Hotel industry demand has recovered at a faster pace after Covid 2.0 compared to last year’s lockdown, aided by the easing of restrictions in the second quarter of fiscal 2022. The partial lockdown as well as travel restrictions in many states in April and May 2021 after the onset of Covid 2.0 led the ICRA sample of companies to report a 56% drop in revenue on a QoQ basis, according to estimates by the ‘rating agency. However, revenue is expected to improve 85-90% sequentially in the second quarter of fiscal 2022.
The occupancy rate has increased, with the occupancy rate of the Pan-Indian high-end hotels on August 21 ranging from 44 to 46%. For 5M FY2022, the same proportion is estimated at ~ 32-34% (against ~ 13-15% in 5M FY2021) against ~ 46-48% in Q4 FY2021. Pan-Indian ARRs are estimated at ~ Rs. 3,850 to 3,950 for 5M for FY 2022 and still remain at a 25-30% discount from pre-Covid levels, although some high-end hotels and leisure destinations have even seen ARRs return at pre-Covid levels from August 21 to September 21. . Travel during the holiday season will act as a key demand driver for the industry in the third quarter of fiscal 2022.
Vinutaa S, Assistant Vice President and Head of Sector, ICRA, said: “As the first few months have been affected, the industry has grown faster than expected in the second quarter of fiscal 2021, in due to weaker restrictions, a high vaccination rate and pent-up demand, resulting in a journey of revenge. Demand in recent months has come from vacations, weddings, and travel to recreational destinations within driving distance, as well as special purpose groups. There’s the new cookie trend (which runs from a resort town) picking up. The collection of business trips was mainly carried out at project sites / manufacturing sites in specific sectors. Demand related to Covid, which prevailed from mid-April to mid-June, declined from July and we are seeing a recovery in real demand. The situation is evolving and maintaining demand will depend on the effectiveness of vaccines and a possible third wave of Covid. The industry is currently cautiously optimistic.
Most markets reported over 50% occupancy as of July 21 and August 21, key markets – Jaipur, Goa, Delhi, Mumbai and Hyderabad posted healthy occupancy rates while Bangalore and Pune were in the dragged. ARRs at leisure destinations were above pre-Covid levels in July-21 and August-21. Going forward, ARRs will depend on continued demand.
The model of demand recovery is different from other crises, with properties with strong affiliate brands and in the luxury segment expected to benefit as trust and security are paramount. In-car entertainment, stays, MICE / social weddings, and special purpose groups are expected to generate revenue for hotels at least over the next year or so. International traffic arrivals will take time to pick up and in the meantime demand will be supported by domestic travel. Hotels / cities reliant on Business Travel / Foreign Tourist Arrivals (FTAs) will also take a considerable time to recover.
On the supply side, in the immediate future, temporary shutdowns are possible in the affected regions, if there is a third wave. Acquisitions and industry consolidation are the way forward and rebranding in the mid-range and high-end segments will add to the share of the organized offering. In the medium term, part of the pre-Covid offer could be permanently shelved, while new properties could emerge in leisure destinations.
Vinutaa, added: “The hospitality industry is expected to generate at least 45-50% of pre-Covid revenue in fiscal 2022. Continued operating profits in the current fiscal year will be fostered by the ‘improving operating leverage and maintaining some of the cost optimization measures undertaken during the previous fiscal year. However, pre-Covid revenues and profits are only likely by FY 2024. Due to the maintenance of certain cost saving measures, the breakeven point is expected to decrease and hotels are expected to report pre-Covid margins. 85 to 90% of income in the future. Nevertheless, the situation is still evolving and as the estimates depend on the delays linked to the pandemic. “
Moratorium and ECLGS provided much needed financial support during Covid-19. About 70% of the entities in the ICRA hotel portfolio benefited from a moratorium during the first wave, although this is only 39% of the rated debt. Some companies also raised funds through equity and debt reconciliations ahead of the ECGLS announcement. The industry has raised around Rs. 660 crore of equity in FY2021 and has announced Rs. 3,300 crore of capitalization / fundraising plans in FY 2022. ICRA’s expects further equity fundraising / asset monetization to support improved capital structure in the future. However, debt measures are only expected to return to pre-Covid levels in the medium term, while the RoCE is expected to remain below the cost of capital at least for the next few years.
ICRA continues to have a negative view of the Indian hospitality industry, as the continued recovery in demand in recent months remains to be seen. A potential third wave and its impact on travel and hotel occupancy cannot be ruled out. In addition, RevPAR is still significantly lower than pre-Covid levels. About 63 percent of ICRA’s ratings are also on a negative outlook at present.