Royal Orchid Hotels Ltd Management Discussions.

INDUSTRY STRUCTURE AND DEVELOPMENTS

ECONOMIC OUTLOOK

A year ago the global economy was projected to grow at 3.9 percent in 2018 and 2019 as economic activity was accelerating in almost all regions of the world. However, over the last year much has changed on the backdrop of tighter credit policies in China, the US China trade war and financial tightening alongside the normalization of monetary policy in the larger advanced economies. The global economy has significantly weakened and is facing a slowdown since the second half of 2018; this is expected to continue into the first half of 2019. Hence, the World Economic Outlook (WEO) has projected a decline in growth for 70 percent of the global economy. For 2018 the global growth declined to 3.6 percent as compare to close to 4.0 percent in 2017, for 2019 the global growth is projected to decline further to 3.3 percent.

As per the world economic outlook, post 2020 global growth will stabilize at around 3.5 percent boosted mainly by countries like India and China and their increasing weights in world income. India, supported by recovery of investment and robust local consumption along with a more expansionary stance of monetary policy and impetus from fiscal policy is projected to grow at 7.3 percent in 2019 and 7.5 percent in 2020.

Real GDP Projections
Year 2018 2019 2020
United States 2.9 2.3 1.9
Brazil 1.1 2.1 2.5
Japan 0.8 1.0 0.5
China 6.6 6.3 6.1
India 7.1 7.3 7.5
Asia 5.3 6.3 6.2

Global Tourism

In the year 2018, the Global Travel & Tourism sector grew by 3.9% contributing 8.8 trillion USD which equates to 10.4% of the global GDP. The sector outpaced overall economy growth for the eighth consecutive year. China and USA together accounted for 35.2% of the worlds total Travel & Tourism GDP and still are the largest Travel & Tourism economies in 2018 followed by Japan, Germany and the UK.

Domestic travel is the main driving force of the sector in major economies. The domestic tourism in the five largest Travel & Tourism economies of the world (USA, China, Japan, Germany and the UK) was accounted for at least 80% of the total Travel & Tourism spending. A strong growth in the sector is set to continue over the next decade, particularly across Asia where China will overtake the USA as the worlds largest Travel & Tourism economy. Nearly 67 million ‘new travelling households are expected in China, followed by India with 14 million and the USA with 9 million. China is expected to account for 35% of the worlds absolute change in Travel & Tourism GDP during 2018-29, followed by the USA (11%) and India (6%).

2018 2018 RANK 2018T&T CONTRI- BUTION TO GDP (US$BN) 2018T&T %OF COUNTRY GDP 2018 T&T GDP GROWTH (%) 2018-29 T&T GDP GROWTH CAGR % DOMESTIC SPEND, % SHARE OFTOTAL, 2018 I NTERNA- TIONAL SPEND, % SHARE OFTOTAL, 2018 LEISURE SPEND, % SHARE OF TOTAL, 2018 BUSINESS SPEND, %SHARE OF TOTAL, 2018
USA 1 1,595 7.80 2.20 2.60 81.20 18.80 71.30 28.70
China 2 1,509 11.00 7.30 6.50 85.80 14.20 81.40 18.60
Japan 3 368 7.40 3.60 1.70 82.50 17.50 68.50 31.50
Germany 4 345 8.60 1.20 1.60 85.20 14.80 83.10 16.90
UK 5 311 11.00 1.00 1.90 84.40 15.60 65.90 34.10
Italy 6 275 13.20 3.20 1.70 76.20 23.80 79.10 20.90
France 7 266 9.50 4.10 2.00 65.70 34.30 80.50 19.50
India 8 247 9.20 6.70 7.00 87.20 12.80 94.80 5.20
Spain 9 211 14.60 2.40 2.50 44.80 55.20 88.50 11.50
Mexico 10 209 17.20 2.40 3.20 85.20 14.80 94.10 5.60

Tourism in India

Tourism in India is growing rapidly and the world travel and tourism council expects India to become the worlds fourth largest travel and tourism economy in less than a decade India accounted for 6.7 percent of total worlds travel and tourism GDP in 2018; this is poised to more than double by 2029. The direct contribution of travel and tourism to Indias GDP is expected to rise by 7.1 percent per annum from 2018 to 2028. Total contribution of travel and tourism to employment is also expected to be at 8.4% of the total employment in India by 2028, this includes jobs that are directly and indirectly supported by the sector. The foreign exchange earning in India increased by 4.8 percent in 2018 on a year on year basis to US$ 28.59 billion, for January 2019 foreign exchange earnings recorded were US$ 2.55 billion. Also, the sectors contribution to capital investment is expected to grow at 6.7 percent per annum from 2018 to 2028. Indian tourism industry is poised for growth backed by robust demand, niche tourism products, geographical diversity and policy support. During 2018 foreign tourist arrivals in India grew by 5.2 percent year on year to 10.55 million. The growth in arrivals has been because of easy availability of the – visas and flexible government policies. As of December, 2018 the – tourist visa facility has been extended to citizens of 166 countries. The number of tourists arriving on the – tourist visa stood at 0.29 million in January 2019, depicting an increase of 21.10 percent year on year. The government of India has set a target of 20 million foreign tourist arrivals by 2020.

