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‘Hotel industry recovers faster than expected’: ICRA

The hotel industry demand has recovered at a sharper pace post Covid 2.0 compared to last year’s lockdown, aided by the easing of restrictions in Q2 FY2022. Partial lockdown as well as travel restrictions in many states in April and May 2021 post the onset of Covid 2.0 resulted in the ICRA sample of companies reporting a 56 per cent decline in revenues on a QoQ basis, in line with the ratings agency’s estimates. However, the revenues are expected to improve by 85-90 per cent sequentially in Q2 FY2022.

Occupancy has picked up, with the August-21 Pan-India premium hotel occupancy at 44-46 per cent. For 5M FY2022, the same is estimated to be ~32-34 per cent (up from ~13-15 per cent in 5M FY2021) vis-à-vis ~46-48 per cent in Q4 FY2021. The Pan-India ARRs are estimated at ~Rs. 3,850-3,950 for 5M FY2022 and still remain at a 25-30 per cent discount to pre-Covid levels, although some high-end hotels and leisure destinations have even seen ARRs return to pre-Covid levels in Aug-21/Sep-21. Travel during the festive season travel will act as a key demand booster for the industry in Q3 FY2022.

Vinutaa S, Assistant Vice President and Sector Head, ICRA said, “While the first few months were impacted, the industry witnessed faster-than-expected ramp up in Q2 FY2021, because of lower restrictions, high vaccination pace and pent-up demand, which resulted in revenge travel. Demand in the last few months has come from staycations, weddings and travel to driveable leisure destinations, and from special purpose groups. There is the new trend of biscations (which is working from a resort) that is picking up. Business travel pickup has been mainly to project sites/manufacturing locations from specific sectors. The Covid-related demand which was prevalent April mid to June mid, waned from July and we are seeing real demand pick up. The situation is evolving, and sustenance of demand will depend on efficacy of vaccines and a potential third Covid wave. The industry is currently cautiously optimistic.”

Most markets reported over 50 per cent occupancy in Jul-21 and Aug-21, the key markets - Jaipur, Goa, Delhi, Mumbai and Hyderabad displayed healthy occupancies whereas Bangalore and Pune lagged behind. The ARRs in leisure destinations were above pre-Covid levels in Jul-21 and Aug-21. Going forward, ARRs will be a function of sustenance of demand.

The demand recovery pattern has different from other crises, with properties with affiliated strong brands and in the luxury segment standing to benefit, as trust and safety are paramount. Drive-to leisure, staycations, social MICE/weddings and special purpose groups are expected to drive revenues for hotels for the next one year at least. International traffic arrivals will take time to pick-up and in the intervening period, demand will be supported by domestic travel. Hotels/cities dependent on business travel/foreign tourist arrivals (FTAs) will also take considerable time to recover.

In terms of supply, in the immediate term, temporary shutdowns are possible in affected regions, if there is a third wave. Acquisitions and industry consolidation are the way forward and rebranding in the midscale and upscale segments will add to share of organised supply. Over the medium term, a part of pre-Covid supply may be permanently shelved, while there could be new properties coming up in leisure destinations.

Vinutaa, added, “The hotel industry is expected to clock at least 45-50 per cent of pre-Covid revenues in FY2022. Further operating profits in the current fiscal will be aided by improved operating leverage and sustenance of some of the cost-optimization measures undertaken last fiscal. However, pre-Covid revenues and profits are likely only by FY2024. As a result of sustenance of some cost-saving measures, the breakeven is expected to reduce and hotels are likely to report pre-Covid margins of 85-90% of revenues going forward. Nevertheless, the situation is still evolving and as the estimates are contingent on timelines tied to the pandemic.”

Moratorium and ECLGS provided the much-needed financial support during Covid-19. About 70% entities in ICRA’s hospitality portfolio availed moratorium during the first wave, though it was only 39% of rated debt. Some companies also raised funding through equity and debt tie-ups before ECLGS announcement. The industry has raised about Rs. 660 crore of equity in FY2021 and has announced Rs. 3,300 crore of equity/fund raising plans in FY2022. ICRA expects further equity fund raising/asset monetization to support capital structure improvement going forward. However, debt metrics are expected to return to pre-Covid levels only over the medium term, while RoCE is expected to remain sub cost-of capital atleast for the next few years.

ICRA continues to have a negative outlook on the Indian hotel industry, as the sustenance of the demand pickup in the recent months remains to be seen. A potential third wave and its impact on travel and hotel occupancies cannot be ruled out. Further, the RevPAR is still significantly lower than pre-Covid levels. About 63 per cent of ICRA’s ratings are also on negative outlook currently.

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