Hotel sector leverage creeps up, RevPAR outlook strong for FY26: Ind-Ra
While occupancy rates are likely to be supported by business events and leisure travel, potential economic slowdowns could dampen them if trade wars were to prolong.
Hotels based out of Bengaluru, New Delhi, and Hyderabad have been the best performers, with Mumbai lagging behind due to tepid RevPAR growth. (Image: Freepik)
India Ratings and Research (Ind-Ra) expects the hotel sector’s revenue per available room (RevPAR) to grow in the range of 5% to 8% yoy in FY26, after showing muted growth in 1HFY26. While occupancy rates are likely to be supported by business events and leisure travel, potential economic slowdowns could dampen them if trade wars were to prolong.
The sector’s revenue growth in 1HFY26 was supported by growth in average room rates (ARR), while occupancies declined. Ind-Ra peer-set hotel companies had weighted average occupancy rates of 72% in 2QFY26, down 1.5% yoy. The agency expects supply from tier 1 players may improve 10%-12% annually in FY26, to keeping up with demand. However, given the strong balance sheets and asset-lite supply strategy, room additions are unlikely to substantially increase the leverage intensity.
“The hospitality sector saw a transient dip in occupancy in 1HFY26, due to geopolitical tensions and extended monsoons. Growth was predominantly in average daily rates, with majority of companies reporting a moderate decline in occupancy in 2QFY26, highlighting the pricing discipline. The 2HFY26 sector outlook remains improving, supported by festivities, holidays, and weddings. Balance sheet leverage has inched up to support ongoing capital expenditure plans and inorganic growth activities, but is less of a concern in the near term as the sector tailwinds are seemingly structural,” says Mahaveer Shankarlal Jain, Director, Corporate Ratings, Ind-Ra.
Ind-Ra has observed hotel operators’ peer-set revenue growth in 2QFY26 was largely driven by nearly 4% yoy rise in ARR while the occupancy dropped about 150bp yoy. The portfolio occupancy has been calculated by considering the total number of rooms available and the total number of rooms occupied for the peer-set. The ARR growth is attributed to strong pricing discipline and limited new supply in key urban markets, amid the supply taken out for renovation. However, four of the nine players considered for the study have shown a dip in the occupancy in 2QFY26, while eight of them reported a rise in ARR.
The operating performance was mixed across luxury, premium and mid-market categories, as such there is no clear distinction in the relative performance of these segments. Hotels based out of Bengaluru, New Delhi, and Hyderabad have been the best performers, with Mumbai lagging behind due to tepid RevPAR growth. The peer-set saw a stable RevPAR in 2QFY26, as the drop in occupancy was countered by the increase in ARR. The agency expects RevPAR growth in FY26 to be led by ARR with flat-to-modestly improving occupancies, given the new supply in core central business districts, addition of renovated rooms, and continued asset-light expansion in peripheral markets.
The total supply at end-September 2025 increased about 10% yoy. Renovation supply and a higher mix of premium and luxury supply are likely to be added in 2HFY26. Occupancy might be supported by a higher number of corporate & MICE events (meetings, incentives, conferences, and exhibitions), weddings, sustained momentum in domestic tourism, and penetration in Tier 2 cities. Foreign tourist arrivals in India remain below the pre-covid highs, with about 6.34 million visitors recorded till September 2025 compared to 9.95 million in 2024 and the 10.9 million peak in 2019, as per the Ministry of Tourism’s Monthly Tourism Statistics. However, the supply outlook portrays operators’ high confidence in market demand from diversified end-consumers.
The peer-set absolute EBITDA inched up 8% yoy in 2QFY26, due to both operational performance and new supply. This is despite renovation expenses and one-time operating overheads. Improved renovation supply should enable operating leverage benefit, while higher priced premium and luxury rooms could improve average daily rates. The leverage metrics has inched up on a yoy basis, despite growth in operational profits, amid elevated capex outflows. Ind-Ra expects a strong operational performance in 2HFY26 to moderate the elevated balance sheet leverage by end-FY26. The sector has also seen an increase in asset-light expansion strategies, such as management contracts and franchise models, which improves the financial flexibility.
There were minimal rating changes in Ind-Ra’s portfolio in 1HFY26, despite acquisition-led higher-than-expected leverage, due to a better-than expected operating performance. The agency expects a strong operating performance to keep the balance sheet leverage moderate in FY26, while the sector cyclical uptrend may plateau in the near term due to base effect. The Indian hotel sector continues to show healthy growth momentum, with overall stable occupancy, ARRs, and operating profits pointing to stable growth into FY26, despite the high base-effect following Covid years. However, the growth could moderate if macroeconomic uncertainties, such as global trade tensions, continue to weigh on corporate travel.
