Hospitality remains one of the worst-hit sectors from the Covid-19 pandemic and the second wave has come at a time when hospitality industry was on its path to recovery. Since mid-April, hospitality industry has been affected by the pandemic related lockdowns/restrictions on mobility by various states and increased wariness to travel due to fear of infection contagion.

Consequently, recovery to pre-covid levels, says an ICRA report, has now been pushed back by 6-8 months from previous estimates. The revenue recovery to pre-Covid levels is currently expected by FY2024.

“The intensity of Covid 2.0 has been far steeper than the first and it has put a temporary brake on the industry’s recovery path. We expect a significant scale back in FY2022 pan-India RevPAR estimates to ~Rs. 1,300-Rs. 1,500, from an earlier estimated RevPAR of about Rs. 2,500. FY2022 RevPAR is likely to be at a 60-65 per cent discount to pre-Covid levels. Although this will be an improvement from the low base of FY2021, the pandemic timelines pose downside risks to the estimates. The situation is still evolving and remains contingent on the pace of vaccination, efficacy of vaccines, high infection rates and possibility of a third covid wave. We expect long road to recovery, with the revenue recovery to pre-covid levels expected only by FY2024. ICRA continues to maintain a negative credit outlook on the sector.”

Vinutaa S
Sector Head and Assistant Vice President
ICRA
  • The industry was impacted in Q1 FY2022 after two quarters of sequential recovery witnessed in Q3 FY2021 and Q4 FY2021 till mid-March 2021
  • Weak operating performance and part-funding of the losses through debt are likely to result in stretched coverage metrics for FY2022 as well
  • ICRA continues to maintain a negative credit outlook on the sector. Hospitality industry credit profile has weakened in the last 12-15 months and 74 per cent of the entities faced negative rating actions
  • Pan-India Occupancy and ARRs are expected to improve to pre-Covid levels by FY2024. The road to recovery is long, with the debt/OPBDITA of ICRA’s sample expected to surpass FY2020 levels (of 5.0x) by FY2024. The RoCE is expected to be sub cost of capital at least until FY2025, despite minimal capex

hospitality industry was impacted in Q1 FY2022 after two quarters of sequential recovery, witnessed in Q3 FY2021 and Q4 FY2021 till mid-March 2021. The pick-up in demand in H2 FY2021 was largely led by leisure travel, staycations, wedding MICE and higher F and B revenues. Some business travel in specific sectors also aided recovery.

ICRA’s sample reported operating profits (increasing on a QoQ basis) for the second consecutive quarter in Q4 FY2021, on the back of improved demand and better operating leverage, before the onset of Covid 2.0. With demand and occupancy declining severely in Q1 FY2022 (due to cancellation of several events, travel restrictions etc.), revenues are expected to witness a drop of 50-55 per cent on QoQ basis, although the decline would be lower than Q1 FY2021, which was marred by the pan-India complete lockdown.

Demand slowdown has significantly impacted Q1 FY2022 occupancy and ARRs, although it is better than Q1 FY2021 levels. As against a 10-12 per cent occupancy witnessed in Q1 FY2021, it was higher at 26-28 per cent in Q1 FY2022, with demand in May 2021 largely coming from quarantine business for mild-Covid positive patients, wherein the hotels entered into formal contracts with hospitals chains.

Pan-India ARR was at Rs. 3,600-3,700, about 8-10 per cent higher on YoY basis, although the demand slowdown has impacted ARRs since the onset of the pandemic. It is likely to remain significantly lower than pre-covid levels through FY2022, in the absence of adequate demand. Q1 FY2022 RevPAR too has been at a 65-70 per cent discount to pre-Covid levels and an ~80-85 per cent discount to the FY2009 peak.

Discounting in the market is inevitable with such a drastic fall in demand, and hence the recovery is expected to be occupancy driven. We also expect permanent closure of some smaller hotels and this will lead to consolidation in the near to medium term.

ICRA’s industry sample is expected to report operating losses in FY2022 as well, although it will be lower at low-single digit, compared to the ~23 per cent operating loss witnessed in FY2021. This will be supported by better operating leverage and sustenance in fixed cost saving initiatives undertaken in FY2021.

Hoteliers have cut costs significantly including redeployment of manpower, outsourcing of non-core activities, centralization of business functions and automation of certain processes. Some of these will be permanent and will aid in reduction of break-even levels. ICRA expects the operating losses in Q1 FY2022 is also expected to be lower relative to Q1 FY2021, in the range of 45-50 per cent.

Hoteliers have funded the losses in FY2021 through debt and promoter/investor capital. Recourse to the RBI provided moratorium on debt servicing as a part of its Covid relief package announced in March 2020 and availment of debt under ECLGS 2.0 scheme in November 2020 had supported the industry.

The announcement of the ECLGS 3.0 in the last week of March 2021, coming on the heels of second wave, is expected to further bolster the industry in meeting the operational and financial commitments in the medium term. The cash losses expected in FY2022 are likely to be funded through a combination of undrawn lines, incremental debt tie-ups, and equity from investors and promoters.

Adds Vinutaa S, “The debt levels rose in FY2021, owing to incremental borrowings for meeting financial and operational commitments and push-back of debt repayments because of availment of the RBI-provided moratorium. Given the second wave and a delayed recovery, ICRA expects the industry sample to report cash losses in FY2022 as well. A weak operating performance and part-funding of the losses through debt are likely to result in stretched coverage metrics for FY2022. The industry coverage metrics are expected to return to pre-covid levels only in FY2024. With recovery currently a few years away, the RoCE is expected to remain sub-cost of capital at least until FY2025, despite minimal industry capex over the same period.”

ICRA continues to have a negative credit outlook on the Indian hotel industry. The negative outlooks have been at an all-time high since the start of the pandemic. Only 31 per cent of the rated portfolio have stable outlook as of June 2021, compared to 92 per cent in stable outlook, a year and half back in Jan 2020.

Severe impact of the pandemic has also resulted in a sharp increase in downgrades as hotels closures and low occupancies led to deep losses. About 70 per cent entities in ICRA’s hospitality portfolio applied for the moratorium during the first wave.

Subsequently, although many companies had initially applied for restructuring, most of them withdrew their applications following the ECLGS 2.0 announcement in November 2020. About 65 per cent of ICRA’s rated debt was eligible for ECLGS 2.0, while about 32 per cent was eligible for ECLGS 3.0. A small portion was not eligible for the relief by virtue of being in delays as on the cut-off date.

Suggested Read: Healthcare infrastructure to benefit from new loan guarantee scheme and incremental allocation towards short-term Covid-19 preparedness: ICRA (indiaunicorn.com)

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