India’s hospitality sector to grow 7-9% in FY25; 6-8% in FY26: ICRA

The Indian hospitality industry has experienced solid growth in recent years due to numerous factors, such as sustained domestic leisure travel, demand from meetings, incentives, conferences and exhibitions (MICE), including weddings, and business travel. The revenues of the hospitality sector are projected to rise further in the next fiscal, though margins are expected to remain flattish amid increase in costs.

The revenues of the Indian hospitality industry is expected to grow by 7-9% year-on-year (YoY) in the financial year 2024-25 and 6-8% YoY in FY26, over the high base of FY24, according to a latest report by ICRA.

“Demand is expected to remain strong across markets in Q4 FY25 and FY26 as underlying drivers remain healthy. Hotel-specific metrics would, however, depend on location, competition and other property-related dynamics,” says Vinutaa S, Vice President and Sector Head – Corporate Ratings, ICRA.

As per the report, pan-India premium hotel occupancy is seen improving to 72-74% in FY26 from 70-72% in FY25. The average room rates (ARRs) for premium hotels are projected to rise to ₹7,800-8,000 for full-year FY25 (up 8% YoY) and subsequently improve further to ₹8,000-8,400 in FY26.

“The ARRs are likely to witness healthy YoY increase in FY25 and FY26 across markets. This sharp rise in ARRs of premium hotels will result in spillover of demand to mid-scale hotels,” says Vinutaa.

She further says that domestic tourism would be the prime driver, with foreign tourist arrivals (FTA) improvement depending on the global macro-economic environment. “Mumbai and NCR, being gateway cities, are likely to report occupancy north of 75% for full-year FY25 and FY26, benefitting from transient passengers, business travellers and MICE events.”

ICRA anticipates this trend to continue over the next 9-12 months. Spiritual tourism and tier-II cities are expected to contribute meaningfully in FY26 as well. Domestic tourism has been the prime demand driver in YTD FY25 and is likely to remain so in the near term. Foreign tourist arrivals (FTA) are yet to recover to pre-Covid levels and the improvement would depend on the global macroeconomic environment.

As per the report, the demand outlook over the medium term remains healthy, supported by a confluence of factors, including improvement in infrastructure and air connectivity, favourable demographics, and anticipated growth in large-scale MICE events, with the opening of multiple new convention centres in the last few years, among others.

The report highlights that healthy demand amid relatively lower supply will lead to higher ARRs. Several hotels have also been undergoing renovation, refurbishment and upgradation in the last few quarters, and these are likely to support the ARRs further, going forward. Larger players would also benefit from revenues/share of profits generated from hotel expansions through management contracts and operating leases.

The agency opines that sustenance of a large part of the cost-rationalisation measures undertaken during the Covid period, along with operating leverage benefits, has resulted in the sharp expansion in margins compared to pre-Covid levels. The staff-to-room ratio remains 15-20% lower than the pre-Covid levels. Companies have increased their usage of renewable power while pass-through of the cost inflation and strict control on fixed cost increase have also supported  margins. Adding to it, asset-light expansions have been margin-accretive for larger hotel chains.

“The healthy demand uptick has resulted in a pick-up in supply announcements and commencement of deferred projects in the last 24-30 months. Several global brands have made their entry into India. However, supply, which is expected to grow at a CAGR of 4.5-5% at least until FY2026, would lag demand,” says Vinutaa.

She adds that compared to the downcycle in FY2009, which saw untimely supply increases of over 15% of the inventory at the bottom of the cycle during FY2009-2013, the current low inventory growth is expected to support the upcycle, as demand improves over the medium term.

“A large part of the new supply is through management contracts and operating leases. Land availability issues currently constrain supply addition in the premium micro-markets in metros and larger cities. The addition to premium hotel supply in these areas is largely on account of rebranding or property upgradation and the greenfield projects are largely in the suburbs,” explains Vinutaa.