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HOTELS • After witnessing good times for 3 years, the hotel sector had KEY POINTS a tough 2008 due to the global economic slowdown and terror attacks. The travel & tourism growth in 2008 slowed down to Supply: Supply is catching pace. Metros will witness an just 1%. The global economic downturn impacted the Indian oversupply situation after four to five years. tourism and hospitality industry which saw a decline in the Demand: Largely depends on business travelers but tourist foreign tourist arrivals to India from 5.27 m in FY08 to 5.13 m traffic is also on the rise. Demand normally spurts in the peak in FY09, thereby resulting in a decrease of 3%. season between November and March. • India occupies the forty-sixth position among the sixty tourist Barriers to entry: High capital costs, poor infrastructure destinations in the world. To encourage the tourism sector, facilities and scarcity of land especially in the metros. the government in recent times, has taken some measures which will benefit the sector. In FY09, Rs 5.2 bn for Bargaining power of suppliers: Limited due to higher development of tourism infrastructure was allocated. This competition, especially in the metros. figure is higher by Rs 970 m as compared what was allocated Bargaining power of customers: Higher in metro cities due to in the previous year. However, it is only 1% of the total increasing room supply. government spending. RBI has allowed ECB upto US$ 100 m in Competition: Intense in metro cities, slowly picking up in January 2009, which would help in raising funds. The Centre secondary cities. Competition has picked up due to the entry and States are also working out a PPP (Public-Private- of foreign hotel chains. Partnership) model to increase hotel capacity. • 2009 is to be observed as the 'Visit India Year'. The concept is CURRENT SCENARIO AND PROSPECTS that those who visit India in 2009 would thereafter experience India's rural tourism, eco tourism, adventure tourism, wellness • The outlook for the sector does not look very promising this tourism in specially worked out packages in 2010 and year. For the next year, the industry expects to see a muted 2011.These are expected to have a positive effect on both growth of 0.3%. The hotel players may witness a RevPAR fall foreign tourist arrivals and domestic tourism. The segment of 10% to 15% during the year. In India, the economic slowdown can be divided into 3 sub-segments namely Luxury, Business and the terrorist attack in Mumbai are likely to impact both and Leisure. The growth in this segment indicates the type of business and leisure travel in 2009. CRISIL Research expects travelers coming into the country. the profitability of premium hotels to be impacted due to a sharp decline in occupancy rates and room rates. It expects FY09 demand to decline by 15.5% YoY in FY10. This is likely to affect the profitability of the sector. • The sector began the year FY09 on a strong note. Rising tourist • The cash crunch may lead to a stop or delay in the completion inflow, higher occupancy and room rates continued to benefit of projects as well as a revision of the project expenditure. the hotel players. In the first four months of the year, the As per KPMG, only 60% of hotel projects announced in key tourist arrivals were higher by 11.7% YoY. Existing hotel metros are operational as per schedule. Developers have also companies, new foreign players and real estate players diverted their plans in favour of commercial or residential continued with their expansion plans. Prospects were looking buildings due to liquidity crunch and higher land prices leading good, until the sector faced a double blow. to a longer breakeven period. Considering all these factors, • The worst financial crisis in many decades, high oil prices and industry estimates that just over half of the planned 0.1 m a slew of militant attacks hit the hotel industry. When the Indian new rooms will finally be built. Hence, considering the demand tourism and hotel industry had just started gaining recognition supply mismatch, the new room additions will not create an worldwide, it was hit by a double whammy. The first being the overhang. Thus, we believe that the existing players would global credit crisis and the second, the terror attacks on the benefit from the continued demand-supply mismatch once the iconic hospitality landmarks; the 'Taj Mahal Palace and Tower economy revives. Hotel' and the 'Oberoi Trident'. • Further, with events like the Commonwealth Games planned in • During FY09, lower corporate spending, fluctuating dollar and Delhi in 2010, the hotel industry will benefit. While the long the credit crisis did impact occupancy rates in some cities like term fundamentals remain strong, the sector is highly Bangalore, Pune, Hyderabad and Chennai. The room rates dependent on external factors which could possibly mar its however, remained high. While during 2007, a 16% YoY growth performance. was seen in tourist arrivals during the first 8 months, the same stood at 10% YoY in 2008, due to the slowdown. According to the Ministry of Tourism, October 2008 saw an increase of just 1.8% in the number of foreign tourist arrivals compared to the same time in 2007. • With the terror strikes (26/11) during the onset of the peak season, things got murkier. This prompted the Indian government to ask hotels to slash their prices in the hope of keeping demand stable. This coupled with cost pressures, liquidity crisis and regulations concerning the real estate sector made funding for hotel projects difficult. The unrealistically high land prices and government red tapism also resulted in hotel projects taking longer to fructify. The hotel companies faced cash flow pressure, thereby affecting their expansion plans. The balance sheets of the hotel companies were under stress on account of acquisitions of land banks and rising debt levels.
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