Hotel sector structurally well placed to gain further traction in 2023

What's Buzzing? 

After passing through a long and challenging phase for two years, CY22 saw a remarkable recovery in the domestic hotel segment. Let us examine whether there is further potential for growth in CY23. 

Context 

The past two years have been very challenging for the sector due to pandemic related setbacks. While a gradual re-opening of the economy in CY21 led to a rise of revenge tourism across domestic leisure destinations, a full resumption in CY22 led to a sharp rebound in corporate demand as well as the MICE segment. This, in turn, helped hotel players to raise room tariffs without disturbing demand. Hence, the change in the strategy from occupancy led growth during the pre-Covid era to ARR led growth was clearly visible. Further, major hotel players utilised the long 18-24 months of the pandemic phase to structurally realign their cost base and become leaner in terms of costs. This, in turn, aided a sharp expansion in margins. 

Our Perspective 

As we enter CY23, the sector is now structurally well placed to gain further traction, in our view. Domestic air traffic is now inching towards pre-Covid levels. Hotel booking data also suggests a continuance of strong buoyancy in demand led by the wedding and holiday season along with healthy corporate demand. Further, India's G20 presidency in 2023, the ICC World Cup, MotoGP racing event and easing of e-visa rules are anticipated to lead to a sharp rebound in foreign tourist arrivals in CY23. The government is also aiming to make India one of the top five tourism destinations in the world by 2030 under the new tourism policy. This would provide growth visibility from a long-term perspective. The current inventory growth is significantly lower than the growth witnessed during FY09-13 post the global financial crisis. The hotel supply pipeline is expected to grow only at a five year CAGR of 3.5-4%, adding ~18,400 rooms to the current pan India premium inventory of 90,974 rooms across 10 key cities. This is expected to facilitate the up cycle as demand improves over the medium term while supply is expected to lag demand with a cautious expansion approach by hoteliers. The significant part of the recent inventory is coming mainly through management contracts and operating leases.