The hotel industry has reported impressive earnings and revenue growth for the year ended March 2001. This was after a slack period in the financial year 2000, when net profits dipped on a negative sales growth. The industry is again headed for a hit, with the attacks on the world's largest financial centre in the US.

 Highlights: 

• The Indian hotel industry is metro dependent, as 75 to 80 per cent of the revenues of top hotel chains come from the five metros. Mumbai and Delhi are the most profitable hotel markets currently.
  

• The hotel industry is heavily taxed. Expenditure tax, luxury tax and sales tax inflate the hotel bill by over 30 per cent. The effective tax in Southeast Asian countries works out to only 4 to 5 per cent. As these taxes are the domain of the state government, the rates vary accordingly. Among the metro cities, the luxury tax rate in Chennai is the highest.
  

• The average room rate (ARR) and occupancy are the two most critical factors that determine the profitability. ARR, in turn, depends on location, brand image, star rating, quality of facilities and services offered and the seasonal factor.
  

• In the long term, the hotel industry in India has a latent potential for growth. This is because India is an ideal destination for tourists as it is the only country with the most diverse topography. India attracts approximately 2.5 million tourists every year that is just 0.4 per cent of the world tourist arrivals. Countries like Thailand and Malaysia attract thrice as many tourists.

Sector comments:
In recent times, any discussion on the hotel industry only veers around the falling occupancy rates and average room rates and the trying times that the Indian hotel industry is going through. Also, room supply in the five-star segment has grown by only 3 per cent over the last five years and consequently this has not been an area of concern in the past as new capacity additions in the five-star segment in the metro cities have been slow. It is expected that in the metro cities, after three to four years, the hotel industry is expected to face major problems on the supply side. However, we would regard these as a long-term concern.

The slow growth in room supply in the past can be attributed to the high land costs, long gestation periods, license problems and the scarcity of good locations. The hotel sector boomed from 1992 to 1996. Led by the lure of easy money and missed perception that hotels can be a simple business, profitable (especially the five-star segment) and is easy to get a foreign tie-up prompted many companies in the construction and real estate business to enter the arena. Since the past two years, almost all major hotel chains have unveiled plans to expand into the three- and four-star segments in smaller towns. As the growth in metro cities is getting saturated, hotel chains are looking on to this segment for future growth.