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New Delhi, Nov. 21: Major five-star hotel chains are planning to increase their capacity by 40 to 80 per cent in Calcutta and Mumbai. The demand for hotel rooms is expected to clock a 5 per cent growth.
Overall room capacity in the country is expected to grow at the rate of 7 per cent over the next two years, just a little above the demand rate.
This could force hoteliers to keep tariff low in the medium term, if not actually launch a rate war. Crisil, a leading credit rating agency, points out that the compounded aggregate growth rate is much higher than the 4.7 per cent recorded between 1995-2002.
Calcutta already has about a 1,000 rooms spread between Taj, Oberoi, Hindustan International, Park and Ashok, said G. B. Dey, advisor, ITC Hotels.
The Mumbai hotel industry is poised to witness a far greater boom. Nearly 2,500 rooms are being added to the existing 3,500 rooms. The Grand Maratha, floated by ITC, has added about 400 rooms, Meridian will be adding 200, Hyatt 500, the Grand Hyata 400 and Intercontinental 350 rooms. Similarly, Mariott will be adding 350 rooms and ITCs proposed hotel in Parel will have 250 rooms.
However, it is expected that demand for five-star rooms till the year 2004 will not be very high, leading to a wide demand-supply gap. The gap is likely to increase next year as capacities increase.
The country has a woefully small number of five-star hotelsjust 80,000. May be the demand is not there right now. But with the economic cycle heading northwards within a few years even this expansion will seem too little and we will again face the same old problem of short supply, independent tourism analyst Rabindra Seth said.
According to Crisil if the demand-supply mismatch has to narrow further, leisure tourist inflow will have to increase. Currently, demand for leisure tourists is low due to poor infrastructure, political instability and rival cost-effective and attractive destinations like south-east Asia, which steal potential tourists.
The scenario can improve if the government promotes India as a tourist destination more aggressively, suggests Crisil. Also, lowering tax rates will increase the countrys cost effectiveness. But Crisil points that such a scenario is unlikely in the next two to three years.
Hotel demand from foreign travellers will grow at a higher rate in 2003-04 over the current year, courtesy the stable political climate and improved business prospects in sectors, like information technology, biotechnology and pharmaceuticals and greater foreign investments in the country.
On the other hand, cost-cutting drive by the domestic corporate sector is expected to continue which will act as a deterrent to the rise in demand for five-star hotels.
Any increase in the use of video conferencing as a substitute to business travel (a medium recommended post-September 11) could also affect foreign business tourist traffic and consequently five-star hotel occupancies.
Even though demand from business tourists may grow, overall demand for hotel rooms is unlikely to touch a high of 15-18 per cent as witnessed by the infotech sector in the year 2000-01.
Since a majority of room additions are likely to take place in Calcutta, Mumbai and Goa, profitability of players in these cities will be more adversely hit compared with their counterparts in Bangalore and Gurgaon-Delhi. These cities are expected to witness higher demand growth than other cities.
Crisil feels that extensive competition and consequent declining profitability will impact the credit profile of the hotel industry as a whole. However, strong players like EIH Limited and Indian Hotels will continue to leverage on their current business positions and established brands.
Simultaneously, credit profile of both small and large players undertaking new projects can weaken if they do not adopt an appropriate funding structure for such projects. This seems to be important in the light of hotel projects being capital intensive as well as having long gestation periods.