Hospitality industry revenues and margins expected to reach pre-Covid levels by FY2023

The Indian hospitality industry has witnessed healthy recovery from mid-February 2022 aided by leisure, transient demand, MICE/ weddings and gradual pickup in business travel. While demand was impacted in January 22 and for the first two weeks of February 22 because of the Omicron wave, normalcy has returned at a much faster pace compared to that during Covid 2.0. Further, the impact on hotel demand during the third wave was relatively shorter at about 4-5 weeks compared to 10-12 weeks in Covid 2.0. While the possibility of a fourth Covid wave cannot be ruled out, the increasing vaccination coverage and reducing disruption with each Covid19 wave provide comfort.

One trend that is clearly visible from the travellers is the increasing openness to travel and dine-out. There is willingness to undertake long-haul travel, as against drive-to travel being the preferred mode post Covid19. As for business travel, it is likely to pick up steadily over the next few months. Overall, demand for the Indian hotel industry is likely to be healthy for the next eight-12 months. 

The pan-India premium hotel occupancy is estimated to be ~40-42 per cent in FY2022, up from ~26-28 per cent in FY2021. This is likely to increase to 68-70 per cent in FY2023. The demand in the near term would be largely from domestic leisure travel, although there will be gradual recovery in business travel and FTAs. Pan-India premium hotel ARRs stood at ~Rs 4,200 – 4,400 in FY2022 and were at a 25-30 per cent discount to pre-Covid levels. However, for some high-end hotels and leisure destinations, ARRs have been higher than pre-Covid levels in the last few months. While there was significant YoY RevPAR increase in FY2022, it remained 50-55 per cent lower than pre-Covid levels and at ~60-65 per cent discount to the FY2009 peak. With significant improvement in demand, RevPARs are expected to improve to pre-Covid levels in FY2023, as against the earlier expectation of pre-Covid levels only by FY2024.

In terms of markets, leisure destinations continued to report strong occupancy and ARRs. Gateway locations like Mumbai and the NCR have also witnessed healthy improvement in occupancy in March 2022, although they were lagging by at least 20 per cent to pre-Covid levels in ARRs. Bengaluru and Pune were laggards because of muted business / IT sector travel. However, sequential improvement in occupancy is likely in these markets as well over the next few months. Pan-India ARRs are also likely to witness sequential improvement going forward, with opening up of the economy and increase in travel over the next few months.

Compared to the previous downcycle in FY2009 which saw untimely supply increases of over 15 per cent of the inventory at the bottom of the cycle in FY2009-2013, the current pipeline inventory is about 3-4 per cent for the period FY2022-FY2025 – with supply anticipated across markets. This will facilitate an upcycle, as demand improves over the medium term, and supply lags demand. 

The industry has reported ~50 per cent growth in revenues on a QoQ basis in Q3 FY2022. Owing to improved operating leverage and sustenance of some of the cost saving initiatives, the operating margins also jumped closer to pre-Covid levels. Despite the Omicron impact, Q4 FY2022 revenues and margins are expected to be better than Q2 FY2022. 

The hotel industry is expected to clock ~60 per cent of pre-Covid revenues in FY2022. Further, the industry is also likely to report operating profits in the current fiscal aided by improved operating leverage and sustenance of some of the cost-optimisation measures undertaken in FY2021. Notwithstanding the potential impact on demand with further Covid waves, if any, the industry is expected to return to pre-Covid levels, both in revenues and margins, in FY2023. Some smaller hotels / those dependent primarily on FTAs or business travel could be negative outliers. 

Financing dependence for the industry has always remained high. Lenders and investors have been cautious, especially after Covid19, and funding is predominantly based on promoter comfort. Debt metrics are expected to return to pre-Covid levels in FY2023, while RoCE is expected to remain sub cost of capital, at least for the next few years. There could also be further equity fund raising and asset monetisation, and this would support capital structure improvement for hotels going forward. The financial stress from Covid19 and preference for larger brands is also likely to result in some consolidation in the industry over the medium-term. 

AUTHOR BIO: Vinutaa S is Assistant Vice President & Sector Head - Corporate Ratings, ICRA Limited