India's Hospitality Sector Enters 'Golden Cycle' as Luxury Demand Outpaces Supply: Nomura

The brokerage expects the ADR growth cycle to continue over the medium term, driven by a widening demand-supply gap in the luxury segment. According to Hotelivate data cited in the report, supply in key business cities and the luxury hotel segment is projected to grow at only 6-7% annually due to high barriers to entry. In contrast, demand is likely to expand at a high-single to low-double-digit pace, supported by rising spending from affluent Indians and high-net-worth individuals, corporate travel in GCC-focused cities like Hyderabad, Bengaluru and Pune, and resilient foreign as well as strong domestic tourism. The depreciation of the rupee is also acting as a tailwind for ADR growth, making Indian hotels more attractive to international travellers.

On a global comparison, Indian hotels remain significantly under-penetrated. Nomura's analysis of hotel density across Asia-Pacific cities -- based on population, air traffic and Grade A office stock -- shows notable demand-supply gaps even in major metros such as Delhi NCR, Mumbai and Bengaluru. At the same time, while commercial office rentals in India are lower than in most other Asian cities, the gap in hotel ADRs is much narrower. This dynamic is translating into better yields for hotels compared to commercial office space, strengthening the investment case for the sector.

The report also highlights a divergence in returns across hotel segments and business models. Luxury assets maximise earnings per room, while budget hotels combine strong operating margins with lower capital intensity to deliver higher return on capital and equity. Upscale hotels, meanwhile, offer a more balanced risk-adjusted profile. Overall, Nomura estimates that hotel internal rates of return in India remain attractive at mid-teen levels, supported by operating leverage, improving demand-supply dynamics and pricing power. Even in weaker scenarios, IRRs are expected to hold up in the low-teens, suggesting relatively protected downside.

Valuations currently appear reasonable against historical cycles. Sector valuations expanded from 16x EV/EBITDA in FY22 to 23x in FY25 but have since cooled to 18x for FY27 and 15x for FY28 estimates. These levels are comparable to those seen during FY11-14, when the industry was in a downcycle. Current consensus estimates point to a 15% EBITDA compound annual growth rate over FY26-28, while most companies are maintaining comfortable net debt or net cash positions -- a sharp contrast to the highly leveraged balance sheets seen in earlier cycles.

Nomura expects the sector's growth to be anchored by luxury and corporate demand. The structural shortage of high-quality rooms, particularly in the luxury category, should sustain pricing power as urbanisation, business travel and inbound tourism continue to rise. The brokerage also notes that INR depreciation could further boost ADR growth by making India a more cost-effective destination for foreign visitors.

- ANI