Infra status, tax sops top demand menu of hotels

With a sharp drop in tourist arrivals (FTAs) in the country and downturn in the domestic market, the tourism and hospitality sectors have been among the worst hit in the country.

Revenue growth for hotel companies remained muted in fiscals 2013 and 2014 due to a weak demand environment.

India's slow GDP growth -- below 5% in the past two years -- coupled with a global slowdown, led to subdued growth in business and leisure traveller numbers.

S M Shervani, president, Federation of Hotel and Restaurant Associations of India (FHRAI), said, "The past two years have been particularly challenging for the hospitality industry, due to the impact of continued global economic uncertainties and a sharp domestic downturn."

Investor confidence and expansion plans in the industry have also been hit by high interest rates, steady rise in input costs, exorbitant land prices and inordinate delays in securing various statutory and regulatory clearances, he said.

The number of incremental foreign tourist arrivals (FTA) in India fell below 0.3 million in 2012 and 2013 (2011: 0.53 million; 2010: 0.61 million), reflecting the slowdown in global markets. According to the tourism ministry, compounded annual growth rate of FTAs declined t0 5.3% during 2008-2013 from 14.1% over 2003-2008.

India Ratings and Research, a Fitch Group company, said, "The situation has been exacerbated by fresh supply of room inventory across major cities. A lower demand environment coupled with overcapacity has stressed occupancy and average room rate (ARR) across India."

Industry estimates indicate that ARRs declined 5-10% year on year in 2013-14 across major cities in the country, while occupancies showed a mixed trend. This has also limited the ability of hotel companies to pass on increase in input costs, impacting their profitability negatively.

Ajay Bakaya, executive director, Sarovar Hotels and Resorts, said, "The sluggish economy had been a serious challenge for the sector. Oversupply of hotel rooms is another problem. Seeing the growth story of 2005 and 2006 in the hotel segment, everybody that time thought of building hotels. This slowly created a situation where now supply exceeds demand in the market."

Due to the crisis, a number of hoteliers restructured company brands and even came out with differentiated products. Several hotel companies which went for aggressive debt-led capex in the past are finding it difficult to manage their overleveraged balance sheet.

"The industry has seen stalling of projects worth around Rs 14,300 crore over fiscals 2012- 2014 (80% of new projects announcement). The industry is likely to continue facing near-term challenges unless there is a strong revival in demand," said India Ratings.

To tide over the crisis, the hospitality sector is expecting to get the infrastructure status in the budget.

Sanjay Sethi, managing director and CEO, Berggruen Hotels, said, "The industry is leveraging the advantages in a limited fashion through export promotion capital goods benefits. High cost of debt in this capital intensive business is the biggest challenge for this industry. For the purposes of capital structuring, hotel industry should be given an infrastructure status."

The cost of borrowing is around 14%, which, according to Bakaya, is unlikely to come down. "However, a strong incentive to link infrastructure is what is required," he said.

Sethi said while the Centre has declared hotels as an industry, most state governments have not.

"As a result, electricity is charged at commercial tariff as against industrial tariffs. This anomaly in the status of the industry must be corrected to make the business viable. Secondly, even three-star hotels are charged a luxury tax. It is surprising to see hotels with room rates as low as Rs 1,500 to be charged such a tax," Sethi said.

V V Giri, regional director, Premier Inn, South Asia, said, "We are expecting positive initiatives which will greatly support the growth and development of the hospitality industry, including reforms in labour laws, a revival in growth of the hospitality sector and curb on inflation, a significant boost in the manufacturing industry, fiscal concessions and incentives for capital inflow, long-term financing plans and clarity in tax laws."

Among various suggestions given by FHRAI included that the minimum project cost mandated for inclusion of hotels in the Reserve Bank of India's infrastructure lending list should be lowered from Rs 200 crore to a more reasonable threshold of Rs 50 crore, so that a larger number of hotels across diverse market segments can benefit.

Bakaya said incentives should be given to companies which have adopted energy-saving model.

"A lot of hotel properties have taken up the green measure. So far there are zero incentives for this from the government. Some incentives should be given on capital investment for those who are adopting such measures."