Comprehensive Pack

Hotels

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• Hotel Classification :3

• Business Models : 16

• Industry Characteristics : 23

• Revenues and Margins : 35

• Demand and Supply : 46

• Future Outlook : 60

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 Hotel Classification

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Classification of hotels based on concepts

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Based on location
• These hotels are located near the city's central business district. Due to its location, these
properties typically charge high average room rates (ARRs).
• Further, occupancy rates (ORs) are generally higher on weekdays because of a higher
number of business travellers.
• Hotel Leela Chanakyapuri in New Delhi, Taj Banjara in Hyderabad and The Oberoi in
Bengaluru are examples of city hotels.
• Suburban hotels
• These are located in suburban areas, catering to customers travelling for business or leisure.
These hotels are situated far from the central business district
• . For e.g., Sohna Road, a suburb near Gurgaon, is a weekend getaway for the residents of
Delhi.
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Based on location
• Westin Sohna Resort and Spa operates in this region.
• Airport Hotels
• These hotels are located near an airport and act as transit hotels for guests who need a place
to stay between flights.
• Novotel Airport Hotel in Hyderabad and Clarks Exotica in Bengaluru are examples of
airport hotels.
• Resorts
• Resorts are usually located at hill stations or near beaches. Resorts can be further classified
into hill resorts, health resorts, beach resorts, summer resorts and winter resorts.
• Since these places are frequented by travelers for the purpose of relaxation or recreation,
occupancy rates in resorts are generally higher on weekends and public holidays.
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Based on level of service
• Economy / budget hotels
• These hotels offer fewer amenities to guests and charge lower prices.
• Budget hotels would have services equivalent to 1- or 2- star-rated hotels.
• Mid-segment / mid-scale hotels
• Mid-segment hotels provide simple and comfortable services to guests.
• These hotels may have amenities such as a fitness centre or a swimming pool, but the usage
of these facilities is not included in the room tariff.
• Also, these hotels have a single restaurant

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Based on level of service
• 4-star-rated hotels.
• Upscale / luxury hotels
• Upscale hotels have 5-star rating or above and house multi-cuisine restaurants and lounges.
Other facilities include concierge service, meeting rooms and banquet rooms.
• Guest rooms contain furnishing, artwork, etc.
• The Oberoi Amarvilas in Agra, Taj Rambagh Palace in Jaipur and Taj Mahal Palace in
Mumbai are a few upscale hotels in India. These hotels would have services equivalent to 5
/ 5-D-star-rated hotels.

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Based on themes
• ECOTEL
• ECOTEL is an environmental certification specific for hospitality. It enables hotels to
incorporate environmentally friendly best practices by involving the entire value chain -
owners, architects, operators, employees, suppliers and hotel guests. ECOTEL was
developed by HVS in association with Rocky Mountain Institute, USA with the help of
engineering and hospitality experts.
• The ECOTEL certification is an evaluation of how environmentally-friendly the hotel is
based on five parameters - energy conservation, water conservation, solid waste
management, employee environmental education and environmental commitment.

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Based on themes

• Qualifying for the certification entails scoring a minimum qualifying percentage on each of
the five parameters and satisfying the primary criteria or features considered essential at
being an ECOTEL in all five parameters. In Asia, The Orchid Hotel, Mumbai was the first
to receive the ECOTEL certification in India.
• Hotel Rodas and Meluha The Fern Hotel in Mumbai, Uppals Orchid Hotel in Delhi,
Cabbana Hotel in Punjab, and The Fern Hotel in Jaipur are some of the other properties in
India to have received ECOTEL certification.

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Boutique hotels
• Boutique hotels differentiate themselves from larger chain/branded hotels and motels by
providing personalised accommodation and services/facilities.
• Boutique hotels are furnished in a themed and/or aspirational manner and are operated by
individuals or small companies.
• It has less than 150 guest rooms. Some of the international boutique hotels include Melia-
Comfort Boutique Hotels, Hotel Punta Islita, W Hotels, Zoo Hotels, Ian Schrager Hotels,
Scotsman Hotels, Bvlgari Hotels.
• Savita Retreat in Rajasthan, Panchavatti, Pousada Tauma in Goa and Old Harbour Hotel,
Brunton Boatyard in Kerala are few prominent boutique
• hotels in India.

