Decreased demand coupled with increased supply is set to depress the profit margins of 5-star hotels in India over the next two years, according to new data from Crisil Research. According to Crisil, decline in both occupancy rates and ADR will shrink operating margins and rising costs will accentuate that pressure. Operating margins will drop to just over 16% in 2013-14, the lowest in 10 years.

Slowing demand growth and large-scale room additions will cause occupancy rates of premium hotels in these cities to slip. As the global economic slowdown affects both business and leisure travel, annual demand growth for premium hotel rooms is likely to stay subdued at 7% in 2012-13 and 2013-14. The slowing demand growth will coincide with large additions of rooms, with 14,500 new rooms to be added by 2013-14 to the existing 46,200 rooms. Occupancy rates of premium hotels will, therefore, fall from 64% in 2011-12 to 56% in 2013-14.

As the increased room inventory intensifies competition and aggravates the demand-supply imbalance prevailing in the segment, ADR for premium hotels will dip by about 10% over this period. The fall in both occupancy rates and room rates will precipitate a sharp decline in RevPAR, the revenue from rooms occupied divided by the number of rooms available. The average RevPAR for premium hotels will plummet from Rs5,000 per day in 2011-12 to Rs3,900 per day in 2013-14. RevPAR will decline in 10 of the 12 Indian cities. Premium hotels in Ahmedabad and Chennai will be the worst affected, with an annual decline of over 20%. Hotels in Bengaluru, Hyderabad, NCR, Jaipur and Kochi will also record a significant fall, of 15% annually. By contrast, limited room additions will keep RevPAR stable in Agra and even increase it marginally in Goa.

The decline in RevPAR will erode the profitability of premium hotels, as room revenues make up almost two-thirds of their total revenues. Rising costs will add to the pressure on profitability, too. A shortage of personnel will increase employee costs, whereas energy costs are also expected to rise significantly. Operating margins will dip from around 24% in 2011-12 to slightly over 16% in 2013-14.

“Operating margins will drop to their decadal lows in 2013-14,” said Binaifer Jehani, director at Crisil Research. “The margins had previously dropped to 16% to 17% in 2002-03 and 2003-04, when the 9/11 terror attack and the SARS outbreak had countries issuing travel advisories, sparking a drastic fall in demand. But that fall was temporary, and the margins recovered to their earlier levels of 30% to 35%. But this time around, the recovery will be slower. A continued oversupply, at least till 2015-16, will maintain the pressure on profitability of premium hotels.”