INDIAN HOTELS & HOSPITALITY

SECTOR
BY: HANY HUSSEIN, CFA
HANYHUSSEIN1973@YAHOO.COM
MOBILE: ++ 971559644773

About Hany Hussein

Hany Hussein brings an extensive financial expertise amassed
throughout his 18 year career in the field of asset management,
research, and capital markets in UK, US, and Middle East. His last role
was the Head of Asset Management in Abu Dhabi Islamic Bank. For
more than 3 years, his core duties were to establish, manage, and
market several investment funds including ADIB Islamic MENA Equity
Fund, and ADIB Dividend Income Strategy Fund. Before establishing
ADIB Asset Management platform, Hany for more than a year assumed the role of Acting General Manager of ADIB Securities. He
turned the company around, improved its ranking from 25 th to 6th in
terms of volume, and tripled its market share from 1% to more than
3%. Hany joined ADIB from Union National Bank in 2008 where he was
serving as the Head of Asset Management managing investment
portfolios over USD 500 million for the banks HNW and UHNW clients.
Prior to UNB, he assumed the role of Lead Fund Manager with
Mashreqbank managing 3 mutual funds with AUMs of over AED 2.5
billion. Makaseb Emirates Equity Fund, Mashreqbanks flagship fund,
was named best UAE growth fund in 2005 after achieving an
appreciation of 100% in NAV. Hany also played a pivotal role in the
success of Injazat Technology Private Equity/VC Fund where he
assumed the role of Sr. Investment Advsior. In Injazat Fund, Hany
actively closed many successful deals including Ducont.com, Docman,
and Raya Holding. He started his career back in 1994 as a financial
analyst in London covering Egyptian stock market with Robert Fleming

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 Economic

backdrop

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, India's 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

India's 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 government's 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 Hotels Market in US billion
40
30
20
10
0
-10

Size of the Market: As per the retail consultancy Technopak, the

Indian hotels market worth was estimated at around US$ 17 billion by
end of 2010 representing less than 1.5 percent of the nominal GDP.
Estimated Growth: The industry grew at CAGR of 9% during 2005-08
and is estimated to grow at a CAGR of 15% from 2010 -15.
World Travel & Tourism Council (WTTC) expected travel and tourism
(T&T) 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 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%
50%

0
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 20092011. 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

Located in
business district
of metro cities
Cater to
business
travelers and
foreign tourists
Considered to
be the most
expensive

- Cater to:
Average foreign
and domestic
leisure travelers.
- Also caters to
middle level
business
travelers
- Offers most of
the essential
services of
luxury hotels
without the high
costs since the
tax component
of this segment
is lower
compared with
the premium
segment

Do not offer as
many facilities
as the other
segments but
provide
inexpensive
accommodation
to the highly
price-conscious
segment of the
domestic and
foreign leisure
travelers

Certain
architecturally
distinctive
properties such
as palaces and
Forts, built prior
to 1950, have
been converted
into hotels. The
Ministry
of
Tourism
has
classified these
hotels
as
heritage hotels

Cheap motels
spread out
across the
country
Very cheap
and price is
the only selling
point

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 70s 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

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

% of
Growth Total

207

302

46%

12%

Mid Market 636

1,026

61%

41%

2009 2010
34,93
Premium
5
51,331
31,81
Mid Market 6
48,644

Budget

275

374

36%

15%

Budget

9,294 10,983

Heritage

88

146

66%

6%

Heritage

Others*

623

635

2%

26%

Others

Total

1,829 2,483

36%

Total

2,545 3,879
52%
14,19
4
2,978
-79%
92,78
4
117,815 27%

Premium

Growth % of
%
total
47%

44%

53%

41%

18%

9%
3%
3%

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.

Number of Domestic Tourist Visits

800
600
400
200
0

CAGR of 12.1%

Foreign Tourists Arrivals (FTAs)

in millions
8

CAGR of 7.3%

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 future. Disposable income
in India has grown by 10.11% annually from 2001-2006,
and much of that is being spent on travel.
The Ministry of Tourisms 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 & Incredible India increase the
image of India as a safe destination, and thereby
increase consumer confidence in choosing India for a
holiday.

4
2
0

SOURCE: MINSTRY OF TOURISM INDIA

The booming IT and outsourcing industry. The growing

number of business trips made by foreigners to India,
who often add a weekend break or longer holiday to
their trip. Foreign tourists spend more in India than

Demand, supply, occupancy

Budget segment (1star & 2 stars) is in high

demand due to its limited availability only
a supply of 11,000 as of 2010. Accordingly,
the segment enjoys high occupancy ratio.
Most of oversupply falls in in the premium
and to lesser extent in the mid segment 85% of total market supply falls into these
two segments.

As per Knight Frank, out of 35,000 new

rooms added by 2013, only 3.000 will fall in
the budget segment while the remaining
will be added to premium and mid market.
Occupancy in Premium segment Knight Frank

Upcoming supply (2010-2013) Knight

12000Frank
10000
8000
Premium

6000

Mid Market
Budget

4000
2000

80%

2010

2011

2012

2013

Demand vs. Supply in Premium Segment Knight Frank

Demand
Supply Occupancy
100000

70%

80000

60%
50%

60000

40%

40000

30%
20%

20000

10%
0%
2010e

0
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, ShangriLa, 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.

Premiu
m

Service
Mediu
m
Budg
et

Other
s

Competition

Government policies, 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

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

Incredible India

Critical success factors

Site & Location:

Opportunities & challenges

Challenges

Conclusion
Conclusion

India, with a population over 1.2 billion people and a rapidly growing economy at real
GDP of 8%, is allowing the hotel market to prosper as hotel brands continue to expand
their portfolio in the main cities and in the regions. The Indian hospitality sector is posed
to grow at a CAGR of 15% until 2015 as number of foreign tourist arrivals FTAs is rapidly
increasing at a CAGR of 7.3%, well educated middle class continues driving the domestic
demand, Indian government is showing serious political well to support the growing US$
17 billion sector, and revival of global economy and hosting sports and important events
is taking place.
Having said that, the sector is also facing serious challenges including lack of
infrastructure, lack of trained manpower, socio political conditions, and fierce competition
in the premium and middle market segments which will cause pressure on occupancy
and average rate per room. Unlike premium hotels, budget hotels as a new innovative
Recommendation
concept is emerging as untapped segment with limited availability but positive prospect.
I am bullish on the country, industry, and sector. I also like the concept of the budget
hotel especially with the current high demand for it coupled with its limited availability.
Hany Hussein, CFA
hanyhussein1973@yahoo.com
++971559644773