Consumer

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Chest-thumping official propaganda doesn't often yield good investment ideas. But make an exception for the Indian government's claim that its visa-on-arrival program saw a 1,987.9 percent jump in October from a year earlier.

It's no idle boast. With New Delhi deciding to give people of 113 countries access to its online visa application system, there has been a 12-fold jump this year in visitors seeking to bypass the Indian embassies' notoriously slow travel authorization regime.

Surely, those 258,000 who got their e-tourist visas for India in 2015 have lodged somewhere? And with the rupee down 33 percent against the U.S. dollar since August 2011, that somewhere might have been a nice four- or five-star hotel instead of a backpacker hostel or cramped Airbnb apartment?

Taj Gets Busy
Indian Hotels, operator of the Taj brand, reported strong quarterly results

The hunch checks out. Indian Hotels, the country's largest operator, quadrupled its operating profit in the September quarter. Slightly smaller rival EIH swung into the black from a net loss in the year-ago period. For the industry as a whole, the average occupancy at premium properties has risen to 60-plus percent. Room rates are firming up as well. 

And yet, hotel stocks continue to trail the benchmark Sensex. Based on analysts' current estimates of future sales revenue and cash flow per share, Indian travel and leisure stocks are more expensive than their counterparts in Singapore, but cheap versus Chinese hoteliers.

Check-In, Please
India's hotel stocks underperform the index

One reason investors aren't exactly piling into India's hotels is their heavy indebtedness. The country's 57 publicly traded hotel groups have combined net debt of $3.64 billion. That's almost four years' worth of operating profit, compared with the global average of less than three. For the more egregious offenders such as Hotel Leela Venture, debt is almost 35 times annual earnings before interest, tax, depreciation and amortization, according to Bloomberg data. Leela, too, saw a reduction in its third-quarter loss, though that's because it's stopped recognizing interest on the debt its lenders have sold to asset reconstruction companies. 

But all this is yesterday's news, for which at least part of the blame rests with Jim O'Neill. When the then-Goldman Sachs chief economist coined the shorthand BRIC to refer to Brazil, Russia, India and China in 2001, there were fewer decent hotel rooms in all of Mumbai than at one biggish Las Vegas casino.

As BRIC hysteria caught on, and demand for business travel to and within India surged, local hotel groups started borrowing and investing like crazy. But then, somewhere in 2012, a bone-crunching slowdown arrived. First, the leverage started to look onerous. Then it became something that could no longer be swept under even the hotels' industrial-strength carpets. Investor sentiment soured.

That gloom has now passed. Economic growth is still flagging, but it appears the more Indian Prime Minister Narendra Modi travels overseas, the more traffic he helps generate in the other direction. Besides, it's great for shareholders that India's hoteliers are too scarred by their debt misadventures to contemplate hasty expansion. Groups such as EIH, which operates the Oberoi franchise, are still shrinking their balance sheets.

Still Shrinking
EIH, operator of the luxury Oberoi chain, has seen fixed assets fall

That means room rates and occupancy will get pushed to the limit -- just as they did in 2007. Better still, as their profitability improves, the hotels will invest in online booking systems. The 10 percent to 12 percent of room tariffs that are currently being shared with intermediaries would fall as the desperate quest to put heads on pillows ends. 

The ultimate kicker for investors might be consolidation. Marriott's $12.2 billion purchase of Starwood Hotels may be the blueprint of how traditional hoteliers will hold their own against Airbnb. Given the debt overhang, buyouts would make immense sense.

 Until then, here's a tip: If you do manage to get that e-visa for India but your secretary can't get you a room, don't be annoyed. Check out the share prices of Indian hotel chains instead. They're more than ready for investors to check in.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net