The Hindu Business Line : High operating costs result in flat Q1 net for hotel industry

Mumbai, Aug. 16 Rise in raw material, employee and power costs resulted in a flattish net profit growth of 8.5-9 per cent in the hospitality industry for the first quarter ended June 30, 2008.

Operating costs for the sector went up by 12-13 per cent. Employee costs, which rose 20 per cent, accounted for a major part of this increase. Other costs such as raw material and power expenses went up by 8-10 per cent from last year.

However, with a marginal rise in average room rates (ARRs) and occupancy levels, revenues were up by 12-13 per cent over the same period last year. The increase in ARRs and occupancy has been in the range of 5-7 per cent.

“Some key cities like Kolkata, Chennai and Pune have seen a slight dip in occupancy levels but that is purely a demand and supply play,” Mr Rashes Shah, Equity Analyst with ICICI Securities, told Business Line. It is to be noted that the June quarter is cyclically a lean period for the sector.

The ARRs for premium segment hotels ranged from Rs 11,000 to Rs 13,700 in the country’s metro cities. The occupancy levels on the other hand remained between 60 per cent and 75 per cent.

Budget hotels

On budget hotels, analysts feel there is a scope for many more in this category, especially in tier II and III cities. A large number of players such as Indian Hotels — with its budget brand ‘Ginger’ — are aggressively expanding in this segment. Also, certain foreign players have shown interest in the budget or ‘value-for-money’ segment lately. “There are currently around 40,000 rooms available, against 430 million budget travellers. So, as far as performance of this segment is concerned we do not expect any downside here,” said Mr Shah.

Lack of skilled manpower still remains a big concern for the hospitality industry. This could result in employee costs shooting up by at least by 15-18 per cent in the coming years, analysts said. With the increase in room supply in the future, the problem is likely to get aggravated.

Hiring of staff for new projects also adds to employee costs. “Given that most of the hospitality players have upcoming properties, staff costs are likely to remain a significant component of operating costs in the coming years,” said an equity analyst at a brokerage.

Commenting on the likely impact of the downturn in the aviation sector on the hospitality market, industry experts said there has not been any major effect as many airline companies hiked air fares from only June onwards.

The impact is unlikely to be felt by the premium segment in any case because there has been healthy growth in in-bound tourists on an annual basis, Mr Shah added. However, on a long-term basis, much would depend on the path that crude oil prices take.

On the outlook for the next quarter, analysts said occupancy levels and ARRs were expected to remain the same as in the first quarter. “However, from the third quarter onwards we expect ARRs to rise by 35-40 per cent or even more from current levels. This is mainly on account of the substantial number of foreign tourists visiting India during the September-March period,” said Mr Shah.

Related Stories:
IT slowdown bites — Bangalore hotel room rates softening