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    INDIAN HOTELS & HOSPITALITY SECTORBY: HANY HUSSEIN, [email protected]

    MOBILE: ++ 971559644773

    mailto:[email protected]:[email protected]
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    About Hany Hussein

    Hany Hussein brings an extensive financial expertise amassed throughout his 18year career in the field of asset management, research, and capital markets inUK, US, and Middle East. His last role was the Head of Asset Management in

    Abu Dhabi Islamic Bank. For more than 3 years, his core duties were toestablish, manage, and market several investment funds including ADIB IslamicMENA Equity Fund, and ADIB Dividend Income Strategy Fund. Beforeestablishing ADIB Asset Management platform, Hany for more than a year -assumed the role of Acting General Manager of ADIB Securities. He turned thecompany around, improved its ranking from 25th to 6th in terms of volume, andtripled its market share from 1% to more than 3%. Hany joined ADIB from UnionNational Bank in 2008 where he was serving as the Head of Asset Managementmanaging investment portfolios over USD 500 million for the banks HNW andUHNW clients. Prior to UNB, he assumed the role of Lead Fund Manager withMashreqbank managing 3 mutual funds with AUMs of over AED 2.5 billion.

    Makaseb Emirates Equity Fund, Mashreqbanks flagship fund, was named bestUAE growth fund in 2005 after achieving an appreciation of 100% in NAV. Hanyalso played a pivotal role in the success of Injazat Technology Private Equity/VCFund where he assumed the role of Sr. Investment Advsior. In Injazat Fund, Hanyactively closed many successful deals including Ducont.com, Docman, and RayaHolding. He started his career back in 1994 as a financial analyst in Londoncovering Egyptian stock market with Robert Fleming Securities before moving toNew York where he served as a buy side analyst with AIG for one year. Hanyholds BSc of commerce from Cairo University, Diploma in modern accountingfrom the American University, CFA designation, and ICFA membership since

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    Table of Contents

    Economic backdrop of India

    Hotels market in India

    Recent market trends

    Market structure & classification

    The budget hotel concept

    Supply

    Growth drivers

    Demand, supply, occupancy

    Competition

    Government policies, taxes, and regulations

    Critical success factors in hotels business Opportunities & challenges

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    India 2011 Economicbackdrop Economic liberalization, industrial deregulation, privatization, lower control on trade and investment

    served to accelerate real GDP growth at average 7% since 1997.

    In 2010, the economy rebounded from the global financial crisis - in large because of strong domesticdemand - and growth exceeded 8%. However, India's economic growth in 2011 is estimated to slow to7.8% because of high inflation and interest rates of 6.8% and 11.8% respectively.

    GDP per Capita of US$ 3,700 compared to US$ 3,500 in 2010. Large and growing middle class of 50million Indians with disposable income of US$ 4,100 to US$20,800

    India's diverse economy encompasses modern agriculture (19% of output), industries (23%), andservices (54%) out of which (6%) stems from tourism sector. More than 50% of labor force is inagriculture, but services are the major source of economic growth

    Unemployment is 8.6%

    High crude oil prices have exacerbated the government's fuel subsidy bill contributing to a higher fiscaldeficit of -5% of GDP

    External debt of US$267bln, foreign exchange & gold reserve of US$ 347bln, and stable exchange rateof 44-55 per dollar

    Indian economy looks positive due to the rapid real economic growth, robust domestic demand, youngEnglish speaking population, healthy saving and investment rates, and integration into global economy.Key challenges are widespread poverty, lack of social and physical infrastructure, limited non agricultureemployment opportunities, and accommodating rural to urban migration.

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    Hotels Market in India

    Size of the Market:As per the retail consultancy Technopak, the Indian hotelsmarket worth was estimated at around US$ 17 billion by end of 2010representing less than 1.5 percent of the nominal GDP.Estimated Growth: The industry grew at CAGR of 9% during 2005-08 and isestimated to grow at a CAGR of 15% from 2010 -15. World Travel & Tourism Council (WTTC) expected 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 in terms ofgrowth.-10

    0

    10

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    30

    40

    Annual Growth Rate %

    Size of Hotels Market in US billion

    Average Occupancy & Rate Per Room2005-2008: The hotels & hospitality industry is cyclical and takes lag time to respond to economic fluctuations. Theindustry witnessed a real improve from 2005 and peaked in 2008 2009-010: The industry witnessed turbulent times giving the global economic crisis and local terrorist attacks. Thiswas reflected in lower occupancy rates and rate per room.

    2010-11: Started to show signs of recovery. Occupancy rate reached 68% & ARR of Rs 6.800

    0

    2000

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    10000

    2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

    Average Room Rate in Rs Source HVS

    50%

    55%

    60%

    65%

    70%

    75%

    2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

    Occupancy Rate % - Source HVS

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    Recent market trends

    Although the crisis, Indian hotels enjoyed lucrative margins. Theindustry witnessed negative growth in revenues and earnings but mostplayers managed to achieve a good margin of more than 30%.

