This time around, too, there is a belief on the Street that the sharp depreciation of the Indian rupee against the US dollar will help the hospitality sector. Shares of luxury hotels inched up as the rupee fell. But the reality is very different.
Rupee fall unlikely to make big impact on hotel sector earnings
First, hotels earn in rupee terms, which dismisses the fact that a rise in foreign tourist arrivals will directly bring more revenue through exchange gains.
There is only an indirect benefit: a weaker rupee makes it cheaper for foreign tourists to holiday in India. Therefore, India becomes a more attractive destination for travellers from developed economies.
And there’s reason to believe so. According to data from the ministry of tourism, the US accounts for 16.4% of foreign tourist arrivals and the UK another 10.5%. So, the probability of India becoming a favourable holiday destination is more, when the rupee is low. According to Sarthak Mukherjee, analyst, Stewart and Mackertich Research, “the US economy is seeing healthy growth. Unemployment rate is down to a 49-year low. So, the depreciating rupee will encourage US tourists to holiday in India.”
Growth in foreign tourist arrivals (FTA) during the April-June quarter at about 20.4% year-on-year was among the best in six years, second-highest after the January-March quarter of FY18. FTA is only a minuscule portion of total tourism in India and, therefore, does not immediately translate into higher profits for hotel firms.
Hotel chains owe the rise in occupancy rates (OR) in the last few quarters, along with improving average room rates (ARRs), to increased domestic travel in both the business and leisure segments. According to a presentation by Indian Hotels Co. Ltd (IHCL) after the June quarter results, the average room rate increased by 2.6% y-o-y, and revenue per average room (RevPAR) rose by 4.3%. But high input costs, given rising inflation, continue to weigh on profitability.
Certainly, the depreciating rupee will give a leg-up to the luxury hotel sector by driving income. But this is not sufficient to impact earnings positively. Until that happens, investor interest in the sector is likely to be low.