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The travel and hospitality industry continues to be the sector, which has largely profited from the fast growing economy of India. This has largely been due to the 5.2 m tourist arrivals in FY08 (11% growth) over the previous period. In the last five years, growth stood at 17% per annum. The hotel industry went through a rough patch between FY00 to FY04 owing to factors like the Asian financial crisis, Afghan war, Middle East unrest, September 11 attacks, SARS and domestic riots.
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India occupies forty-sixth position among the sixty tourist destinations in the world. A flourishing economy helped boost demand for the industry. To encourage the tourism sector, the government is planning to propose a conditional 10-year tax holiday for all tourism projects in the country. Companies will enjoy full tax exemption up to 50% of profits, but will qualify for tax benefits for the remaining amount only if they re-invest it in tourism projects. The Centre and States are also working out a PPP (Public-Private-Partnership) model to increase hotel capacity. Efforts to diversify tourist attractions by offering new products such as wellness tourism, medical tourism and golf tourism are expected to have a positive effect on both foreign tourist arrivals and domestic tourism.
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The five star hotel segment has grown the fastest during the last five years clocking a CAGR of 12%. Further this segment can be divided into 3 sub-segments namely Luxury, Business and Leisure. The growth in this segment indicates the type of travelers coming into the country.
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| Supply |
Supply is catching pace. Metros will witness an oversupply situation after four to five years.
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| Demand |
Largely depends on business travelers but tourist traffic is also on the rise. Demand normally spurts in the peak season between November and March.
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| Barriers to entry |
High capital costs, poor infrastructure facilities and scarcity of land especially in the metros.
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| Bargaining power of suppliers |
Limited due to higher competition, especially in the metros.
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| Bargaining power of customers |
Higher in metro cities due to increasing room supply.
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| Competition |
Intense in metro cities, slowly picking up in secondary cities. Competition has picked up due to the entry of foreign hotel chains. |
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India continued to witness cheering trends in the tourism sector in 2007 with 5.2 m tourists visiting the country, registering a growth of 11% YoY. The Indian hospitality sector continued to be the forerunner of India's economic growth with support from the government. In the Budget 2007, five-year tax holidays for new star-category hotels and convention halls coming up in the National Capital Region by 2010 were announced. The Ministry has sanctioned 225 projects and utilised Rs.4.6 bn for upgradation of infrastructure facilities at important tourist destinations. Even public-private partnership is being planned to develop infrastructure projects. As a result of the high room rates in branded hotels, unregulated, unorganised hotels and guesthouse segments have emerged. Even the existing hotel players entered new segments like budget hotel and service apartments.
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However, in the beginning of the year, the global crisis, slowdown in corporate earnings and rising air fares affected the hotel sector to a certain extent. Occupancy levels at hotels catering to business travellers have dropped 5% to 10% since the end of January. With the dip in occupancy levels and new supply coming in certain destinations, the room rates witnessed a marginal increase, which was much slower than what was witnessed last year. Further, with hotel rooms in India being relatively more expensive (last year was unusual when tariffs rose by 25%), a slowdown was inevitable. Average room rates (ARRs) in the branded hotel category in India have increased 280% in the past three years, as per HVS International. Bangalore saw a decline in room rates, while Mumbai and Delhi witnessed a 15% to 18% increase as compared to more than 30% hikes witnessed in FY07. Going forward, the prices will soften by the end of the year as the supplies would start coming in from FY09, which would bring tariffs to a more realistic level.
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The Planning Commission's High Level Group on services sector has pegged the room shortage in the country at 150,000 rooms by 2010, out of which more than 100,000 will be in the budget category. Not only the Indian hotel majors, but even international players have lined up huge capex plans. Investments of US$ 11 bn over the next 2 years are expected to be earmarked for the hotel industry in India. Further, new segments like budget hotels, service apartments and management contracts are witnessing increasing interest.
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According to the 2002 estimates of the World Tourism Organisation (WTO), international tourist inflow in India by 2020 would be 10 m, which means the tourist influx has to grow at a CAGR of 6.5% for the next 14 years. This makes the country one of the fastest growing tourist destinations in the world second only to China. As of FY08, the increase in the tourist arrivals is well inline with the WTO estimates.
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India accounts for 0.5% of world tourism. Strong GDP growth, improving infrastructure, confidence in the country's economic prospects, open sky policy and the 'Incredible India' campaign has improved the outlook for India. This positive outlook would increase the tourist arrival in the country and the hotel industry is expected to be the major beneficiary. Even domestic tourism is gaining momentum. Rising disposable incomes, cheaper airfares and better connectivity would continue to increase the demand for rooms.
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Many international hotel chains either have or are on the look out for setting up shop in the country. Companies like the Hilton and Hyatt group have already tied up with local giants East India Hotels and Asian Hotels. Others like Four Seasons, are on the lookout for a partner or would be setting up their own hotels, government permitting. This clearly shows that India is on the international tourism radar.
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Although prospects are promising, as mentioned earlier, any change in the global geo-political situations can and have adversely affected the performance of this sector. Also, the heightened demand for land, especially from real estate players has led to a steep escalation in the prices. Also, shortage of manpower is going to be a huge challenge going forward. Hotel players with a diversified portfolio across different segments are likely to be the key beneficiaries. This should be one of the determining factors while investing in this sector.
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