CREDIT PROFILE AND

CREDIT MIGRATION

OF THE HOTEL INDUSTRY

IN INDIA

DHRUVA SAREENROLL NO. 955

B.B.A.LL.B | CANDIDATE OF 2017

NATIONAL LAW UNIVERSITY, JODHPUR

A CREDIT PROFILE IS A DOCUMENT WHICH PROVIDES INFORMATION ABOUT SOMEONE'S CREDIT HISTORY. CREDIT PROFILES ARE USED BY LENDERS AND OTHER AGENCIES WHICH OFFER CREDIT TO DETERMINE SOMEONE'S CREDITWORTHINESS, AND THEY ARE ALSO UTILIZED BY PROSPECTIVE LANDLORDS AND OTHER PEOPLE WHO MIGHT HAVE AN INTEREST IN SOMEONE'S CREDIT HISTORY. A GOOD CREDIT PROFILE WILL MAKE IT EASIER FOR SOMEONE TO ACCESS CREDIT, AND A BAD CREDIT PROFILE CAN BECOME A MAJOR STUMBLING BLOCK.

AN ASSESSMENT OF THE CREDIT

WORTHINESS OF A BORROWER IN

GENERAL TERMS OR WITH RESPECT TO A PARTICULAR DEBT

OR FINANCIAL OBLIGATION. THESE RATING AGENCIES ARE PAID BY THE ENTITY THAT IS

SEEKING A CREDIT RATING FOR ITSELF OR FOR ONE OF ITS

DEBT ISSUES

THE HOTEL INDUSTRY IS A MAJOR PART OF THE HOSPITALITY INDUSTRY. THE MAJOR FIELDS WITHIN THE HOSPITALITY INDUSTRY INCLUDE LODGING, RESTAURANTS, EVENT PLANNING, THEME PARKS, CRUISE LINE, ETC. THE HOSPITALITY INDUSTRY IS A MULTI-BILLION DOLLAR INDUSTRY THAT MOSTLY DEPENDS ON THE AVAILABILITY OF LEISURE TIME AND DISPOSABLE INCOME.

A HOSPITALITY UNIT SUCH AS A RESTAURANT, HOTEL, OR EVEN AN AMUSEMENT PARK CONSISTS OF VARIOUS GROUPS WITHIN IT, INCLUDING FACILITY MAINTENANCE, DIRECT OPERATIONS (SERVERS, HOUSEKEEPERS, PORTERS, KITCHEN WORKERS, BARTENDERS, ETC.), MANAGEMENT, MARKETING, AND HUMAN RESOURCES.

THE GLOBAL HOTEL INDUSTRY IS A PROSPEROUS INDUSTRY AND ACCORDING TO A NEW INDUSTRY REPORT BY GLOBAL INDUSTRY ANALYSTS, INC., THE GLOBAL HOTEL INDUSTRY IS EXPECTED TO REACH US $479 BILLION BY 2015.THE HOTEL INDUSTRY IN INDIA IS SET TO GROW AT 15% A YEAR.

THIS FIGURE IS EXPECTED TO SKYROCKET IN 2015. ALREADY, MORE THAN 50 INTERNATIONAL BUDGET HOTEL CHAINS ARE MOVING INTO INDIA TO STAKE THEIR TURF.

ACCORDING TO THE WORLD TRAVEL AND TOURISM COUNCIL INDIA, INDIA RANKS 18TH IN BUSINESS TRAVEL AND WILL BE AMONG THE TOP 5 IN THIS DECADE6. SOURCES ESTIMATE THAT DEMAND WILL EXCEED SUPPLY BY AT LEAST 100% OVER THE NEXT FEW YEARS.

A HOTEL IS AN ESTABLISHMENT THAT RENDERS LODGING IN LIEU OF PAYMENT. THIS LODGING IS USUALLY GIVEN IN EXCHANGE FOR A SPECIFIED PREDETERMINED AMOUNT OF MONEY. MODERN HOTEL ROOMS COME EQUIPPED WITH CLIMATE CONTROL AND ATTACHED BATHROOMS. HIGHER END HOTELS OFFER GUESTS INTERNET CONNECTIVITY WITHIN ROOMS AND ALSO THROUGHOUT THE PREMISES. A COMBINATION OF MEALS AND ACCOMMODATION COMES AS A PACKAGE IN MOST HOSPITALITY ESTABLISHMENTS. HOTELS ARE USUALLY MANAGED BY PROFESSIONALLY QUALIFIED MANAGERS. JUNIOR WORKERS USUALLY MAINTAIN THE HOTEL. FUNCTIONS LIKE COOKING IS USUALLY DONE BY PROFESSIONALLY TRAINED CHEFS.

CREDIT MIGRATION:

FACTORS AND MORE

FIVE KEY RATING CONSIDERATIONS THAT DRIVE CREDIT RATING OFTHE HOTELS COMPANIES:

1. PROMOTERS/MANAGEMENT ANALYSIS

2. BUSINESS RISK ANALYSIS

3. INDUSTRY RISK ANALYSIS

4. FINANCIAL RISK ANALYSIS

5. RISK ASSOCIATED WITH ONGOING/UPCOMING PROJECTS

PROMOTERS/ MANAGEMENT ANALYSIS

1. REPUTATION & EXPERIENCE OF THE PROMOTER

2. FINANCIAL STRENGTH AND COMMITMENT OF THE PROMOTER

BUSINESS RISK ANALYSIS

1. EVALUATION OF BUSINESS MODEL

2. BRAND STRENGTH

3. HOTEL SEGMENTS

4. SCALE, DIVERSIFICATION AND COVERAGE

5. OPERATIONAL PERFORMANCE

6. LOCATION ANALYSIS

FINANCIAL PARAMETERS

1. REVENUES & PROFITABILITY

2. LEVERAGE & DEBT SERVICING

3.REFINANCING/RESTRUCTURING RISK

PROJECT RISK

INDUSTRY RISK

CREDIT PROFILE OF BIGGER

PLAYERS:

NOT CREDITWORTHY!