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Boutique hotels
• Heritage hotels
• Heritage hotels are old palaces and havelis that have been converted into hotels.
• Erstwhile royal families, especially in Rajasthan, have converted their palaces into hotels.
• Rajasthan has the highest number of heritage hotels in the country.
• WelcomHeritage runs over 40 heritage hotels across India.
• Destination spas
• Destination spas are resorts providing fitness activities, healthy spa cuisine, life coaching or
classes, nutritional guidance, a range of body and beauty treatments.
• In India, Ananda Spa and Moksha Himalaya Spa Resort in the Himalayas, and ayurvedic
spas in Kerala such as Upavan Resort and Kairali Ayurvedic Resort are instances of
destination spas.
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Other concepts
• Timesharing industry
• A timeshare is a form of ownership or right to the use of a property.
• Instead of booking a week or two at a resort every year, or purchasing a holiday property
outright, timeshare offers buyers the ability to buy rights of occupancy in a property,
typically in multiples of one week, for a set period.
• Units may be on a part-ownership or lease/right to use basis, in which the sharer holds no
claim to ownership of the property. Once consumers have purchased their holiday time,
they can use it, pass it to friends or relatives, or rent it out.
• The timeshare industry offers various purchase options.

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Service apartments
• A service apartment is a furnished apartment available to a customer for short- and long-
term stays. Service apartments provide amenities for daily use, which include household
utilities and appliances, kitchen or kitchenette, facilities, and services such as
housekeeping, room service, fitness facilities and swimming pool.
• A service apartment is different from a hotel in terms of target customers. In a service
apartment, the main demand drivers are business travellers such as expatriates and
individuals relocating for long-term projects.
• Therefore, the average length of stay in a service apartment is more than 30 days, while in
the case of a hotel it is very low at 2-3 days.

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Bed and Breakfast Hotels
• usually does not offer other meals. Typically, B&B are private homes or family houses
offering accommodations.
• The B&B/Homestay facilities in India is categorized as:
• Silver
• Gold
• The B&B/Homestay establishment will be given only in these cases.
• The owner/promoter of the establishment along with his/her family is physically residing in
the same establishment and letting out a minimum of one room and a maximum of 12
rooms.

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 Business Models

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Hotels employ a variety of business models
• Hotels in India employ various models of ownership. These models are essentially a
combination of four parties - owner, manager, operator and franchisor.
• With regard to marketing and distribution, hotels employ various in-house and third party
channels.
• Business/Ownership models
• There are various business/ownership models in the hotel industry.
• The management contract model is a largely preferred model for expansion by established
players in the hotels industry.
• However, new entrants typically adopt full ownership or lease models to establish their
brand identity.

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Business/Ownership models in the hotel industry

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Full ownership

• Full ownership requires substantial capital and involves the most risk but offers high returns
due to the owner's ability to influence margins by driving RevPAR (revenue per available
room) and managing operating expenses.
• The full ownership model has a high fixed-cost structure that results in a high degree of
financial leverage.
• Profits from a full ownership model increase at a higher rate by increasing room rates than
increasing occupancy rates since there are incremental costs associated with higher number
of guest.

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Franchise
• Franchisers license their brands to a hotel owner, giving the hotel the right to use the brand
name, logo, operating practices, and reservations systems in exchange for a fee and an
agreement to operate the hotel in accordance with the brand standards.
• Under a franchise agreement, the hotel pays the franchiser an initial fee, a percentage-of-
revenue royalty fee and a marketing/reservation reimbursement.
• A franchiser's revenues are dependent on the number of rooms in its system and the topline
performance of those hotels.
• Earnings drivers include increase in RevPAR, unit growth and effective royalty rate
improvement.

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Management contract
• Management companies operate hotels for owners that do not have the expertise and/or the
desire to self-manage.
• These companies collect management fees predominately based on revenues earned and/or
profits generated.
• Similar to franchising activities, the key drivers of revenue-based management fees are
RevPAR and unit growth, and similar to ownership activities, profit-based fees are driven
by improved hotel margins and RevPAR growth.
• The operator handles the day-to-day working of the hotel and takes up all the additional
responsibilities such as maintenance, front office, housekeeping, handling food and
beverages and sales of the hotel which benefits the owner.

