Debt Can Fuel Growth In Hospitality Sector: IIM-I Study

Indore (Madhya Pradesh): A new study by researchers at the Indian Institute of Management (IIM) Indore has found that higher debt levels can significantly boost sales growth in India's hospitality and tourism (HT) sector, challenging the conventional belief that excessive borrowing invariably hampers business performance.

The study, co-authored by Prof Sujay Mukhoti and Prof Kousik Guhathakurta and published in the International Journal of Hospitality Management, examines how capital structure influences sales growth in Indian hospitality and tourism firms, offering practical insights for managers and policymakers.

Researchers analysed the financial data of 35 Indian hospitality and tourism firms — including hotels, restaurants, resorts and tourism companies — and compared them with 1,176 firms from other sectors over a nine-year period from 2012 to 2020.

The data was sourced from the CMIE Prowess database, with the study period ending before the Covid-19 pandemic to avoid distortions caused by the global health crisis.

Using a trans-dimensional Bayesian machine learning framework, the researchers found a clear difference between hospitality and non-hospitality businesses.

While hospitality firms continued to record stronger sales growth as leverage increased, firms in other sectors benefited only from moderate debt levels, with growth weakening once leverage became excessive.

The study suggests that hospitality businesses should view debt not only as a financial risk but also as a strategic tool for expansion.

Companies with leverage below 35.06% could accelerate sales growth by increasing debt financing, while firms with leverage above 65.52% recorded even stronger growth, although they must carefully balance the associated bankruptcy risks.

In contrast, the study advises non-hospitality firms to adopt a more cautious approach. It found that leverage supports sales growth only up to moderate levels, with the strongest gains occurring when leverage remains below 21.71%.

The researchers said the findings underscore the need for industry-specific financing strategies rather than relying on uniform financial rules.

They believe the study is among the first empirical investigations to directly examine how capital structure affects service market performance in Indian hospitality and tourism firms.

The study concludes that adaptive capital structure strategies tailored to industry characteristics can help businesses sustain long-term growth and strengthen competitiveness in India's rapidly expanding hospitality and tourism sector.