Hospitality Unit Credit Rating

Asian Hotels (North) Limited

CARE BBB

Golden Jubilee Hotels Limited

CARE D

Ascent Hotels Private Limited

CARE C

Gayatri Hotels and Theatres Private Limited

CARE D

N M Royale County CRISIL B

ITC ICRA A1+

Oriental Hotels ICRA A1+

Narayani Hotels And Resorts Limited

CRISIL D

Mapple Hotels Ind B+

Dhanlakshmi Hotels Ind BB-

Mansingh Hotels Ind BBB-

Intercontinental hotels (Ind)

Fitch BBB-

Hospitality Unit Credit Rating

Adarsh Realty & Hotels Private Limited

ICRA BB

Adityapur City Centre Hotel Private Limited

ICRA B+

Belaire Hotels Private Limited

ICRA BB

D R Hotels and Resorts ICRA B -

GMR Hotels and Resorts Limited

ICRA BBB

Kaynes Hotels Private Limited

ICRA C+

Lemon Tree Hotels Private Limited

ICRA BBB +

Rockland Hotels Limited ICRAB+

Triton Hotels and Resorts Private Limited

ICRA BBB-

HOTEL INDUSTRY CONTINUES TO FACE A MUTED REVENUE GROWTH, STAGNATED PROFITABILITY AND ELEVATED CREDIT RISK IN FY15, DRIVEN BY LOWER DEMAND GROWTH AND SUPPLY-SIDE PRESSURES, AN INDIA RATINGS & RESEARCH (IND-RA) REPORT SAID.

THE AGENCY EXPECTS MAJOR HOTEL COMPANIES TO REGISTER REVENUE GROWTH OF 5 TO 10 PERCENT IN FY15 DUE TO SLUGGISH DEMAND IN THE NEAR TERM. THIS IS IN LINE WITH THE TREND IN 9MFY14 AND FY13, WHERE WEAK MACROECONOMIC CONDITIONS LED TO MUTED GROWTH IN BUSINESS TRAVELLERS AND FOREIGN TOURIST ARRIVALS.

CORPORATE TRAVELLERS ARE KEY DEMAND DRIVERS FOR HOTELS AS THEY ACCOUNT FOR AROUND 60 PERCENT OF GUESTS.

INDIA RATINGS SAYS THAT THE REVENUE GROWTH OF INDIAN HOTEL COMPANIES IS LIKELY TO REMAIN MUTED IN THE NEAR TERM DUE TO CONTINUED SLUGGISHNESS IN CORPORATE SPENDING AMID WEAK ECONOMIC GROWTH. THIS IS BECAUSE AROUND TWO-THIRDS OF THE GUESTS IN HOTELS (EXCEPT HERITAGE HOTELS) ARE CORPORATE/BUSINESS TRAVELLERS.

AMONG HOTEL SEGMENTS, PREMIUM HOTELS ARE MORE NEGATIVELY IMPACTED BY A GLOBAL ECONOMIC DOWNTURN AS THEY DEPEND MORE ON FOREIGN TRAVELLERS, PARTICULARLY BUSINESS TRAVELLERS. DURING FY08-FY12, HIGH-END HOTEL COMPANIES WITNESSED SLOW GROWTH DUE TO A SLOWDOWN IN KEY FOREIGN MARKETS AND COST PRESSURES ON CORPORATES, TRIGGERING A CUT IN THEIR TRAVEL SPENDING. WEAK DEMAND LIMITED THE ABILITY OF THESE HOTEL COMPANIES TO PASS ON COST INCREASES, WITH WAGES AND POWER COSTS INCREASING OVER 1.5X DURING THE SAME PERIOD.

HOWEVER, INCREMENTAL LENDING TO THE SECTOR DECLINED IN FY12 TO INR35.89BN FROM INR83.19BN IN FY11 INDICATING A DROP IN SECTOR CAPEX DURING THE YEAR. THE DECLINE IN LENDING COULD BE LARGELY ATTRIBUTED TO THE DEFERRING OF CAPEX PLANS BY CORPORATES PRIMARILY DUE TO AN INCREASE IN BORROWING COSTS IN INDIA AMID THE PREVAILING ECONOMIC SLOWDOWN. INDIA RATINGS EXPECTS THIS TREND TO CONTINUE IN THE NEAR TERM AS THE INDIAN HOSPITALITY SECTOR WILL CONTINUE TO DELAY CAPEX PLANS AMID HIGH INTEREST RATES AND SUBDUED DEMAND PROSPECTS.LOCAL DEMAND-SUPPLY DYNAMICS IS LIKELY TO BE THE KEY FOR EXECUTING UPCOMING PROJECTS.. HOWEVER, MOST MARKETS ARE LIKELY TO CONTINUE SEEING CAPACITY ADDITION IN THE LOWER/BUDGET SEGMENT CATEGORY DUE TO HIGHER DEMAND COMPARED WITH THAT OF THE HIGH-END CATEGORY.