Pulled out these number from the equityresearchindia website. Pretty depressing economics ….guess one can make money on one can catch the inflexion point when the economy is turning and the hotel industry is poised to do well …

2005 2004 2003 2002 2001 2000 1999
A) Return on Equity (i x ii) 9.20% 4.40% 3.20% 4.40% 8.90% 9.50% 11.90%
i) Return on Total Assets
4.70% 2.10% 1.60% 2.40% 5.20% 5.90% 7.90%
ii) Total Assets To Total Equity
2 2.1 2 1.8 1.7 1.6 1.5
B) Return on Total Assets (iii x iv) 4.70% 2.10% 1.60% 2.40% 5.20% 5.90% 7.90%
iii) Net Profit Margin
11.10% 6.60% 5.60% 8.20% 13.90% 15.40% 17.20%
iv) Total Assets Turnover
0.4 0.3 0.3 0.3 0.4 0.4 0.5
C) Total Assets Turnover (v / vi) 0.4 0.3 0.3 0.3 0.4 0.4 0.5
v) Total Income (Rs. Cr.)
3103 2452 2052 1924 2241 2012 2078
vi) Average Total Assets (Rs. Cr.)
7374 7597 7023 6577 5959 5260 4495

Was looking at the latest results of the hotel industry. The headlines are screaming about the triple digit growths and the tight demand supply situation. The rise in tourist inflows / good business climate are being cited as the reason for the optimism.

I am not too excited by the results or by the economics of the hotel industry. It is typical commodity industry. Some companies have good brand names, but do they have a strong franchise. What i mean by that is, can these companies charge a premium price? . Taj and others can charge a premium compared to the other hotels, but when there is excess supply, the typical occupancy rates and ARR (average room rents) suffer. During such period the margins drop and due to the high fixed costs , even the best of the companies can barely remain in black.

So over a complete business cycle most of the companies in this sector can barely cover their cost of capital. The asset turnover ratios are very low and so to earn a return over their cost of capital, most of these hotels need to maintain a Net profit margin in excess of 10 % ( a tall task when times are bad).

On the contrary this industry looks almost like the steel, cement and the other commodity industry, where only a low cost producer like gujarat ambuja or Tata steel can be profitable over the long term. Can’t think of any such hotel company …

Compare this with the FMCG/Pharma/IT and most of these companies even during a downturn, earn over their cost of capital.

As a side note, ITC seems to be investing their cash flows from ciggarette business to hotels, Paper and FMCG which are businesses with poor economics. Granted , that the company is getting growth, but is it profitable ( doesnt seem to be as of now)?