Moneycontrol Pro Panorama | India’s tourism sector uncorks the bubbly

The 'I Like My Suitcase' trend itself is all about unique experiences related to not just your suitcase, but also about what an entire trip may have entailed. Or how different people pack differently (Image: Canva)

Dear Reader,

Travel appears to be on the bucket list of just about everyone. As the party begins to ring in the new year, India’s travel and tourism sector is preparing for a growth spurt. A combination of aspirational domestic travellers, inbound tourists curious to explore the cultural heritage and scenic destinations and, the government's push to boost tourism industry are expected to see the industry grow at 20 per cent plus annually over the next five years. Very few sectors can come close to boasting these sort of growth numbers.

This swelling up of demand has kept the travel and hospitality sector in celebratory mode since the recovery from the pandemic. A recent media article cited Julia Simpson, CEO of the World Travel and Tourism Council as saying that the Indian tourism sector is expected to double in size to $523 billion in the next 10 years, underscoring this sector's importance to the economy. While the business opportunities are one side to it, it's also a key provider of employment. A white paper released by the Confederation of Indian Industry and EY stated that this sector is set “for a major transformation, projected to generate 61 lakh new jobs by 2034, with spending anticipated to increase by 1.2 times.”

As industry veterans point out, vacations and leisure travel are no longer considered a privilege of the elite or upper strata of society. The country’s airports are overflowing with travellers-business and leisure- and airlines are reporting 90 per cent capacity utilisation also marking a shift in favour of air travel from railways. If not for the financial woes of some airlines of which a few have closed operations, air travel numbers would have been higher. It's no wonder that a report by Jefferies on aviation states that India needs at least 12 more ‘+10mn passenger capacity’ airports to maintain +10 per cent demand compounded annual growth rate in the next decade. That's infrastructure investments that get created as a result of the travel bug that's bitten Indians.

And the euphoria of demand outstripping supply in the hotel sector is underscored by robust expansion plans announced by leading hotel chains. This article in today’s edition highlights that improving room rates and occupancies in hotels have enthused new entrants in the sector into tapping equity markets for funding expansion plans. Stocks of listed hotel companies have provided sweet returns for investors in the sector.

To be sure, domestic travel that came back with a vengeance post-COVID is here to stay. In addition, the Ministry of Tourism is expecting a 10 per cent growth in inbound tourism in 2024 over the previous year. Industry experts cite escalating conflicts in the Middle East, Ukraine-Russia and the shift of foreign tourists away from China in the COVID aftermath as key factors propelling India into the spotlight as an attractive destination for foreign travellers.

Yet, all is not hunky-dory. Per global tourism media articles, European countries such as Spain, France made a comeback as among the preferred destinations in 2023 for global tourists. A CRISIL Market Intelligence and Analytics report points out that destinations like Qatar, Dubai, Vietnam, and Sri Lanka are surpassing pre-COVID tourism levels, with FTAs rising by 47 per cent, 11 per cent, 4 per cent, and 0.2 per cent, respectively, in the first half of 2024.

Challenges of poor connectivity, infrastructure and maintenance particularly in and around the culturally rich and heritage sites, leaves much to be desired.

That said, big bucks are now backing this industry by way of private equity investments in India’s airports, hotels and related infrastructure. The government too will pour in money to support the sector, given the lure of foreign exchange earnings that accrue from inbound tourism.

For retail investors in equity markets, the listed travel and hospitality universe is widening as more companies hit the IPO trail. Also, stock prices of airline firms such as InterGlobe Aviation and hotel stocks such IHCL, EIH, Chalet and Lemon Tree have more than doubled over a year. More listings are likely. But remember that stocks in this sector have fallen prey to the industry’s cyclicality. Once capacity constraints are felt and profitability is healthy, investments begin in new capacity. The rush to add rooms then leads to a situation where excess capacity enters the system at which point room rates decline, affecting performance. While the surge in demand does raise hopes that there will be enough demand at healthy rates even if capacity expansion happens, much depends on how the economy is faring in that period. Therefore, investors who are boarding the travel and hospitality gravy train should remember to keep an eye on the warning signals along the way.

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