The Indian Hotel industry is going through its worst performance phase ever following the economic slowdown, the outbreak of Covid-19 pandemic in Q4 FY2020 and subsequent lockdowns. These have led to significant decline in occupancy and average room rates (ARR) as also revenues, operating margins and credit metrics. As per ICRA’s detailed sector report, the pan- India average occupancy during FY2020 declined sharply and the same is abysmally low in YTD FY2021. Occupancy in FY2020 was down to around 65% from around 69% in FY2019; and in 2M FY2020, it drastically declined at 8-12%.
Occupancy declined in all the key markets in Q4 FY2020 and YTD FY2021, impacted by the travel restrictions and lockdowns to contain the virus spread. Only one-third of the hotels were open in April and May 2020, with demand coming mainly from medical/other frontline workers, stranded travelers and work-from-hotel guests. Given the grim scenario, ICRA expects the pan-India occupancy to hit a multi-year low in FY2021 at 35-40% (from 65% in FY’20 & 69% in FY’19) and consequently result in sharp decline in RevPAR in FY2021. There will also be adverse impact on other key industry parameters, consequently.
Giving more insights, Pavethra Ponniah, VP and Sector Head, ICRA, says, “ICRA expects the FY2021 RevPAR to decline by ~50% across markets. The pandemic outbreak means recovery will be prolonged by atleast 3-4 quarters with normalcy around two years away. While the consensus on a sharp correction in RevPAR holds true, the extent of decline is contingent on timelines tied to the pandemic, and hence can witness revision in the coming months. There are bound to be long-lasting changes to demand pattern and the situation is still evolving. During this phase maintaining liquidity will be critical as credit profile of most players is likely to weaken and defaults/debt distress will rise.”
Coming to the key demand drivers, CY2020 will be the worst year for International Tourist Arrivals (ITA)s; the same is unlikely to recover before CY2021. Progressive M-o-M and Y-o-Y decline in ITAs were witnessed in Q1 CY2020. While ITAs grew by 2% in January 2020, they were down by 9% and 57% respectively on Y-o-Y basis in February and March 2020. The WTTC expects a decline of 58-78% in ITAs for CY2020 with demand revival linked to the speed of containment, duration of travel restrictions/border shutdown; and the depth of economic recession.
The pandemic induced decline will be far steeper than previous crises. With travel restrictions imposed globally for the first time, the Indian market has witnessed a noticeable decline of Foreign Tourist Arrivals (FTAs) since February 2020; and is expected to remain at a multi-year low in CY2020. Reduced discretionary travel amid health concerns and the containment measures by Governments globally and in India resulted in a sharp drop in travel - both the business and leisure travel segment since March 2020. There was a 23.4% Y-o-Y decline in FTAs (ex-Bangladesh) to India in Q1 CY2020. There have been no FTAs in April, May and June as international commercial flight operations remain suspended since March 22, 2020.
As for the recovery, lower-end business travel will recover first and group business and MICE segment will be the last to recover as cancellations will continue well into the end of 2020. Further, drive-to destinations will recover earlier than long-haul markets which will take 12-18 months to recover, depending on a cure to vaccine.
Regarding supply of incremental premium category hotel rooms, the pre-covid supply pipeline growth was estimated at CAGR of 4.5% (FY2021-2024); the estimated rooms supply at around 90,500 in FY2020 is likely to increase by ~17,500 rooms to 108,000 in FY2024. The estimated growth is significantly lower than 17.2% growth after the global financial crisis (FY2010-FY2013). The announced incremental supply was primarily in Mumbai, NCR and Bengaluru. Atleast 20% of the pre-Covid announced supply was from real estate majors. Post-covid, real estate players into hospitality assets could defer supply as their core business is witnessing tight liquidity. Also, corporate houses could defer supply by withholding their surplus funds into hotel business. Repurposing of hotels for alternative uses like co-living, senior-housing and office spaces will impact supply. ICRA expects deferment of incremental supply by at least a year whereas those projects that are in initial stages of execution could be shelved.
Financially, Q4 FY2020 was muted and impacted by the pandemic; the industry’s performance remained subdued in FY2020. Factors like social distancing norms lead to cancellation of various events, deferred travel and ultimately complete shutdown of operations following the nation-wide lockdown since March 24, 2020. Revenues in Q4 FY2020 fell by ~14% leading to weak fixed cost absorption and margin moderation. The lower accruals resulted in moderation in interest coverage ratio despite recent equity funded debt reduction measures by some hotel groups. Interest coverage metrics came down from 4.4x in Q4 FY2019 to 2.9x in Q4 FY2020.
The industry is expected to witness over 90% revenue contraction during Q1 FY2021 leading to severe cash bleed. Companies are undertaking several cost control measures like head count reduction, salary cuts, and deferring several costs; and variabilising others like maintenance contracts, lease payments, etc. Going forward, FY2021 revenues and margins are expected to witness sharp decline and the industry will take over two years to reach pre-covid revenue levels. Operating revenues are estimated to decline~56-57% in FY2021. The operating margins are expected to decline from ~21.5% in FY2020 to 12.8% and the NPM to a steep loss.
ICRA’s hotel industry downgrades exceeded upgrades in FY2020. Further, the pace of downgrades is likely to increase significantly in FY2021. Significant deterioration in coverage metrics is expected in FY2021 and FY2022; RoCE will remain at sub cost of capital levels over the medium term, until 2024. TD/OPBDITA is estimated to rise from 3.8 times in FY2020 to 14.6 times in FY2021 while OPBDITA/Interest is estimated to fall from 2.4 to 0.6 times respectively. ROCE is expected to fall from 7.3% in FY2019 to -2.5% in FY2021. Debt coverage metrics will sharply deteriorate in FY2021 owing to weak profits, high interest cost and moderate debt reduction, given the fact that large number of companies has opted for moratorium. About 51% of ICRA’s hotel portfolio has a negative outlook as of June 15, 2020.
As for the outlook, CY2020 is likely to be catastrophic for the industry due to prevailing circumstances and recovery being contingent upon a Covid-19 vaccine and overall economic revival. Low demand will result in a large number of hotels staying shut in CY2020. The short-term demand from quarantine traffic/medics will sustain hotels. Short-haul and business traffic will likely commence before other segments. There is potential from diversion of outbound travel inside India. Group Booking / MICE cancellations are being seen throughout 2020; this segment could take the longest to recover. Recession will result in sharp cut in discretionary spend and consequently leisure travel. Part of business travel could also turn virtual permanently However, the deferred supply pipeline growth could support the recovery when it starts.
Adds Vinutaa. S, AVP, ICRA Limited, “Depending on revival in business sentiment and pandemic control, market wise, demand in Mumbai market is expected to pick up sharply once business and other forms of travel commence. NCR too is expected to be one of the better performing markets occupancy wise in FY2021. Hyderabad will also recover faster.”