Hotel industry recovering faster than expected post-Covid 2.0: ICRA

According to ICRA Ltd, independent and professional investment information, and credit rating agency, the hospitality industry is likely to report operating profits in the current fiscal and to clock at least 45-50% of pre-Covid revenues in FY2022. But it’s all contingent on the efficacy of vaccines and a potential third Covid-19 wave, say the experts.

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% 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.

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Image: Shutterstock/solarbeamk.

Occupancy has picked up, with the August 2021 pan-India premium hotel occupancy at 44-46%. For 5M FY2022, the same is estimated to be ~32-34% (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, although some high-end hotels and leisure destinations have even seen ARRs return to pre-Covid levels in August/September 2021. Travel during the festive season travel will act as a key demand booster for the industry in Q3 FY2022.

Giving more insights, Vinutaa S, Assistant Vice President and Sector Head, ICRA Ltd, says, “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 biz-cations (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 mid-April to mid-June, 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% occupancy in July and August 2021. The key markets – Jaipur, Goa, Delhi, Mumbai, and Hyderabad displayed healthy occupancies whereas Bengaluru and Pune lagged behind. The ARRs in leisure destinations were above pre-Covid levels in July and August 2021. 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 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 the 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.

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Time to reset, restart and recover. Image: Shutterstock/Panchenko Vladimir.

“The hotel industry is expected to clock at least 45-50% 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-optimisation 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,” adds Vinutaa.

Moratorium and ECLGS provided the much-needed financial support during Covid-19. About 70% of 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 the 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 fundraising/asset monetisation 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 at least for the next few years.

Even so, 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% of ICRA’s ratings are also on a negative outlook currently.

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