If the Q2 FY2025 numbers from Chalet Hotels are any indication, the Indian hospitality sector is riding a wave of optimism. The K Raheja-owned chain reported results last evening, revealing a loss primarily due to increased tax expenses. However, the underlying story is one of robust demand, evidenced by a strong 10 percent year-on-year (YoY) jump in average daily rates (ADR) and impressive 74 percent occupancy levels. This paints a positive picture for investors eyeing the sector.

Strong Quarter for Hotels

While other major players like Indian Hotels Company Ltd (IHCL) and EIH are yet to unveil their Q2 performances, the prevailing sentiment points towards a continuation of this upward trend. Brokerage consensus suggests a healthy 8-9 percent YoY growth in revenue per available room (RevPAR) for the fiscal second quarter. This consistent demand across the board is clearly encouraging for the hotel industry.

Room Capacity Expansion

Such sustained demand naturally fuels investment in capacity expansion, and the hotel sector is no exception. A Jefferies report highlights IHCL’s aggressive growth strategy, with 35 new hotel signings and 12 openings in just the first half of FY25. Their portfolio now boasts 345 hotels, with a pipeline of 115 more. Mid-sized chains and international giants alike are also ramping up their Indian presence. CareEdge Ratings estimates project approximately 55,000 new rooms will be added over the next five years, representing a substantial 4.5-5.5 percent compound annual growth rate (CAGR) in supply.

Inbound Tourism Matters

The critical question is whether this surge in supply will dampen the current upward trajectory of occupancy rates and RevPAR, both vital for hotel profitability. While domestic travel, both leisure and business, is expanding, the real earnings drivers for upscale and luxury hotels are in-bound tourists. Foreign Tourist Arrivals (FTAs) in India grew by 9.1 percent YoY in the first half of 2024, but this is still shy of the pre-pandemic levels of 2019. Although average room rates in US dollar terms have increased, they remain significantly lower than FY2008 levels, indicating potential for tariff hikes, but also the crucial role of FTAs in boosting RevPAR and overall profitability.

ROA for Hotel Performance

From an investment perspective, understanding a hotel’s financial health requires looking beyond just revenue and profit. Return on Assets (ROA) is a key profitability ratio that reveals how efficiently a company generates profit from its assets. In the hotel industry, which is asset-heavy, a strong ROA signifies effective management and utilisation of resources like properties and infrastructure. A rising ROA trend would indicate that hotels are increasingly profitable with each rupee invested in their assets, while a declining ROA might signal inefficient asset management or poor capital allocation.

Will the anticipated increase in room supply outpace demand growth, potentially cooling off the sector’s current hot streak? For sustained profitability and investor confidence, the focus must remain on attracting higher-spending in-bound tourists and ensuring efficient asset utilisation to maintain healthy ROA figures. The next few quarters will be crucial in observing how this demand-supply equation plays out in the Indian hotel sector.