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Lease
• Under the lease agreement, the hotel property owner (lessor) will give the property on long
term lease.
• The lessor will specify a proportion of gross revenue to be paid and minimum rent for the
premises.

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 Industry Characteristics

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Hotel industry: Cyclical and seasonal in nature

• In order to study the characteristics of the hotels industry, travel destinations may be
classified into two categories - business and leisure.
• Under both categories, hotels exhibit cyclical and seasonal nature which exhibit different
trends in occupancy.
• Hotels in business destinations show greater sensitivity to the macroeconomic environment,
whereas hotels in leisure destinations bear a sharper correlation to events such as terror
attacks and health-related travel advisories.

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Business and Leisure Destinations

• From the point of view of the hospitality sector, destinations may be classified as business
and leisure destinations.
• It must benoted that the two are not mutually exclusive as some business destinations also
have their fair share of leisure travelers and vice versa.
• The demand dynamics of the two segments are quite different and can be discussed under
the following headers:

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Cyclicality
• The hospitality sector is cyclical in nature. During positive cycles, the industry witnesses
periods of sustained growth and healthy average room rates (ARR) and occupancy rates
(OR).
• This trend continues until the economy undergoes a downturn or there is excess supply in
the sector.
• Usually, occupancy rates begin to decline when recession sets in and this is followed by a
decline in ARR.
• In the recovery phase, occupancy rates start to move up.
• Subsequently, ARR also start increasing.
• Business destinations are more sensitive to macroeconomic factors i.e.

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Cyclicality
• RevPAR growth in business destinations is more sensitive to macroeconomic indicators
such as nominal GDP growth.
• On the other hand, Leisure destinations are more sensitive to noneconomic factors such as
terror attack and health related travel warnings.
• In 2011-12, RevPAR in business destinations declined by 7% (on year) as the
macroeconomic slowdown continued, however leisure destinations were not impacted and
RevPAR there recorded an increase of 1% (on year).
• In 2012-13, the RevPAR in business destinations saw a decline of 9% (on year) due to the
slower macroeconomic growth.

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Cyclicality
• On the other hand, leisure destinations recorded a marginal rise in RevPAR. In 2013-14,
RevPAR in business and leisure destinations both witnessed decline of 8% and 5% (on year)
respectively.
• In 2014-15, RevPAR in business destinations remained at par with 2013-14, as a result of
improvement in business sentiments following a strong mandate in the general elections.
• In leisure destinations, RevPAR recorded a growth of nearly 7% (on year).
• Foreign tourist arrivals (FTA), a key demand driver for premium segment hotels, increased
by 8% to 7.6 million in 2014-15 vis-avis 5.8% growth achieved in 2013-14.
• During 2015-16, RevPAR in business destinations witnessed a growth of nearly 4% (on
year) with stable growth in foreign tourist arrivals and Nominal GDP.

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Cyclicality
• RevPAR in leisure destinations witnessed an increase of 5% (on year).
• With continued growth in macroeconomic environment and FTA in 2016-17, RevPAR in
business and leisure destinations both witnessed a growth of nearly 5% and 6% respectively.
• In 2017-18, average occupancy rate (OR) is expected to grow by 100 basis points (on year)
to 65% in the business destinations.
• Average room rate (ARR) are expected to increase marginally by 1% (on year), while a
growth of 3% in RevPAR is expected in this fiscal.
• During the same period, for leisure destinations, room availability and room demand is
estimated to have increased by 2% and 6% respectively.

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Cyclicality
• Average occupancy rate (OR) is estimated to increase by 300 bps to 68% (on year).
• However, ARR in leisure destinations are estimated to grow by 5% (on year) due to
improving demand, resulting in a sharp growth of 9% in RevPAR during 2017-18.

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Cyclicality of OR and ARR

Source: Crisil Research

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 Seasonality

• The nature of demand in the hotels industry is seasonal.

