Will the GST rate cut boost the worried hospitality sector?

The hospitality sector is still not out of the woods. The recent Indian Hospitality Trends and Opportunities 2019 report by consultancy firm Hotelivate points out that despite key performance metrics - average room rates (ARRs), occupancy rates, and RevPAR (revenue per available room) - improving in 2018/19, the trend was not reflective of an up-cycle in the sector.

The report shows that the average occupancy rate across 1,068 branded hotel properties (and 1.33 lakh rooms) stood at 66.7 per cent in the last fiscal, which is just 1.4 per cent higher than the year before that. The average room rate - Rs 5,973 - inched up marginally by 3.6 per cent over the previous year. The slow growth in ARRs and occupancy rates are a sign of worry, especially because the demand-supply equation favours growth across most markets. For instance, the number of rooms that will be added over the five years (till 2023/24) will be just short of 37,000, and much lower than the proposed supply of 1.02 lakh rooms in 2010/11.

The lower supply of rooms presents an opportunity to hotel companies to increase tariffs though rise in room rates remains elusive as hotel companies fear missing out on the opportunity to fill guestrooms.

The reduction in GST (goods and services tax) in the third week of September is expected to give confidence to hotel companies to increase tariffs. Pavethra Ponniah, vice president and sector head at ratings agency ICRA says that despite witnessing sustained increase in occupancies since 2017, the hotel companies have not pushed for higher average room rates due to loss of guests to competition and fear of incremental supply. "This [measure] opens up room for increase in net room rates, which the hotels effectively earn. With lower tariffs post the GST cut, the industry will attempt to push for higher net rates," she said in a note.

The reduction in GST rates would also improve the overall sentiment in the sector. The first quarter numbers (in 2019/20) have been weak. The global and regional geo-political environment as well as the downbeat macro-economic sentiment have weighed heavily on the performance of hotel companies. To make the matter worse, the grounding of Jet Airways in April has made the domestic travel more expensive and lesser convenient.

Hotelivate report says that the reason for slow uptick in tariffs is primarily driven by hotels not employing the right strategies. "We are not just making offers that cannot be refused. It's not simply about dishing out great deals or attractive packages, the crux lies in how we approach the principles of revenue management... The majority of room bookings are now happening 24 to 48 hours before travel, and the fear of rooms being left unsold at the last minute is leading to a lower revenue realisation for hotels... Given the broad fundamentals of the sector, we would urge the industry to pay close attention to strategies that can help them retain and grow the market share and optimise revenues...," the report says.

The report also highlights that nearly 15 per cent of the 1,068 branded hotels tracked in the survey averaged over 80 per cent occupancy in 2018/19. These hotels are largely based in urban corporate markets where the weekend demand is believed to be weak. These properties seem to have bucked the trend and performed well even on weekends. After dealing with supply-demand mismatch for more than a decade, the sector has come to a point where the fundamentals in the sector are favouring the companies. It's for the hotel companies to shed their fears, capitalise on the opportunities and benefit from the tax-cut boost.

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