Hotel Industry: Budget Expectations

Hotel players in India in the past have faced many headwinds like rise in inflation (higher cost of food and fuel), high interest rate regime and the uncertain markets in the US and Europe restricting the arrival of tourists in India which have affected their growth. According to media reports, foreign tourist arrivals have grown at a CAGR of just 4.12 per cent in the past five years versus CAGR of 13.2 per cent in the preceding five years. Also, in 2008, when the US went into a subprime crisis, the sector was severely affected. This resulted in lower occupancy rate affecting the average room realisations (ARR).

At present the average industry occupancy rate is approximately around 60 per cent while the ARR is around Rs 6,000 to Rs 7,000. One should note that the ARR in FY09 was more than Rs 8,000. Adding to this, in the last Union Budget 2011-12 the government imposed service tax on the following new categories:

• Hotel accommodation, in excess of declared tariff of Rs 1,000 per day, will have to charge service tax of 5 per cent.
• Further services provided by air-conditioned restaurants that have the license to serve liquor, will have to charge service tax of 3 per cent on the bill amount.

The ability of the players to pass on this additional levy of service tax is limited on the back of rising competition. Muted growth outlook coupled with the negative impact of the last budget’s announcements have affected the performance of the hotel stocks on the bourses, as seen from the following table:

The industry’s expectations from this budget are as follows:

• The hotel industry wants to be granted an infrastructure status just like the railways and airports. Earlier, hotels were added to the infrastructure list so that the interest received by the financial institutions and banks for loans given to hotels were exempted from tax. However, it was discontinued from April 1, 2007.
• Hotel industry must be included in the RBI’s infrastructure lending which will help the industry players in multiple ways through lower interest rate on term loan, increase in tenure for repayment, etc. They would also be able to borrow through the ECB route up to USD 500 million, etc.
• Allow 100 per cent FDI in developing tourism infrastructure in India.
• Investment in tourism needs to be encouraged. India’s investment in tourism is 0.8 to 1 per cent of the budget versus Malaysia’s 5.1 per cent, China’s 3.8 per cent, Singapore’s 9.1 per cent, etc. All the other three countries, like India, are emerging economies and therefore we also should escalate investment in tourism.
• Depreciation on hotel buildings needs to be increased to 20 per cent from the existing 10 per cent.
• Regain export industry status which was discontinued after 2005-06 in respect of foreign exchange earnings by tourism.

Conclusion

Overall, we believe that the hotel industry has been facing various issues and hence the government may not add negatives for the sector. It is equally unlikely that there will be any positives. One can expect the depreciation charges to increase to 20 per cent as hotels have to maintain their premises and this calls for huge investments. The government may encourage investment in tourism which may result in growth in the hotel industry. With the Congress receiving a massive setback in the recently held assembly elections in the states of UP, Goa and Punjab, one may see the FM introduce a more populist approach while presenting the Union Budget 2012-13. The populist approach may again discourage FDI investment up to 100 per cent.