Being light on assets gives hotel chains a lift at the bottom line
Hotel chains in India have focused on the asset-light model over the past decade to drive profitability. But has the strategy delivered results?
An analysis of the financials over the past eight years, which typically forms the industry cycle for hotels, reveals that the listed large and medium-sized hotel companies reported better profitability during the period, underscoring the effectiveness of having a lighter balance sheet.
In an asset-light model, instead of owning properties, hotel companies adopt the franchise route thereby reducing capital investment.
Between FY15 and FY23, the average operating margin before depreciation and amortisation (Ebitda margin) of the sample hotel companies improved to 34.6% from 17.6%. The share of rooms based on management contract (asset-light model) during the period increased to 40% from around 15%.
Hotels were also able to streamline costs over the past few years including employee expenses, corporate overheads and other operating costs, which also supported the margin performance.
Travel trends such as weekend getaways, road trips, staycation (vacation close to home), workation (leisure trip which includes work as an add-on) and bleisure (business trip extended to leisure trip) have boosted leisure travel in the past two years.
This has provided additional sources of revenue for hotels.
Among hotel companies, Indian Hotels, Lemon Tree Hotels and Chalet Hotels have relatively higher growth in revenue than their peers. Their revenues grew by 55-91% in FY23.
