India's Hotel Industry: The Balancing Act of Demand and Supply

India's hotel industry is poised for growth as demand outstrips supply, with a projected 12% CAGR in demand from FY24-27E. Factors like leisure travel, business recovery, and infrastructure improvements drive expansion, but challenges include seasonality and potential market entrants.

India's hotel industry is witnessing a robust phase as demand forecasts outpace supply, according to a recent report by Axis Capital. The report anticipates a compound annual growth rate (CAGR) of 12% in demand for the fiscal years 2024-2027, contrasting with a more modest 9% CAGR in supply during the same period.

This advantageous supply-demand relationship, driven by structural factors and enhanced operating metrics, is expected to sustain the industry's growth trajectory. India's hotel sector is experiencing a shift, with a cyclical recovery in supply following years of solid Average Room Rate (ARR) increases.

During the previous growth phase from FY08-15, supply soared with a 15% CAGR, resulting in overcapacity. However, current projections indicate a more moderate supply increase, ensuring prolonged growth. Luxury hotels, with their higher capital investments and longer payoff periods, remain relatively less affected by industry cycles.

Adding to the potential growth, India's branded hotel supply is among the lowest worldwide, hinting at vast expansion opportunities. While most establishments are in Tier-1 cities, attention is shifting to Tier-2 locations as domestic players expand their presence. Structural drivers like leisure travel, which has consistently risen due to increasing disposable incomes, continue to propel demand.

Business travel is also expected to rebound from its drop to 31% of total demand, driven by improved corporate funds and the expansion of Global Capability Centers. The MICE sector anticipates growth as well, spurred by larger wedding budgets and more international events occurring in India.

International tourism, though yet not at pre-pandemic levels, looks set for growth with enhanced infrastructure and attractions expected to draw global visitors. This growing demand, which outpaces supply, should lead to higher occupancy rates and ARR gains. While the first quarter of FY25 experienced temporary hiccups due to elections, the latter half of the fiscal year is forecasted for robust performance.

Axis Capital underscores the sector's recent financial restructuring, which has improved cash flows and increased the proportion of managed hotel rooms. Nonetheless, risks remain. The sector is vulnerable to seasonal shifts and economic slumps, potentially affecting both leisure and business travel. Additionally, the emergence of new market players could alter current supply-demand balances.

(With inputs from agencies.)