Aug. 15, 2012--The Indian hospitality sector is bracing for a tough season with the slump in economic growth and a poor monsoon raising costs, while travellers are cutting budgets, said analysts and industry veterans.

With costs and low occupancy having eroded hotel profitability in the three months ended June, the dampening effect is likely to persist into the current quarter (July-Sep) and next quarter (Oct-Dec) period, traditionally the busy season for the Indian hotel business.

Indian Hotels Co. Ltd, the owner and operator of the Taj hotels and resorts, posted a consolidated loss of '33.36 crore for the June quarter, wider than the loss of '22.27 crore in the corresponding quarter last year. EIH Ltd, operator of Oberoi and Trident hotel chains, posted a 39% drop in net profit to '9.45 crore.

The rain-deficient monsoon is likely to make things worse.

"If it impacts the economy and inflation rises, our costs will increase. Our margins will be under pressure then," said Vipul Kamboj, director of sales and marketing at the Leela Kempinski, Gurgaon. "There is a limit to which hotel companies can take the hit. After a threshold, extra burden will have to be passed on to the customers, that is in case of inflation because of the delayed monsoons. Extra services will have to be charged just as in the case of airlines."

With the rupee under pressure from the dollar and inflation rising, coupled with poor business sentiment due to global uncertainty and the euro zone crisis, people are travelling but trying to economise. "It will not impact business travellers but travel cost will go up for them," said Kamboj.

Analysts expect a muted outlook for the next few quarters with costs remaining high because of delayed monsoons, companies cutting down on travel and hotel stays due to uncertainty in the economic environment, unabsorbed supply of rooms in some of the major cities in the country and stagnant room rates.

"Because of delay in monsoons, costs have been revised. It might not have direct impact as such but indirectly the sector may be affected, because it impacts the overall GDP (gross domestic product) and the corporate sector," said Binaifer Jehani, director, Crisil Research. "Travel and hotel accommodation are among the first things to be cut down by the corporates." Considering the quarterly results of hotel companies, operating margins have fallen by 200 to 400 basis points (bps), Jehani said. One basis point is one-hundredth of a percentage point.

"It shows that hotel companies are under pressure because revenues are either stable or declining on the one hand, and costs are increasing on the other," said Jehani. "It has put pressure on profitability of the hotel companies. Over the last quarter, the situation in the industry has worsened. We don't think it will improve going forward."

The delayed monsoon may impact business travel and domestic leisure travellers, said Subrata Ray, senior group vice-president and head, corporate ratings, at rating firm Icra Ltd. "The delayed monsoons may impact the economy and corporate sector. A subdued outlook for the economy would curtail business travel, a key demand driver for premium hotels," said Ray. "Lower disposable income could also impact domestic leisure travel."

According to Icra, operating margins across the hotel industry have contracted by 500-700 bps due to an increase in employee costs and power and fuel costs coupled with inflation in consumables.

"The outlook for the current quarter continues to be muted. Uncertainty in demand and unabsorbed supply is expected to keep ARRs (average room rates) under pressure in the coming quarters. We do not expect any marked traction in ARRs even with the start of the season in October," Ray added. Some analysts, however, are optimistic that the start of the festive season in October will boost fortunes. "Next few quarters will be certainly better than the quarter just gone by in terms of occupancy because of the seasonality of the quarter, but not necessarily in terms of room rates," said Akshay Kulkarni, regional director, South and South East Asia, Cushman and Wakefield Hospitality. "Increasingly, the hotel companies are trying to enhance occupancies, even if it comes at lesser prices, because the cost of running a hotel needs to be recovered. Things will pick up but slowly, so next few quarters will be tough but better than the months gone by."

Even as the current global environment remains weak for the hospitality sector, the sharp rupee depreciation has offset the negative impact to some extent, said Sudip Bandyopadhyay, managing director and CEO, Destimoney Securities Pvt. Ltd. "With the rupee depreciating significantly, the tariff has become attractive for foreign tourists," he said. "There has been an increase of 6.6% in tourist arrival in YTD (year-to-date) 2012 over the last year (as per the ministry of tourism). This has enabled the industry to sustain rates in spite of global economic turmoil."

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