a bid to fill up their rooms even as RevPARs declined by 30-40 per cent. Nationwide performance Year 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Source: HVS After declining 3 per cent in 2009, foreign tourist arrivals (FTAs) to India saw a heartening 9.3 per cent increase during 2010. The inflows of tourists continued in 2010-1. As a result, ARRs have increased by 10-15 per cent in the past one year. The RevPAR though increased to Rs 4,624 but still it is way short of the revenue clocked by hotels in the year prior to crisis. Of the 60,000 rooms that are due for opening by 2015, Pune, Chennai, Bangalore and Delhi are likely to see maximum increase in supply. Occupancy Rate 71.5 71.4 68.8 60.3 65.0 68.0 % change 3.6 -0.1 -3.6 -12.4 7.8 4.6 Average Room Rate Rs 5,444 Rs 7,071 Rs 7,989 Rs 7,837 Rs 6,426 Rs 6,800 % change 26.6 29.9 13.0 -1.9 -18.0 5.8 Revenue Per Room Rs 3,892 Rs 5,049 Rs 5,496 Rs 4,726 Rs 4,177 Rs 4,624 % change 31.2 29.7 8.9 -14.0 -11.6 10.7

Cities/No. of rooms Chennai Kolkata Bangalore Hyderabad Pune NCR Mumbai

Current premium room supply 2,150 1,240 3,350 2,250 1,600 8,750 8,000

Incremental room supply by FY14 2,500 1,400 4,500 3,000 3,000 5,000 3,500

Source: ICRA Financials Demand revival and occupancy rates will result in higher profits for the hospitality sector in 2011-12.

Revenues FY 10 Indian Hotels EIH Taj GVK Hotels Hotel Leelaventure Source: Bloomberg Hotels classification 2457 845 228 430 FY 11E 2985 1144 266 540

(Rs crore) FY 12E 3633 1363 315 769

Net Profit FY 10 -137 66 26 41 FY 11E 86 69 45 56

(Rs crore) FY 12E 274 161 59 81

EV/EBIDTA(X) FY 10 23 27 13 35 FY 11E 18 20 8 22 FY 12E 12 15 6 14

Presently there are 1593 classified hotels with a capacity of 95,087 rooms in the country. The hotels sector comprises various forms of accommodation, namely star category hotels, heritage category hotels, timeshare resorts, apartment hotels, guest houses, and bed and breakfast establishments. Based on that the hotels in India are classified into following segments: I. Star rated hotels (5 star and star deluxe) These are mainly situated in the business districts of metro cities and cater to business travelers and foreign tourists. These are considered to be very expensive. These account for about 30% of the industry. The star hotels are further classified into six categories: Five star deluxe, Five star, Four star, Three star, Two star, One star. a) Five Star Deluxe & Five Star:These are restricted to the four metros and some major cities like Bangalore and Hyderabad. The customers of these hotels are mostly foreign business and leisure travelers, senior business executives and top government officials. b) Three Star & Four Star: These are located in all major cities as well as tourist destinations. Their customer group ranges from middle level business executives to leisure travelers. c) One Star & Two Star:These are located in major cities as well as in small cities and other tourist destinations. Their customers include usually the domestic tourists. Major players in this segment are Taj, WelcomeGroup, EIH and Oberoi. Apart from Indian players some of the international hotels also have their presence in this segment. Those include, Best Western, Choice hotels, Bass Hotels, Park Plaza and Carlson Hospitality. Room supply in the 5-star segment has grown at a compounded annual growth of 5 per cent over the past decade. While, the 3 and 4-star categories have grown at 6 per cent and 8 per cent CAGR respectively during the same period.

II.

Heritage hotels

These are characterized by less capital expenditure and greater affordability and include running hotels in palaces, castles, forts, hunting lodges, etc. They are further classified as: Heritage classic (hotels built between 1920 and 1935), Heritage Grand (hotels built prior to 1920) and Heritage (hotels built between 1935 and 1950) III. Budget hotels:

Budget hotels cater mainly to domestic travelers who favor reasonably priced accommodations with limited luxury. These are characterized by special seasonal offers and good services. IV. Unclassified hotels:

These are low-priced motels spread throughout the country. A low-pricing policy is their only selling point. This segment accounts for about 19% of the industry. V. Resorts and Clubs

Located at the outskirts of city could be from premium to budget category VI. Restaurant

These are food chains and outlets set up in the India. They are usually by international chains like Dominos, Espresso, Pizza Hut and McDonalds. Key players

Company Indian Hotels

Type of properties Luxury, mid-segment and budget Luxury, budget and heritage hotels