• However, the trend in OR shows a significant variation in business and leisure
destinations. Though the peak season (January-March) is the same for both business and
leisure destinations, the two segments exhibit a markedly different behaviour during the
rest of the year.
• Business destinations maintain relatively constant OR (albeit 5-10% lower than the
January-March period) from April to November.
• However, ORs show a month on month decline in business destinations in December as
this coincides with the international holiday period.
• On the other hand, leisure destinations witness low OR (around 55-70%) during the May-
October period, while occupancy is good (above 70%) during December on account of
holidays.
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Seasonal nature of the hotels industry (OR)

Source: Crisil Research

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Seasonal nature of the hotels industry (OR)
• The seasonal nature of the industry can also be gauged by the quarterly growth in
revenues for listed* hotel players.
• Typically revenues for the October-December quarter and the January-March quarter
are considerably higher when compared to the April- June and July-September quarters
indicating significant business growth during the last two quarters.
• This also has a direct impact on the operating margins with hotels' being a high fixed-
cost industry.

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 Revenues and Margins

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Revenue and operating margins

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Source: Company Reports, Crisil Research
Average length of stay (ALOS) and occupancy patterns
• The demand for hotel rooms in business destinations is generally concentrated around
weekdays.
• As a result, ORs are generally lower on weekends. The ALOS in business hotels is
usually in the range of 1-2 nights with low levels of double occupancy (i.e. fewer
occasions where more than one person shares a hotel room).
• Conversely, hotels in leisure destinations enjoy higher OR on weekends, and generally
have a higher average length of stay of around 2-3 nights.
• The incidence of double occupancy is also higher in leisure destinations.

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Employee costs account for major share of hotels' total costs
• Hotel revenues can be classified under three broad headers - room revenues, food &
beverages (F&B) revenues and other revenues.
• Room revenues are a direct function of room rates and occupancies, while F&B revenues
comprise revenues from restaurants and banquets/conventions.
• Other revenues largely consist of income from ancillary services provided by the hotel
such as telecommunication, laundry and transport.
• In terms of costs, employee cost is the largest cost component for hotels.

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Revenue structure
Percentage break-up of revenue sources

Source: Company Reports, Crisil Research

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Room revenues
• Room revenues comprise revenues received as room tariffs.
• The total room revenues for a property can be calculated by the following formula:
Room revenues = Room nights sold * Average room rate, where, Room nights sold =
Number of rooms * Occupancy rate * Time period (days) Room revenues typically
constitute 45-50 per cent of total hotel revenues.

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F&B revenues
• Food and beverage (F&B) revenues include revenues from restaurants and banquets. The
share of F&B revenues in overall hotel revenues is usually in the range of 40-45 per cent.
• However, some hotels by virtue of location or brand image of their restaurants have
higher F&B revenues.
• Various factors determine overall F&B revenues:
• Occupancy rate (OR) of the property: Higher ORs generally translate into higher F&B
revenues, as more guests tend to dine at their place of accommodation.
• Banquets and conferences: Certain hotels specialise in large-scale banquets and
conferences, and these act as key contributors to hotel revenues. Important parameters
determining the ability of a hotel to host such events include conference room area,
connectivity and technology and banquet hall area.
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F&B revenues

• Hotel location: Location has two possible implications. Hotels located in central
business districts tend to attract a higher number of non-staying clientele as compared to
peripheral business districts.
• On the other hand, hotels in peripheral business districts typically enjoy a higher
percentage of staying guests opting to dine at the hotel as they face less external
competition than hotels in the central business districts.

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Other revenues
• Other revenues include revenues from spa services, telecommunication services, laundry
services and transport facilities offered by hotels.
• These revenues contribute 10-15 per cent of overall revenues for a hotel.

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Cost structure
• Hotels have high fixed costs. For e.g. hotels incur fixed costs in the form of employee
salaries for reservations and housekeeping staff.
• These costs remain largely at the same level at higher occupancy levels.
• As a result, the marginal cost per extra guest is low.
• This highlights the importance of maintaining high ORs for hotels.

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Percentage break-up of costs

Source: Company Reports, Crisil Research

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 Demand and Supply

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RevPARs estimated to increase in 2017-18

• The RevPARs in business and leisure destinations are estimated to increase y-o-y in 2017-
18.
• In leisure destinations RevPARs are estimated to grow by 9 per cent y-o-y in 2017-18.

