INDIAN HOTELS & HOSPITALITY SECTORBY: HANY HUSSEIN, CFAHANYHUSSEIN1973@YAHOO.COMMOBILE: ++ 971559644773
About Hany HusseinHany 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 inAbu 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 bank’s 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, Mashreqbank’s 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
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
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 domestic demand - and growth exceeded 8%. However, Indias economic growth in 2011 is estimated to slow to 7.8% 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 50 million Indians with disposable income of US$ 4,100 to US$20,800 Indias diverse economy encompasses modern agriculture (19% of output), industries (23%), and services (54%) out of which (6%) stems from tourism sector. More than 50% of labor force is in agriculture, but services are the major source of economic growth Unemployment is 8.6% High crude oil prices have exacerbated the governments fuel subsidy bill contributing to a higher fiscal deficit of -5% of GDP External debt of US$267bln, foreign exchange & gold reserve of US$ 347bln, and stable exchange rate of 44-55 per dollar Indian economy looks positive due to the rapid real economic growth, robust domestic demand, young English 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 agriculture employment opportunities, and accommodating rural to urban migration.
Hotels Market in India Annual Growth Rate % Size of the Market: As per the retail consultancy “Technopak”, the Indian hotels Size of Hotels Market in US billion market worth was estimated at around US$ 17 billion by end of 201040 representing less than 1.5 percent of the nominal GDP.30 Estimated Growth: The industry grew at CAGR of 9% during 2005-08 and is20 estimated to grow at a CAGR of 15% from 2010 -15.10 • World Travel & Tourism Council (WTTC) expected travel and tourism (T&T) 0 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 of-10 growth. Average Occupancy & Rate Per Room 2005-2008: The hotels & hospitality industry is cyclical and takes lag time to respond to economic fluctuations. The industry 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. This was 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 Occupancy Rate % - Source HVS Average Room Rate in Rs – Source HVS 75% 10000 8000 70% 6000 65% 4000 60% 2000 55% 0 50% 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Recent market trends Although the crisis, Indian hotels enjoyed lucrative margins. The industry witnessed negative growth in revenues and earnings but most players managed to achieve a good margin of more than 30%. Increase use of Technology: Indian hotel industry uses new technology in almost every function to increase efficiency and standardize operations. Technology is used to provide better service and communication with customers. Managing Manpower: The industry is witnessing an influx of international and domestic branded hotels but the biggest challenge is managing the manpower due to lack of well paid and trained hotel employees. Domestic Travelers: The global crisis shed the light on the importance of the domestic travelers/ demand who supported the industry during 2009- 2011. In 2009 alone, India witnessed an inflow of approximately 650 million domestic tourist arrivals, compared to only about 5 million foreign tourist arrivals. The well educated middle class segment is price sensitive, demands value for money, and expects better service and quality standards. Outsourcing: With the rising operating and manpower costs in hotels, several hotel managers and operators started to outsource services such as laundry, housekeeping, and food & beverages outlets. Investment in smaller cities: Rising business and leisure travel to smaller cities such as Udaipur, Thiruvananthapuram, Bhubaneswar, Pune, Kochi and Chandigarh, have increased demand for quality hotel rooms in these cities. Diversification into new segments: Many hospitality chains that were earlier focused only on the luxury segment are now diversifying into new product segments, such as budget hotels and serviced apartments, in order to reduce risks.
