Hotel industry recovers faster than expected post Covid 2.0: ICRA

Hotel industry recovers faster than expected post Covid 2.0: ICRA
Representation purpose only

The hotel industry demand has recovered at a speedier pace following Covid 2.0 compared to last year’s lockdown, supported by the lifting of restrictions in Q2 FY2022. Partial lockdown as well as travel restrictions in many states in April and May 2021 at the beginning of Covid 2.0 resulted in the ICRA sample of enterprises reporting a 56 percent reduction in revenues on a QoQ basis, in line with the ratings agency’s estimates. However, the sales are likely to grow by 85-90 percent sequentially in Q2 FY2022.

Occupancy has increased up, with the August-21 Pan-India premium hotel occupancy at 44-46%. For 5M FY2022, the same is predicted to be 32-34%t (up from 13-15% in 5M FY2021), vis-à-vis 46-48% 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% discount to pre-Covid levels, while some high-end hotels and leisure locations have even seen ARRs recover to pre-Covid levels in Aug-21/Sep-21. Travel during the festive season travel would operate as a key demand booster for the industry in Q3 FY2022.

Vinutaa S, assistant vice president and sector head, ICRA Limited, said, “While the first few months were impacted, the industry witnessed faster-than-expected ramp up in Q2 FY2021, because of lesser restrictions, high vaccination pace and pent-up demand, which culminated in vengeance travel. Staycations, weddings, and trips to drivable vacation spots, as well as group travel for specific purposes, have all increased demand in recent months. Biscations (working from a resort) are becoming increasingly popular as a vacation option. Project sites/manufacturing locations from specific industries have accounted for the majority of business travel pickups. The Covid-related demand which was prevalent April mid to June mid, diminished from July and we are seeing true demand come up. Vaccine effectiveness and the possibility of a third Covid wave will determine whether or not demand can be sustained. There is cautious optimism in the industry today."

Most markets recorded over 50% occupancy in Jul-21 and Aug-21, the important markets - Jaipur, Goa, Delhi, Mumbai and Hyderabad demonstrated high occupancies however Bangalore and Pune lagged behind. In July and August, the ARRs in vacation spots were higher than they were before the Covid era. ARRs will be determined in the future by the ability to meet demand.

As confidence and safety are crucial, the demand recovery pattern is different from earlier crises. Properties linked with strong brands and in the premium market stand to benefit. We expect that for the next year at the very least hotel revenues will be driven by leisure travel, staycations, social MICE/weddings, and special interest groups. After a slow start due to international arrivals, demand will be supported by domestic travel for the time being. Business travel/foreign tourist arrival (FTA)-dependent hotels and cities will also require some time to recover.

If there is a third wave, temporary supply shutdowns are possible in the impacted regions. Rebranding will increase the organised supply's market share in both the midscale and upmarket segments through acquisitions and industry mergers. Pre-Covid supplies may be shelved indefinitely, although new properties may pop up in vacation spots over the long run.

Pre-Covid sales are estimated to be clocked by the hotel industry at least 45-50% in FY2022. Improved operating leverage and the continuation of some of the cost-optimization strategies implemented last fiscal will help the company earn even more money this fiscal year. However, sales and profits prior to Covid would most likely not be realised until the FY2024. As long as certain cost-cutting initiatives are maintained, the breakeven point should be lowered, and hotels should see revenues of 85-90% of pre-Covid margins moving forward. However, the situation is still changing, and estimations are subject to changes due to the spread of the epidemic," Vinutaa concluded.

In Covid-19, Moratorium and ECLGS stepped up to the plate and helped out financially. During the first wave, around 70% of companies in ICRA's hospitality portfolio took advantage of the moratorium, despite the fact that only 39% of the rated debt was affected. Before the ECLGS announcement, some companies raised money through stock and debt tie-ups. In FY2021, the sector raised around Rs. 660 crore in equity and has stated FY2022 equity/fund raising ambitions of Rs. 3,300 crore. Going forward, ICRA expects more equity fund raising and asset monetization to help with capital structure reform. While RoCE is likely to remain below cost of capital for the foreseeable future, debt metrics are only expected to return to pre-Covid levels in the medium term.

ICRA continues to be pessimistic about the Indian hotel business due to the uncertainty surrounding the sustainability of the current increase in demand. There's always the possibility of a third wave, which would have significant effects on travel and hotel occupancy. Additionally, RevPAR is still much lower than it was pre-Covid. A total of 63% of ICRA's ratings have a negative outlook at the time of writing.