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 Business destinations

• In 2017-18, the room demand in business destinations are estimated to increase by 6% vis-
a-vis a supply growth of 4% (on year).
• The average occupancy rate (OR), however are estimated to marginally inch up by 200
basis point (on year) to 65% as competition continues to remain intense.
• During the same period, the average room rate (ARR) is estimated to marginally improve
by 1% (on year) to Rs. 7,350.
• Consequently, revenue per available room (RevPAR) during the same period are estimated
to improve by 3% (on year) to Rs. 4,750.
• In 2016-17, OR inched up nearly 100 basis point to 63% (on year) supported by growth in
room demand (8%) vis-a-vis increase in supply (5%). ARR witnessed marginal uptick of
1% (on year) to Rs. 7,250 during the same period. However, RevPAR witnessed a
moderate growth of 5% (on year) to Rs. 4,600.
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Business destinations
• Average occupancy rates (OR) in business destinations improved to 62% in 2015-16 with
demand growth (11%) outstripping supply growth of 6% driven by improving economic
conditions and Foreign tourist arrivals (FTA).
• The room rate witnessed a flat growth in 2015-16, however RevPAR increased
moderately by 4% (on year) to Rs. 4,400.
• After plummeting to the decadal lows in 2013-14, improving economic conditions and
business sentiments, post general elections in 2014-15 supported demand in the premium
hotel industry.
• The average occupancy witnessed growth of 100 basis point (on year) to 59%,
consequently the RevPAR witnessed a flat growth in 2014-15.

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Business destinations
• During 2013-14, business destinations witnessed a sharp growth in room inventory (11%)
vis-a-vis increase in demand (8%), leading to decline in occupancy.
• The average occupancy, therefore in 2013-14 declined to 58% vis-a-vis 60% in 2012-13.
In line, ARR witnessed a negative growth of 5% (on year) to Rs. 7,250 and RevPAR
witnessed a sharp decline by 8% (on year) to Rs. 4,250.

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Room availability, Room demand and RevPAR

Source: Company Reports, Crisil Research

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ARR, OR and RevPAR

Source: Company Reports, Crisil Research

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Demand and Supply Growth

Source: Company Reports, Crisil Research

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Leisure destinations
• In 2017-18, room demand in leisure destinations are estimated to increase by 6% as against
a supply growth of a meagre 2%.
• The RevPAR therefore, are estimated to grow by 9% (on year) to Rs. 4950 driven by
estimated marginal growth in occupancy to 68% (on year) and a moderate growth of 5% (on
year) in ARR to Rs. 7,250. In 2016-17 room demand outpaced the growth in room
availability.
• As a result, RevPARs in the premium hotel industry witnessed uptick of 6% (on year) to Rs.
4500.
• The average occupancy (OR) witnessed a growth of 300 basis point (on year) to 66% and
average room rate (ARR) grew marginally by 1% (on year) to Rs. 6,900.

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Leisure destinations
• In 2015-16, room availability had increased to 7% (on year) with 8% growth in room
demand.
• during the same period, RevPARs went up by 5% (on year) to Rs. 4,250 driven by a growth
of 4% (on year) to Rs. 6,800 in average room rates and marginal increase in occupancy to
63% (on year).
• In 2014-15, improved room demand of 9% over room supply (6%) supported growth in
occupancy by 200 basis point to 62% (on year).
• Consequently, the average room rate increased by 4% (on year) to Rs. 6,550. As a result,
RevPARs also witnessed a growth of 7% (on year) to Rs. 4,050 during the fiscal 2014-15.

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Leisure destinations

• Similar to Business destinations, growth in room inventory in Leisure destinations during

2012-13 and 2013-14 (12% each) outpaced growth in room demand (10% & 9%
respectively) leading to decline in occupancy. The aggregate occupancy for leisure
destinations, therefore declined to 60% in 2013-14 vis-a-vis 62% in 2012-13.
• Consequently, the RevPARs declined to Rs. 3,800 in 2013-14 vis-a-vis Rs. 4,000 in 2012-
13.

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Room availability, Room demand and RevPAR

Source: Company Reports, Crisil Research

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ARR, OR and RevPAR

Source: Company Reports, Crisil Research

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Demand and supply growth

Source: Company Reports, Crisil Research

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 Future Outlook

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Steady demand growth and limited supply additions to usher better times

• With demand growth outpacing supply growth, RevPAR to increase at a CAGR of

5% over the next five years, but the trend will vary across destinations.

