Branded hotels¹ are likely to see double-digit revenue growth of 13-14% this fiscal and 11-12% in the next (see chart in annexure), fuelled by demand outpacing supply. While domestic leisure and business travel will continue to be the primary demand drivers, growing traction in MICE (meetings, incentives, conventions and exhibitions) segment and pickup in foreign tourist arrivals will provide an additional fillip. To be sure, this comes on the back of a strong 17% growth recorded last fiscal.

To meet increasing demand, the pace of room additions, which has increased since last fiscal, is expected to pick up further and majorly through the asset-light management contract route². As a result, supply will increase by a cumulative ~20% over this fiscal and the next.Operating margin is expected to improve by 100-150 basis points (bps) this fiscal and sustain at similar levels in the next, with benefits of operating leverage kicking in and other cost optimisation measures undertaken.

Strong cash flows, asset-light expansion and sizeable equity raising will keep debt levels under check, thereby strengthening credit profiles.

A Crisil Ratings analysis of 52 branded hotel companies, accounting for ~43% of total rooms, indicates as much.

Says Mohit Makhija, Senior Director, Crisil Ratings, “The domestic leisure segment will continue to drive growth on the back of rising travel aspirations and better regional connectivity. Further, positive economic outlook and the government’s ‘Meet in India’ initiative to promote corporate events will support the business and MICE segments. Foreign tourist arrivals are also expected to surpass the pre-pandemic levels this fiscal. These factors will drive up the average room rates (ARRs) of branded hotels by 6-7% this fiscal on an already high base. That said, growth in ARRs is expected to moderate to 3-4% next fiscal as significant room capacities come up.”

The number of branded-hotel rooms is slated to rise 8-9% this fiscal and 11-12% in the next, with leisure and non-metro destinations accounting for ~65% of additions. The top seven metros³, which offer scope for both leisure and business activities, will account for ~25% of additions. The balance additions are expected in up-and-coming spiritual tourism destinations.

Says Pallavi Singh, Associate Director, Crisil Ratings, “The hotel industry is expanding more into non-metros and emerging leisure destinations as travellers seek more choices and infrastructure in these regions improve. Further, as 60-65% of room additions - over this fiscal and the next - are being done through an asset light route, it eliminates the need for large upfront investment and helps navigate business cyclicality better. Balance expansion will be through asset heavy route and in destinations with established demand and attractive potential for growth.”

Despite these significant room additions, occupancy levels are expected to remain strong at 74-75% next fiscal, declining a modest 50 bps after increasing 100-150 bps this fiscal. This will allow hotels to benefit from operating leverage which coupled with effective cost management - including higher adoption of technology and manpower rationalization to move to a leaner fixed cost structure – will lead to earnings before interest, tax, depreciation and amortisation (Ebitda) margin expand by 100-150 bps to 33-34% this fiscal and the next.

Strong cash flows, sizeable equity raises – accounting for 25% of previous fiscal’s networth - and an asset light expansion strategy, involving minimal capital expenditure requirements, will further strengthen the credit profiles of hotel players with gearing expected at 0.30-0.35x in fiscal 2026, a sharp improvement from 0.68x in fiscal 2024. Also, debt to Ebitda is expected to improve to ~1.5x-1.7x by next fiscal from more than 2x last fiscal.

A decline in business travel due to an economic downturn and in leisure travel owing to a surge in airfares will bear watching. Further, deterioration in leverage due to room additions will be monitorable.

¹ Crisil Ratings’ analysis of 52 rated and/or listed hotel companies with ~80,000 rooms (~43% of the branded-hotel industry)
² Under this model, rooms are operated by hotel chains on behalf of owners
³ Mumbai Metropolitan Region, National Capital Region, Bengaluru, Pune, Hyderabad, Kolkata, Chennai