Market structure - segmentation Premium Mid Players Budget (5 Heritage Unclassified (4*,3*) (2*,1*)Deluxe, 5*)Located in - Cater to: Average Do not offer as Certain Cheap motelsbusiness district foreign and many facilities as architecturally spread outof metro cities domestic leisure the other distinctive across the travelers. segments but properties such as countryCater to business - Also caters to provide palaces andtravelers and middle level inexpensive Forts, built prior to Very cheap andforeign tourists business travelers accommodation to 1950, have been price is the only - Offers most of the the highly price- converted into selling pointConsidered to be essential services conscious hotels. Thethe most of luxury hotels segment of the Ministry ofexpensive without the high domestic and Tourism has costs since the tax foreign leisure classified these component of this travelers hotels as heritage segment is lower hotels compared with the premium segment
The “budget” concept A new concept emerged as number of tourists willing to pay a high price for luxurious hotels has decreased while number of inbound tourist who travel has dramatically increased. Comfortable accommodation is not luxury anymore The Americans innovated the “Motel” concept in the 60 th which was adopted by European in the 70’s 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 that everyone is allowed to travel Drastic reduction in Elimination of non-profitable construction time & cost touched points (eg: multiple (using Prefab structures) food and beverage outlets) How to get There? Streamlining of processes – Limitation of the hardware to booking, check-in, check- what the customer needs during out, limited yet efficient service his stay – a bed, a TV, a hot (using technology) shower and a breakfast
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 totalPremium 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 in 2009
Growth drivers • Strong monetary & fiscal policies, and the quick economic recovery- all result in strong performance in tourism sector in 2010. • Robust economic growth added millions annually to the emerging middle-class, a group that driving the domestic tourism growth, rose their purchasing power and increased their awareness to ensure the growth of tourism over the foreseeable Number of Domestic Tourist Visits future. Disposable income in India has grown by 10.11% annually from 2001-2006, and much of that is being spent on800 CAGR of 12.1% travel.600400200 0 • The Ministry of Tourism’s efforts to increase the influx of tourists to the country is likely to see positive results in the coming years. Its campaigns such as “Safe and Honorable Tourism” & “ Foreign Tourists Arrivals (FTAs) Incredible India” increase the image of India as a safe in millions destination, and thereby increase consumer confidence in8 CAGR of 7.3% choosing India for a holiday.64 •The booming IT and outsourcing industry. The growing number2 of business trips made by foreigners to India, who often add a0 weekend break or longer holiday to their trip. Foreign tourists spend more in India than almost any other country worldwide. SOURCE: MINSTRY OF TOURISM - Over the past decade, number of foreign tourists arrivals has INDIA
Demand, supply, occupancy Budget segment (1star & 2 stars) is in high Upcoming supply (2010-2013) – Knight Frank demand due to its limited availability – only a 12000 supply of 11,000 as of 2010. Accordingly, the 10000 segment enjoys high occupancy ratio. 8000 Most of oversupply falls in in the premium and to Premium 6000 lesser extent in the mid segment - 85% of total Mid Market market supply falls into these two segments. 4000 Budget As per Knight Frank, out of 35,000 new rooms 2000 added by 2013, only 3.000 will fall in the budget 0 segment while the remaining will be added to 2010 2011 2012 2013 premium and mid market. Occupancy in Premium segment – Knight Demand vs. Supply in Premium Segment - Frank Knight Frank Demand Supply 80% 100000 70% 80000 60% 50% 60000 40% 30% 40000 20% 20000 10% 0% 0 2010e 2011e 2012e 2013e 2010e 2011e 2012e 2013e
Competition The Indian hotel industry is highly fragmented with a large number of small and unorganized players. The booming industry has attracted many international players as well. A number of global players are already well established in India. These include Hilton, Shangri- La, Radisson, Marriott, Meridian, Sheraton, Hyatt, Holiday Inn, InterContinental and Crown Plaza. New brands such as manda, Satinwoods, Banana Tree, Hampton Inns, Scandium by Hilt and Mandarin Oriental are planning to enter the Indian hospitality industry in joint ventures with domestic hotel majors.Service Premium Mediu m Budge t Others Competition
Governmentpolicies, 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 to become 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
Critical success factors Site & Location: The most factor as significant portion of the IRR stem from selling the property/land. Site also should be close to business districts in metro cities Positioning: Equally important, hotels should be well positioned towards the 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 hotels that usually have high breakeven points Equity Brand: branded hotels that are part of a brand or a chain benefit from the equity value of that brand especially in the advertisement / marketing effort of that brand.
ConclusionConclusion•India, 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 premiumhotels, 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, CFAhanyhussein1973@yahoo.com++971559644773