Sunny days ahead for hospitality sector, set to grow by 9-10% through FY23: Report

The hospitality industry is expected to grow annually by 9-10 per cent over the next four years, mainly due to robust domestic demand and a muted supply pipeline, says a report.

Going forward, rating agency Icra expects revenue improvement and margin expansion for the hotel industry and growth is expected to be 9-10 per cent over the next four years, with a strong 10-12 per cent during 2018-19.

The domestic demand in FY19 will continue to be driven by increased air connectivity, and higher appetite for domestic leisure travel, the report adds.

Besides this, the expects domestic demand to get a boost from the robust corporate performance, which has witnessed the strongest top line growth in the last 10 quarters in the September quarter of the current fiscal year.

The supply side, however, is likely to lag demand over the medium term and grow at a subdued 3.6 per cent over the next five years, warns the report.

But the situation is set to improve given the inventory and the number of premium rooms across 12 key cities is likely to go up from 82,800 in FY18 to 98,900 by FY23.

"This low supply growth is expected to be the backbone for the current up-cycle, as demand is expected to grow at a much faster rate. The demand-supply gap is expected to go up from around 1 per cent in FY18 to 5 percent in FY2023," the report notes.

Margins are likely to expand due to operating leverage, with return of stronger revenue growth, it adds.

Interest and debt cover are likely to improve gradually over the medium term but the return on capital employed is expected to remain at sub-cost of capital at least till FY20, notes the report.

The total debt for the industry is set to improve to 1.2 times in FY23 from 3.9 times in FY2018 and 3.1 times in FY19.

The debt reduction measures undertaken by some large industry participants have resulted in sizable reduction in leverage levels as of March 2018 as a result return on capital employed is expected to improve upwards of 15 per cent in FY23 from 6.3 per cent in FY2018, it adds.

"We expect the current industry up-cycle to continue over the next three to four years and the outlook continues to be stable. The stable outlook will be driven by robust domestic demand and a muted supply pipeline. The return of pricing power across key markets will be more evident from the next rate cycle beginning January 2019 and a consequent improvement in financial performance is expected," Icra vice-president Pavethra Ponniah says.

However, she says, costs will need tight monitoring as the main concerns faced by the industry are fund availability and other case specific factors stemming from heightened competition in the property market, poor revenue management, delayed projected commissioning and over-leveraged capex and acquisitions, she warns.