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 Industry expected to witness better times with steady growth in demand
at the back of slow supply addition
• Due to intense competition and economic slowdown from fiscal 2011 to 2017, RevPAR
growth across India dipped by 2% CAGR.
• RevPAR dipped by 7% in fiscals 2013 and 2014, owing to huge supply addition, and grew
4% on-year in fiscal 2016 because of limited supply addition an improving economic
conditions.
• Demand for premium hotels is expected to grow at CAGR of 6% during fiscal 2018 to
fiscal 2023.
• Ease of travel achieved due to introduction of facilities, such e-visa, is also expected to
have a positive impact on domestic tourism growth in the long run (although the impact is
likely to be marginal in the short term).
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• During the same period, supply is expected to increase at CAGR of 4%, resulting in OR
increasing to 71% by fiscal 2023 from 65% in 2018.
• ARR is expected to grow at CAGR of 3%.
• Room demand (5% CAGR) in leisure destinations - Goa, Agra, Jaipur and Kerala (Kochi,
Kovalam and Thiruvananthapuram) – is expected marginally outpace room supply
(expected to increase 4% CAGR) during fiscal 2018- fiscal 2023.
• While OR in leisure destinations is expected to grow to 72%, ARR is expected to grow at
3% CAGR. Consequently, RevPAR for leisure destinations is expected to grow at CAGR of
5% annually to Rs 6,000 till fiscal 2023.

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• In the short term, the leisure destination of Kerala is expected to witness a fall in occupancy
marginally because of the travel advisory during Nipah virus outbreak and largely because
of the unprecedented floods the state witnessed in the month of August.
• The dull sentiment will get negated in the medium term and occupancy is expected to ramp
up with supply consolidation.
• Room demand in business destinations –Mumbai, National Capital Region (NCR), Kolkata,
Chennai, Pune, Ahmedabad,Bengaluru and Hyderabad is expected to grow at a CAGR of
6% during fiscal 2018 and fiscal 2023, outpacing supply growth of 4% during the same
period. RevPAR for business destinations is expected to grow at CAGR of 5%, with OR
growing to 71% in fiscal 2023 and ARR expected to grow moderately at a CAGR of 3% till
fiscal 2023.
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RevPAR to improve over next five years, but with a varied trend

• Among business destinations:

• Pune and Hyderabad will see their RevPARs increasing at 9% CAGR , as demand is
expected to outpace supply along with considerable growth in ARR Chennai to witness 8%
CAGR growth in the medium term RevPAR in Mumbai and Bengaluru expected to grow at
5% and 3% CAGR respectively, on account of demand growth despite supply additions
taking place in these regions NCR will witness a growth of 4% CAGR on account of
demand growth and improvement in room rates.

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• Kolkata will witness an uptick of 3% CAGR on account of huge supply additions even
though the city is expected to witness a demand growth of 9% CAGR.
• Ahmedabad will, however, be exception to this uptrend due to huge supply addition.
RevPAR are expected to witness de-growth in the medium term.
• Among leisure destinations:
• RevPAR in Goa is expected to increase at an annualised rate of 6%, benefiting from
demand increasing at a higher growth rate than new supply In Jaipur, RevPAR growth of
5% CAGR is expected in the medium term In Kerala (Kochi, Kovalam and
Thiruvananthapuram), RevPAR growth will see a marginal uptick of 2%, mainly due to the
expectation of improvement in room rates.
• The Agra market is expected to witness a growth of 3% over the medium term

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Listed players to witness revenue growth of 7%

• With most of the upcoming supply being planned by international chains, the revenue of
listed premium hotel companies is expected to grow at a pace of 7%.
• With mid-market segment witnessing considerable supply additions (both by
international and domestic chains alike), the competition for the premium segment is
further enhanced.
• The food and beverages (F&B) segment for premium hotels is also gaining huge
attraction due to its revenue generating potential in conjunction with room revenues
• Many hotel players are contemplating towards increasing the F&B share in the total
revenues, especially to capture the MICE demand.

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Stress in the industry continues to some degree

• The sector requires heavy capex from developers’ side.

• Unless the viability is carefully planned and mirrors actual demand-supply scenario,
projects may face serious repayment issue as is visible in few major cases filed in NCLT.
• Most builders partner with international chains like Marriott, Hilton and Hyatt, who are
keen on expanding aggressively via franchisee or management contracts, unlike
domestic chains who have recently taken to asset light strategy in after facing debt issues
( as an offshoot of owning their operational hotels).
• However, with renowned branding comes the associated hefty fees and charges.

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