Indian hotel sector: SWOT analysis

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According to recent estimates of the World Travel

& Tourism Council (as of early 2005), Indian
tourism demand will grow at 8.8% over the next
ten years, which would place the country as the
second most rapidly growing tourism market in
the world. With the Indian hotel industry capturing
the attention of the world, let us understand its
strengths, weaknesses, opportunities and threats.

Strengths

India's rich culture heritage: With a historical

backdrop of 5,000 years, India is one big package
of culture and legend that never fails to captivate
the imagination of the visitor. Along with endless natural splendors like the mighty Himalayas, the
vast Indo Gangetic Plains, lush tropical jungles and a long coastline. A visit to the country is a
changing spectacle of religions, customs, festivals, sights and sounds.

Demandsupply gap: Indian hotel industry is currently facing a mismatch between the demand
and supply of rooms leading to higher room rates and occupancy levels. With 95,000 odd rooms in
the country, the size of the hotel industry represents an abysmal figure for India's size and growth
prospects. Though new capacities are expected to come in the next five years demand will outpace
supply in the short to medium term. The table below highlights that, over the last 24 months, major
cities in the country have witnessed impressive growth in average room rates, due to strong
demand and not much addition to supply.

ARRs: Average growth rate

FY02 FY03 FY04 FY05

Delhi -4.2% -5.7% 2.3% 31.4%

Mumbai -11.2% -15.2% 2.2% 28.7%

Bangalore 3.7% 15.1% 11.7% 29.1%

Chennai -6.9% 6.6% 5.4% 6.4%

Goa -8.2% 12.1% 9.8% 18.4%

source HVS international

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Government support: Till a few years ago, the Indian government had a total apathy towards
promotion of tourism. In fact, the industry did not find a place in the government's fund allocation.
Things have, however, witnessed a change. The government seems to have realized the
importance of tourism and is willing to spend towards the development of the industry. The
'Incredible India' campaign is a product of this realization. The focus on infrastructure, modernisation
of airports, open sky policy, development of new tourist destinations and circuits, more fund
allocation towards tourism are some of the initiatives taken by the government to promote tourism.
The Indian hotel industry stands to gain from this proactiveness shown by the government.

Weaknesses

Poor support infrastructure: India is currently spending a miniscule amount compared with its
needs, on infrastructure. China is spending seven times as much as India on infrastructure
(excluding real estate) in absolute terms. In 2003, total capital spending on electricity, roads,
airports, seaports and telecom was US$150 bn in China (10.6% of GDP) compared with US$21 bn
in India (3.5% of GDP). However, over the past 2-3 years, the government has realized the
importance of infrastructure and has focused on improving it.

Opportunities

Rising Income: While there has been much talk about record number of foreign tourist arrivals,
very little has actually been said or done about domestic tourism, which, according to our estimates,
has registered a 40% annual growth in the last three years and is currently estimated at 300 m
travelers. Per capita income grew by an impressive 7.1% in 2005, while Gross Domestic Savings
touched an all time high of 28%. Significantly, the present-day consumption boom in India has been
influenced more by higher disposable income rather than lower savings. This is good news, as
income induced spending is likely to sustain itself for a longer period. Higher disposable incomes
are also expected to enhance the concept of traveling for leisure.

Also, there has been an overall transformation in consumption pattern in the last five years. The
increase in number of young people, their rising aspiration levels, and an increase in their spending
power has led to a change in the consumption pattern. There is a marked shift from spending on
traditional categories like food and grocery, clothing and jewelry, to lifestyle categories such as
leisure, and aspirational products and services.

Open sky benefits: The opening up of the aviation industry in India brings exciting opportunities for
the hotel industry (airlines transport around 80% of international tourists). Increased airline activity
has stimulated demand and has helped to improve India's troubled infrastructure. Increased
competition among airline companies will further lead to the development of new and improved
services. Also the open skies policy has benefited both international and domestic travel.

New business opportunities: We believe that, over the next three to five years, the biggest surge
in accommodation demand is expected to come from commercial zones that are being developed in
metro suburbs and secondary markets. Mixed-use development projects that include retail and
commercial space have also gained momentum in the last 24 months and will continue to be an
attractive option. This provides a unique opportunity for hospitality projects. Also the new concept,
which is going to gain importance is that of budget hotels (started by Indian Hotels Ginger, the
erstwhile Indione). Due to their inherent nature of operation, associated costs and flexibility, budget
hotels will be better suited to withstand the next economic downturn as and when it takes place.

Threats

Event risk: Dependency on foreign tourism can be a double-edged sword as travel decisions are
based on global patterns and events that happen elsewhere can have serious impact the
performance. Events like 9/11, SARS outbreak and Afghanistan and Iraq wars have severely
impacted the tourism industry in the past and the threat remains.

Increasing competition: Global hospitality majors like the Four Seasons, Shangri-La and Aman
Resorts are all making their entry into the Indian market. They are not the only ones who are turning
their attention to India. The Hilton Group is deciding on a comeback and has tied up with the Oberoi
Group. Two other groups - the Carlson Group and the Marriott chain are furiously hunting for new
hotels in India's top cities. This will increase the competition for the existing Indian hotel majors.

Conclusion
The outlook for the hospitality market in India is optimistic and will continue to remain so, in our
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opinion. The economy's buoyancy, initiatives to improve infrastructure, growth in the aviation and
real estate sectors and easing of restrictions on foreign investment will fuel demand for hotels
across star categories in the majority of markets. India's hotel industry is increasingly being viewed
as investment-worthy, both within the country and outside, and several international chains are keen
to establish or enhance their presence here. We anticipate that, over the next three to five years,
India will emerge as one of the world's fastest growing tourism markets and will be hard to ignore.

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