Profitability of five-star and five-star deluxe hotels will take a hit in 2012-13 and 2013-14 as a slowing demand coincides with large additions of rooms, Crisil Research has said.
“A decline in both occupancy rates and room rates will shrink operating margins. And rising costs will accentuate that pressure,” the research house said in a press release.
It expects operating margins of the hotel chains to drop to the decade-low of just over 16 percent in 2013-14 from 24 percent in 2011-12.
Last time, the margins dropped to 16-17 percent was in 2002-03 and 2003-04, when countries issued travel advisories after the 9/11 terror attack and the SARS (severe acute respiratory syndrome) outbreak.
“But that fall was temporary, and the margins recovered to their earlier levels of 30-35 per cent. But this time around, the recovery will be slower. A continued oversupply (of rooms), at least till 2015-16, will maintain the pressure on profitability of premium hotels,” Binaifer Jehani, director, CRISIL Research, was quoted as saying in the press release.
The brokerage expects 14,500 new rooms to be added by 2013-14 to the existing 46,200 rooms. But the global economic slowdown is seen affecting both business and leisure travel, thus resulting a subdued 7 percent growth in demand for premium hotel rooms in 2012-13 and 2013-14.
Occupancy rates of premium hotels will, therefore, fall from 64 percent in 2011-12 to 56 percent in 2013-14.
Adding to the trouble will be a fierce competition, resulting in a 10 percent fall in room rates.
The fall in both occupancy rates and room rates will precipitate a sharp decline in revenue per available room (RevPAR), the revenue from rooms occupied divided by the number of rooms available, which is a key parameter for hotels’ profitability.
Crisil Research expects the average RevPAR for premium hotels to nosedive to Rs 3,900 per day in 2013-14 from Rs 5,000 in 2011-12.
Premium hotels in Ahmedabad and Chennai will be the worst affected, with an annual RevPAR decline of over 20 percent. Hotels in Bengaluru, Hyderabad, NCR, Jaipur and Kochi will also record a significant fall of 15 percent annually.
In contrast, limited room additions will keep RevPAR stable in Agra and even increase it marginally in Goa.
The decline in RevPAR will erode the profitability of premium hotels, as room revenues make up almost two-third of their total revenues.
Rising costs will add to the pressure on profitability. A shortage of personnel will increase employee costs, whereas energy costs are also expected to rise significantly.
CRISIL Research has assessed the performance of the premium hotel segment across 12 Indian cities, accounting for 80 percent of the country’s premium hotel rooms.