    Increase use of Technology: Indian hotel industry uses new technology inalmost every function to increase efficiency and standardize operations.Technology is used to provide better service and communication withcustomers.

    Managing Manpower: The industry is witnessing an influx of international

    and domestic branded hotels but the biggest challenge is managing themanpower due to lack of well paid and trained hotel employees.

    Domestic Travelers: The global crisis shed the light on the importance ofthe domestic travelers/ demand who supported the industry during 2009-2011. In 2009 alone, India witnessed an inflow of approximately 650 milliondomestic tourist arrivals, compared to only about 5 million foreign touristarrivals. The well educated middle class segment is price sensitive,demands value for money, and expects better service and qualitystandards.

    Outsourcing: With the rising operating and manpower costs in hotels,several hotel managers and operators started to outsource services suchas laundry, housekeeping, and food & beverages outlets.

    Investment in smaller cities: Rising business and leisure travel to smallercities such as Udaipur, Thiruvananthapuram, Bhubaneswar, Pune, Kochiand Chandigarh, have increased demand for quality hotel rooms in thesecities.

    Diversification into new segments: Many hospitality chains that were

    earlier focused only on the luxury segment are now diversifying into newproduct segments, such as budget hotels and serviced apartments, in orderto reduce risks.

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    Market structure - segmentation

    Premium

    (5 Deluxe,5*)

    Mid Players

    (4*,3*)

    Budget

    (2*,1*)Heritage Unclassified

    Located inbusiness district

    of metro cities

    Cater to businesstravelers andforeign tourists

    Considered to bethe mostexpensive

    Certainarchitecturallydistinctive

    properties such aspalaces andForts, built prior to1950, have beenconverted intohotels. TheMinistry ofTourism hasclassified thesehotels as heritagehotels

    Do not offer asmany facilities asthe other

    segments butprovideinexpensiveaccommodation tothe highly price-conscioussegment of thedomestic and

    foreign leisuretravelers

    Cheap motelsspread outacross thecountry

    Very cheap andprice is the onlyselling point

    - Cater to: Averageforeign anddomestic leisure

    travelers.- Also caters tomiddle levelbusiness travelers- Offers most of theessential servicesof luxury hotelswithout the highcosts since the taxcomponent of thissegment is lowercompared with thepremium segment

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    The budget concept

    A new concept emerged as number of tourists willing to pay a high price for luxurioushotels has decreased while number of inbound tourist who travel has dramaticallyincreased. Comfortable accommodation is not luxury anymore

    The Americans innovated the Motel concept in the 60th which was adopted by Europeanin the 70s with the creation of brands such as Ibis and Formula1, and Asia has come up

    with the budget concept.

    The new concept offers what the customer is willing to pay for a good night sleep so thateveryone is allowed to travel

    Drastic reduction inconstruction time & cost

    (using Prefab structures)

    Elimination of non-profitabletouched points (eg: multiplefood and beverage outlets)

    Streamlining of processesbooking, check-in, check-out,

    limited yet efficient service

    (using technology)

    Limitation of the hardware towhat the customer needs during

    his stay a bed, a TV, a hot

    shower and a breakfast

    How to getThere?

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    Supply

    2009 2010 Growth %

    Number of hotels 1,839 2,483 36%

    Number of Rooms 92,784 117,815 27%

    NUMBER OF HOTELS NUMBER OF HOTEL ROOMS

    2009 2010 Growth % of Total 2009 2010 Growth % % of total

    Premium 207 302 46% 12% Premium 34,935 51,331 47% 44%

    Mid Market 636 1,026 61% 41% Mid Market 31,816 48,644 53% 41%

    Budget 275 374 36% 15% Budget 9,294 10,983 18% 9%

    Heritage 88 146 66% 6% Heritage 2,545 3,879 52% 3%

    Others* 623 635 2% 26% Others 14,194 2,978 -79% 3%

    Total 1,829 2,483 36% Total 92,784 117,815 27%

    SOURCE: MINSTRY OF TOURISM -INDIA

    35,000 rooms will be added to the current supply within the next 3 years Premium & Mid Players predominate the market with over 85% of the current supply Although the strong demand for it, Budget concept is untapped with less than 10% of total supply

    * As per the ministry of tourism, number of rooms in the unclassified segment declined to 580 rooms in 2010 compared to 12,411 in2009

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    Growth drivers

    Strong monetary & fiscal policies, and the quick economicrecovery- all result in strong performance in tourism sector in2010.

    Robust economic growth added millions annually to theemerging middle-class, a group that driving the domestic tourismgrowth, rose their purchasing power and increased their

    awareness to ensure the growth of tourism over the foreseeablefuture. Disposable income in India has grown by 10.11%annually from 2001-2006, and much of that is being spent ontravel.

