Indian Hotels Bet Big on Renovations to Drive Growth Despite Slow Start in FY25

The Indian hotel industry started FY25 on a quiet note. The demand for hotel rooms in the June quarter (Q1FY25) was affected by several temporary factors, like general elections, heatwaves, slow air traffic growth, and fewer wedding days. As a result, the revenue per available room (RevPAR) remained flat at ₹4,335 compared to the previous year, according to data from HVS Anarock and Motilal Oswal Financial Services. The average room rate (ARR) went up slightly by about 2% to ₹7,067, but this was offset by a small drop in occupancy, which fell by 0.7% to 61.3%.

However, the outlook for the future is brighter. The hotel industry expects an increase in demand due to more weddings, auspicious dates, and a rise in events like meetings, conferences, and exhibitions (MICE). Additionally, the growth in the supply of branded rooms is expected to lag behind the demand, which is good news for the industry. According to an ICICI Securities report from August 30, the industry’s supply is projected to grow at a compound annual growth rate (CAGR) of 5-6% from FY24 to FY28, while demand is expected to grow at around 10%.

Short-term Revenue Impact Due to Renovations

In the medium to long term, major hotel companies are focusing on renovating their properties to boost RevPAR. During the Q1FY25 earnings call, Indian Hotels Co. Ltd (IHCL) said that several of its properties, including St. James in London, President in Mumbai, Taj Holiday Village in Goa, and Jai Mahal Palace in Jaipur, were undergoing renovations. While these renovations might cause a temporary drop in revenue, IHCL’s management believes that investing in the renovation of key properties like the Taj, which is a major revenue source, is essential.

Renovations can increase costs and affect short-term profit margins, but they are expected to enhance earnings growth over time. For example, Lemon Tree Hotels Ltd plans to spend around ₹100 crore each in FY25 and FY26 on renovations. The company usually renovates during the first half of the year, and in Q1FY25, about 700 rooms were closed for this purpose. After renovations, Lemon Tree expects to earn an EBITDA of ₹60 crore annually from its ‘Keys’ portfolio with an ARR of around ₹4,500.

EIH Ltd also has renovation plans. About 209 rooms at The Oberoi Grand in Kolkata will undergo major renovations and will reopen in three years. Similarly, after renovating 74 rooms at The Oberoi in Bali, the management expects the ARR to double.

“With occupancy rates at record highs, the potential for growth from increasing occupancy is almost maxed out,” stated a Nuvama Research report from August 19. Moving forward, hotels are focusing on renovating their major properties to increase RevPAR growth, the report added.

Expansion and Growth

In addition to renovations, hotel companies are expanding by adding more rooms and growing their portfolios. They are also using management contracts, where they manage hotels without owning them, to expand in an asset-light way. This involves acquiring existing hotels or using current land assets.

Currently, investors in some hotel stocks are seeing good returns. Over the past year, shares of IHCL, EIH, and Chalet Hotels have each gone up by more than 50%. However, Lemon Tree has lagged behind with a return of around 23%. As the festive season approaches in September 2024, a key focus will be whether demand growth can be sustained from the high base set in the second half of FY24, with expected RevPAR growth of 7-8%, according to ICICI Securities. Additionally, after the industry’s strong recovery post-pandemic, analysts warn that rising costs due to higher wages and commissions could pressure profit margins.