Brands Taj, Gateway, Vivanta and Ginger ITC HotelLuxury Collection, WelcomHotelSheraton, Fortune and WelcomHeritage Oberoi and Trident Radisson Hotels and Resorts, Park Plaza, Country Inns & Suites, Park Inn InterContinental, Crowne Plaza, Holiday Inn, Holiday Inn Express, Hotel

ITC Welcomgroup Business hotels, leisure hotels and EIH Carlson InterContinental Source: IBEF cruises Luxury, business hotels, economy and cruises Luxury, mid-segment and business hotels

In the Indian hospitality industry the major players are Indian Hotels, EIH, ITC hotels, Hotel Leela Ventures, Bharat Hotels and Asian Hotels, ITDC and Orient Hotels Ltd. The booming industry has attracted many international players as well. A number of global players are already well established in India. These include Hilton, Shangri-La, Radisson, Mariott, Meridian, Sheraton, Hyatt, Holiday Inn, InterContinental and Crown Plaza.

The country has been flooded by some of the world's leading hotel brands. New brands such as Amanda, Satinwoods, Banana Tree, Hampton Inns, Scandium by Hilt and Mandarin Oriental are planning to enter the Indian hospitality industry in joint ventures with domestic hotel majors. International Hotel Brands Brand Carlson Four Seasons Starwood Hyatt Marriott Wyndham Hilton Intercontinental Fairmont Raffles Accor Source: Business Standard Some announcements: No. of hotels 50 6 15 10 24 50 75 41 15 44 Target date 2012 2012-13 2012 2012-13 2012 2011 2015 2012 2012-13 2012

Carlson Group is bringing Regent to Gurgaon by 2013. To tie-up with Pioneer Urban Land and Infrastructure that will invest US$ 49 million.

The Leela plans to open sixmore properties by 2013.

ITC Ltd expects to add 8-10 hotelsin India in the next 3-5 years.

The Thailand-based hospitality major, Amari, plans seven 4-star hotels near major airports in the country.

International hospitality chains are expected to acquire local players to increase their presence in the country. For instance, in early 2010, Carlson increased its stake in RHW Hotel Management Services Ltd (RHW) from 13 per cent to 87 per cent. RHW has been managing hotels under Carlosns brands since 1998. Both domestic and international players are expected to form strategic alliances and partnerships with regional players /developers to expand in the country, reduce risk and optimize resources. Latest trends

Investment in smaller cities Rising business and leisure travel to smaller cities such as Udaipur, Thiruvananthapuram, Bhubaneswar, Pune, Kochi and Chandigarh, have increased demand for quality hotel rooms in these cities. Hospitality chains are expected to increase their presence in smaller cities to leverage this opportunity. Further, they are likely to plan a suitable project mix (more budget/business hotels compared to luxury hotels) for these cities. For instance, Carlson has announced its plans to set-up mid-segment hotels in tier II and tier III cities. Diversification into new segments: Many hospitality chains that were earlier focused only on the luxury segment are now diversifying into new product segments, such as budget hotels and serviced apartments, in order to reduce risks. IHCL has already launched budget hotels in India, while Accor has announced plans to introduce its budget hotel brand, Formule1, in the country. Moreover, hotel chains are diversifying into niche segments such as medi-cities, wildlife lodges and spas to establish additional revenue-generation streams. These segments also help hotel chains retain customers and provide them with value-added services. For instance, IHCL operates wildlife lodges under the brand TajSafari, a JV between IHCL and &Beyond, an Africa-based safari and ecotourism company. ITC-Welcomgroup and IHCL operates spas at some of their luxury properties. Regulations & Taxation In the Hotel Industry Sector, Foreign Direct Investment (FDI) has been permitted up to 100 per cent under the automatic route. For foreign technology agreements, automatic approval is granted if: 1. Up to 3 per cent of the capital cost of the project is proposed to be paid for technical consultancy services. 2. Up to 3 per cent of the net turnover is payable for franchising and marketing/publicity fees. 3. Up to 10 per cent of gross operating profit is payable for management fees, including incentives fees.

Tax Holiday

A deduction of an amount equal to 100 per cent of the profit and gain for the first 5 consecutive years to an undertaking deriving profits from the business of a hotel or from the business of building, owning and operating a convention centre, in specified areas, if such hotel/convention centre is constructed and has started or start functioning before July 31, 2010.

A deduction of an amount equal to 100 per cent of the profit and gain for the first 5 consecutive years to an undertaking derived profit from the business of a hotel located in the specified district having a World Heritage Site. If such hotel is constructed and has started functioning before March 31, 2013.