India offers geographical diversity, attractive beaches, 30 world heritage sites and 25 bio geographic zones. Moreover the country has a lot of niche tourism products to offer like medical, rural, heritage, religious and wellness tourism. The policy support offered has also been tremendous, like a five year tax holiday has been offered for two, three and four star category hotels located around UNESCO world heritage sites. Also under the Swadesh Darshan Scheme 15 thematic circuits in the country have been selected for development of tourism infrastructure.

Per capita GDP in India as of 2018 stands at US$ 2,134.75 and is expected to rise to US$ 3,273.85 by 2023. Rising income will lead to rise in domestic expenditure on tourism which will help enhance revenues from domestic tourism. Domestic travel revenues are expected to increase from US$ 186 billion in 2017 to US$ 405.8 billion by 2028.

Government Initiatives:

The government of India has taken several significant measures to promote tourism in India. From launching campaigns like Incredible India & Athithi Devo Bhava to development of destinations, circuits, mega projects as well as rural tourism infrastructure projects. Government initiatives like the – visa and m – visa are bound to give a boost to foreign tourist arrivals as well as medical tourism in India. The government initiative of allowing 100 percent FDI through automatic for the hotel and tourism sector has proved to be a bane for the sector. FDI inflows between April 2000 to December 2018 in the hotel and tourism sector have been to the tune of US$ 12 billion.

As per a FICCI report on inbound tourism below are few government initiatives to enhance tourism in India

A. Religious Tourism

• As per the PRASHAD Scheme, under which 25 cities of religious significance have been identified with the objective of holistic development of these destinations. As of December 2018, a total number of 24 projects had been sanctioned for an amount of INR 727.16 crore.

B. Culture & Heritage

• Under the Swadesh Darshan Scheme which was launched in 2014-15 an amount of INR 5,987.60 crore has been sanctioned by the Ministry across 74 projects till date to develop theme based tourist circuits. In February 2017 Government of India has started Aastha Circuit trains covering various religious places. It offers all inclusive tour packages on different itineraries of varying duration, decided by Indian Railway Catering and Tourism Corporation Ltd. (IRCTC). IRCTC also runs various other packages covering key religious destinations along with Buddhist circuit trains.

C. Nature-based Tourism

• Ministry of Tourism has identified several nature-based themes including Coastal, Desert, Eco, Himalayan, North East and Wildlife and sanctioned costs for various circuits under this theme

• Cost sanctioned towards various circuits under these themes are:

o Coastal: INR 895.98 Cr.

o Desert: INR 63.96 Cr. o Eco: INR 608.37 Cr.

o Himalayan: INR 668.95 Cr.

o North East: INR 676.22 Cr.

o Wildlife: INR 187.90 Cr.

Ministry of Environment, Forest and Climate Change has prepared an Eco-tourism policy which will work towards engaging local communities through mechanism to enrich local economy and promote sustainable use of indigenous material. The policy will enhance education and awareness about wildlife and habitat, and will encourage homestead-based hospitality enterprises for enhancing local livelihood.

D. Medical and Wellness Tourism

• The Government of India has introduced e- Medical Visa facility to simplify procedure for obtaining visa for tourists coming to India for medical purpose. Further e- FRRO scheme has been introduced for 27 visa related services (visa extension, conversion etc.)

• A National Medical and Wellness Tourism Board has been formed to promote Medical and Wellness Tourism in an organized manner.

• A film on Medical Tourism has been produced in collaboration with BBC for promotional activities.

• The Ministry of Tourism offers financial support for organizing Wellness and Medical Tourism Promotional shows, workshops, seminars, amongst others.

• Government has planned to set up facilitation counters at major airports of Mumbai, New Delhi, Kolkata, Chennai, Hyderabad and Bengaluru for tourists arriving on Medical Visas.

• Department of Commerce and Services Export Promotion Council (SEPC) has launched a Healthcare Portal as a single platform for medical travelers to provide comprehensive information on healthcare landscape of the country.

E. Adventure Tourism

• The ministry celebrated 2018 as the ‘Year of Adventure Tourism to promote the segment. A task force on adventure tourism was created with the Secretary (Tourism) as the Chair to resolve issues related to development and promotion of adventure tourism in the country. The Ministry, along with the Adventure Tour Operators Association of India (ATOAI), launched the ‘Indian Adventure Tourism Guidelines (Version 2.0) – 2018 on safety and quality norms for adventure tourism in India.

• Ministry of Tourism has established National Institute of Water Sports (NIWS) in Goa under the administrative control of the Indian Institute of Tourism and Travel Management which offers long and short-term courses on water sports.

