Travel Industry Recovering, And It’s Not Just Pent-Up Demand, Says Chalet Hotels CEO

This is the first of a multi-part series called ‘Insight’, where BQ Prime’s Niraj Shah talks up a theme with the best actors in the space. 

Foreigners are yet to warm up to the idea of an India trip, post-pandemic, even as Indians have started travelling by the hordes within the country for work and play.

"And that’s not pent-up demand," Sanjay Sethi, Chief Executive Officer at Chalet Hotels said during a conversation with BQ Prime’s Niraj Shah and Piper Serica Advisors’ founder Abhay Agarwal.

“Pent-up demand doesn’t last for nine months and it’s [demand] growing every month. So, there’s clear growth in the demand for domestic business travel, much higher than it was pre-pandemic,” he said. “And I think that the demand is driven on the back of the India growth story. So, I see that sort of continuing to stay strong in the foreseeable future” he added.

However, inbound travel—foreigners visiting India for a vacation—is still lagging.

“International travel is not back to where it was pre-pandemic, and there's a lot of ground to be gained over there,” Sethi said. “That’s where probably the largest amount of headroom for growth is going to be. And we got to remember that] segment of the travel is the highest paying customer also.”

Pandemic Impact

Few industries were hit as hard as tourism during the pandemic as sporadic lockdowns to reduce the risk of contagion kept people at home for nearly two years. While some green shoots of recovery are now visible, they are nowhere near the rampant growth that lasted nearly 40 years until 2019.

According to the World Economic Forum, international tourist arrivals increased by just 4% in 2022—72% below 2019 levels. That equates to more than one billion fewer international arrivals compared to pre-pandemic levels. The global tourism industry—for all intents and purposes—is now back in the 1980s.

Demand-Supply Mismatch

According to a note by Piper Serica, the domestic hotel industry will see a sharp pick up in demand due to the 200-odd G20 meetings that will take place in India by November. India holds the presidency of the G20 from Dec. 1, 2022, to Nov. 30, 2023. Moreover, the Indian Premier League and Cricket World Cup 2023 are tailwinds for the hospitality sector.

But even as travel within India picks up, where will the travellers stay?

India has 160,000 hotel rooms in the organised space. That’s less than 1% of the global supply of 1.7 crore rooms, Agarwal said.

“Hotels are seeing a multi-decadal high demand but the supply is highly constricted,” he said. “You’re looking at hospitality or hotel chains now forecasting higher than 50% EBITDA margin”, which is probably the highest ever. “It looks like that pricing power is back because of the demand-supply equivalent changing in the favour of the hotel industry.”

The macros indicate a multi-decadal demand environment—as the economy grows, the organised players are going to benefit, Agarwal said. “Valuations have already been priced in. But probably if you look at, you know, valuations three-to-five years out, this is probably still a good time to look at the sector, as a whole.”

Sethi of Chalet Hotels, however, expects demand to go down. There is a certain tensility to the rates but they are unlikely to grow in double digits every quarter. The supply-side looks weak as several hospitality firms had to pull out their projects due to the pandemic, he said.

That calls for an overhaul of the operating model, which is likely in the next 4-5 years.

According to Agarwal, consolidation towards larger players has also contributed to an uptick in both average room rates and occupancy levels. “The industry occupancy levels are at 65%, which is higher than pre-pandemic. Now, ARRs or average room rates are definitely higher than that, and this is not stopping,” Agarwal said.

Chalet Hotels’ Sanjay Sethi echoed the sentiment. He is of the view that room rates will see robust growth annually for the next few years.

Capex Plans

Now, with demand returning and growth on the anvil, does that call for capital expenditure as hotel firms eye higher profitability? 

“Chalet Hotels has had an aggressive capex plan for the last four years which is getting completed now,” Sethi told Agarwal when asked about future spending. “The benefit of that capex plan is going to come in the next few quarters.”

According to Sethi, other hotel companies have announced asset-light strategies. Even their capital-allocation strategy will be two-pronged. 

“One, a lot of the hotels need some upgrading, and it hasn’t happened in three years. So, there’ll be some capital allocation for hotel companies towards upgrading and renewing their products in this competitive space,” he said. “Secondly, I think growth will be on everyone’s mind today because if people miss the opportunity now, they will miss the opportunity for the next decade.”