    The Ministry ofTourisms efforts to increase the influx of touriststo the country is likely to see positive results in the coming years.Its campaigns such as Safe and Honorable Tourism & Incredible India increase the image of India as a safedestination, and thereby increase consumer confidence inchoosing India for a holiday.

    The booming IT and outsourcing industry. The growing numberof business trips made by foreigners to India, who often add aweekend break or longer holiday to their trip. Foreign tourists

    spend more in India than almost any other country worldwide.Over the past decade, number of foreign tourists arrivals has

    0

    2

    4

    6

    8

    Foreign Tourists Arrivals (FTAs)in millions

    CAGR of 7.3%

    SOURCE: MINSTRY OF TOURISM -INDIA

    0

    200

    400

    600

    800

    Number of Domestic Tourist Visits

    CAGR of 12.1%

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    Demand, supply, occupancy

    Budget segment (1star & 2 stars) is in highdemand due to its limited availability only asupply of 11,000 as of 2010. Accordingly, thesegment enjoys high occupancy ratio.

    Most of oversupply falls in in the premium and tolesser extent in the mid segment - 85% of totalmarket supply falls into these two segments.

    As per Knight Frank, out of 35,000 new roomsadded by 2013, only 3.000 will fall in the budgetsegment while the remaining will be added topremium and mid market.

    0

    2000

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    12000

    2010 2011 2012 2013

    Premium

    Mid Market

    Budget

    Upcoming supply (2010-2013) Knight Frank

    0

    20000

    40000

    60000

    80000

    100000

    2010e 2011e 2012e 2013e

    Demand Supply

    Demand vs. Supply in Premium Segment -Knight Frank

    0%

    10%

    20%

    30%

    40%

    50%

    60%

    70%

    80%

    2010e 2011e 2012e 2013e

    Occupancy in Premium segment KnightFrank

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    Competition

    The Indian hotel industry is highly fragmented with a largenumber of small and unorganized players.

    The booming industry has attracted many international playersas well. A number of global players are already wellestablished in India. These include Hilton, Shangri-La,Radisson, Marriott, Meridian, Sheraton, Hyatt, HolidayInn, InterContinental and Crown Plaza.

    New brands such as manda, Satinwoods, Banana Tree,Hampton Inns, Scandium by Hilt and Mandarin Oriental areplanning to enter the Indian hospitality industry in joint ventureswith domestic hotel majors.

    Budget

    Others

    Premium

    Medium

    Service

    Competition

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    Government policies, taxes,regulations Tourism & hotels are heavily regulated by both central and state governments including but not

    limited to approvals, licenses, sanctions,

    100% FDI is permissible in the tourism sector

    Liberalizing the aviation sector, adopting open sky policy, and allowing low cost carriers

    Tourist friendly visa regime; introducing medical visas

    Procedural changes making land available for hotel construction ( India identified 32 villages tobecome touristic hubs)

    Adopting an aggressive foreign trade policy for investors in hospitability sector

    Upgrading the infrastructure of the sector

    Adopting aggressive marketing campaigns such as Incredible India

    Promotion of rural tourism by the Ministry of Tourism in collaboration with the United Nations

    Development Program

    Five-year income tax holidays for 2-4 star hotels established in specified districts

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    Critical success factors

    Site & Location: The most factor as significant portion of the IRRstem from selling the property/land. Site also should be close tobusiness districts in metro cities

    Positioning: Equally important, hotels should be well positioned towardsthe needs of the target guest segment foreign / domestic or business /leisure

    Financial Flexibility: Developing hotels is very capital intensive business.Accordingly financial flexibility is very important especially for new hotelsthat usually have high breakeven points

    Equity Brand: branded hotels that are part of a brand or a chain benefitfrom the equity value of that brand especially in the advertisement /marketing effort of that brand.

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    Opportunities & challenges

    Challenges Opportunities

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    Conclusion

    ConclusionIndia, with a population over 1.2 billion people and a rapidly growing economy at real GDP of 8%, isallowing the hotel market to prosper as hotel brands continue to expand their portfolio in the main citiesand in the regions. The Indian hospitality sector is posed to grow at a CAGR of 15% until 2015 asnumber of foreign tourist arrivals FTAs is rapidly increasing at a CAGR of 7.3%, well educated middleclass continues driving the domestic demand, Indian government is showing serious political well tosupport the growing US$ 17 billion sector, and revival of global economy and hosting sports andimportant events is taking place.

    Having said that, the sector is also facing serious challenges including lack of infrastructure, lack oftrained manpower, socio political conditions, and fierce competition in the premium and middle marketsegments which will cause pressure on occupancy and average rate per room. Unlike premium hotels,budget hotels as a new innovative concept is emerging as untapped segment with limitedavailability but positive prospect.

    RecommendationI am bullish on the country, industry, and sector. I also like the concept of the budget hotel especiallywith the current high demand for it coupled with its limited availability.

    Hany Hussein, [email protected]++971559644773

    mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

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