• Adventure tourism is also a key theme under the Swadesh Darshan scheme. Eco-Adventure Circuit in Mizoram, adventure sports related infrastructure development in Uttarakhand, integrated development of new adventure tourism in Arunachal Pradesh under the North East India circuit are some of the projects being undertaken by the ministry.

F. MICE Tourism

• MICE Tourism is one among the niche tourism products identified by the Ministry of Tourism to develop India as a 365 days destination. India Convention Promotion Bureau (ICPB), set up by the Ministry, is engaged in promoting India as a venue for international congresses and conventions.

• The Department of Industrial Policy & Promotion, Ministry of Commerce and Industry is developing a world class convention center – India International Convention and Exhibition Centre (IICC) at Dwarka, New Delhi in an area of nearly 90-hectare. The total cost of the project is estimated to be around INR 25,700 Cr.

Hotel Sector

According to CARE Ratings Ltd, the industry is set to register an overall healthy growth in revenue on back of economic growth and consistently growing middle class along with increasing disposable income. Going forward, the major markets in the industry are expected to sustain the average room rates (ARRs) and grow at an average of 3.5-4.5% per annum. In FY18 the average occupancy was 66.6% and it is expected to inch up to an average of about 68-70% by the end of FY23. The hotel industry is expected to see an increase in room revenue at the rate of about 10-12% CAGR over the 5 years.

The existing room supply for the country grew by 7.5% y-o-y in FY18 totaling to 128,163 rooms (as of 31 March 2018). This considers the 8,944 new rooms that entered various markets during the year, as well an expansion of the existing properties.

In 11 Major cities of India, the overall Occupancy rates (ORs) increased by about 180 basis points (y-o-y) from 64.8% in FY17 to 66.6% during FY18 on back of increased demand from domestic and foreign travelers for business and leisure activities. The average room rates (ARRs) increased by only about 1.6% during the FY18 to Rs 5,759 per day due to stiff competition faced by players in the market. This increase in ORs and ARRs led to the all India RevPAR performance of major markets to record a growth of about 4.4% over the preceding fiscal and reach Rs 3,837 per day in FY18. This rate was last achieved in the year FY11 Occupancy rates for 5 star hotels witnessed the sharpest growth of about 240 basis points y-o-y during FY18. This was followed by 3 star hotels that registered a growth of about 200 basis points and 4 star hotels that registered a growth of 180 basis points during FY18 while the 5 star D hotels witnessed lower growth of only 110 basis points y-o-y. 2 star hotels however, witnessed a decline of about 10 basis points in their occupancy rates during the year.

Despite registering a decline in occupancy rates, 2 star hotels witnessed the maximum growth in average room rates increasing by about 8.5% y-o-y during FY18. This was followed by 3 star hotels that registered a growth of about 5% y-o-y in FY18. 4 star and 5 star hotels recorded a growth of 3% y-o-y each in average room rates. 5 star hotels, however, registered the lowest growth about 1.8% y-o-y during the year. This may be attributed to the gradual escalation of commercial activity in Tier II and Tier III cities as well as increased domestic travel.

All categories witnessed a y-o-y increase in RevPAR in FY18, with the 3 star category leading the pack, recording a 8.2% growth during the year. The improvement in RevPAR across all star categories can be attributed to both occupancy and average rate, with the exception of 2 star hotels.

Outlook

India possesses tremendous growth opportunity for the travel, tourism and hospitality sector. India is amongst the top ten countries (currently ranked eighth) in the world for its contribution of the travel and tourism sector to the world GDP. It is well placed to rise up to the third position in the next decade only behind China and US. Growth in the sector is expected to be fueled by the expanding base of Indian middle class and its growing per capita income. Government initiatives to promote India as a premier tourist destination will also help the sector grow. India has an advantage of rich cultural and geographical diversity and can attract tourists with varied needs. We at Royal Orchid Hotels have identified this opportunity to grow and have strengthen our position in the mid space hotel segment. Currently Royal Orchid Hotels is amongst the top 20 hotels in India in terms of room inventory. We foresee demand for rooms outpacing the supply and are ready to grab the opportunity. Royal Orchid Hotels is looking to grow at a rapid pace keeping in mind our asset light strategy. Our strategy of going asset light has taken us on the path of profitability with minimal increase in costs. Our robust infrastructure and strong brand recall gives us an edge in terms wining managed contracts. Moreover online booking portals have made life simpler for the millennial generation by allowing booking the entire trip on the go. The advancement of technology will only help us curb our cost of sales and ensure wider reach thus enabling higher occupancy. We understand the importance of digital platforms and are looking to make the best use of it. Along with leisure the company also aims to tap business travelers with presence in all major business centers across the country.

Discussion on Financial Performance with respect to Operational Performance

The details of the Financial Performance with respect to Operational Performance are detailed in notes to accounts for the financial year 2018-19. Further deatils of the internal controls and HR initiatives are given in Directors Report which forms a part of this Annual Report. Source: India Inbound Tourism – FICCI, World economic outlook (International Monetary Fund), IBEF, Travel & Tourism Global economic impact & trends 2019 - world Travel & Tourism Council