Low supply pipeline to support operating metrics improvement

The Indian hospitality industry has witnessed faster-than-expected ramp up post-Covid-2.0, beginning July 2021, with occupancy of over 50 per cent in October 2021. The Covid-19-related demand, which was prevalent from mid-April to mid-June, waned from July and we are witnessing real demand pickup. This is because of easing restrictions, high pace of vaccination and pent-up demand which has resulted in leisure travel within the country. Given the relatively healthy pace of vaccination, the RBI consumer confidence index also showed an uptick. Domestic business travel has started picking up, mainly to project sites/manufacturing locations from specific sectors. The recovery has been at a sharper pace post-Covid-2.0 compared to last year’s lockdown. Further, travel during the festive season has acted as a key demand booster for the industry in Q3 FY2022. In view of rising demand and reduction in Covid19 cases, domestic flights have been allowed to operate at 100 per cent capacity from October 18, 2021, for the first time since March 2020.

The demand upswing has resulted in pickup in occupancies as well as ARRs. In ICRA’s view, some of the premium hotels chains, especially at leisure destinations, have even witnessed ARRs reach pre-Covid19 levels. However, on a pan-India basis, ARRs remain at a 20-25 per cent discount to pre-Covid-19 levels as international and business-oriented traffic is yet to come back in a meaningful manner. The situation is evolving, and the sustenance of demand will depend on efficacy of vaccines and a further Covid19 wave.

While international travel to and from India has been restricted to the special flights operated under Air Bubble arrangements currently, in view of the rising demand and reduction in Covid19 cases, the Indian Government had announced that fully vaccinated foreign tourists would be allowed to enter the country from December 15, 2021, for the first time since March 2020. At present, this decision is being reviewed, with the discovery of Omicron mutant of the Covid19 virus and subsequent infections. Meaningful recovery in international tourist arrivals into India is, at least, a few quarters away. There could be a delay in international tourist arrivals globally as well due to Omicron infections.   

The demand recovery pattern has been different as compared to other crises, with properties affiliated with strong brands and in the luxury segment standing to benefit as trust and safety are paramount. Cities like Shimla, Goa, Coorg, Jaipur and Agra have been the key beneficiaries. There is interest in ecofriendly resorts, wildlife tourism and smaller hotels/ BnBs at leisure destinations.

While the long-term potential led to pick-up in supply announcements in the 12-15 months pre-Covid19, the tight liquidity and uncertainty in demand saw construction activity getting pushing back in FY2021 and the early part of FY2022. Compared to the previous down-cycle 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 largely being in gateway cities and leisure markets. This will facilitate an upcycle as demand improves over the medium term, and supply lags demand. Even pre-Covid19, the supply pipeline was significantly lower than the FY2009-13 period and with projects in initial stages at the start of Covid-19 cancelled/ shelved by a few quarters, the supply pipeline is currently low.

Hotels are capital intensive businesses and the financial stress from Covid19 will result in consolidation in the industry over the medium-term. Smaller hoteliers will be interested in tying up with larger brands to boost occupancy and this will result in significant opportunities for hotel operators. Further, rebranding and upscaling in the midscale and upscale segments will add to organised supply in the sub-five-star category. Another interesting trend we are witnessing now is landowners wanting to build hotels at leisure destinations, witnessing drive-to leisure as a segment that will sustain for longer than just Covid19.

Hoteliers have undertaken various cost-saving initiatives such as redeployments/ reskilling, centralisation and automation of functions, outsourcing of non-core activities and optimising power costs, among others. The staff-to-room ratio remains significantly lower than pre-Covid19 levels, with the number going to below 1x for some companies. As a result of sustenance of some cost-saving measures, the break-even is expected to reduce and hotels are likely to report pre-Covid19 margins at 85-90 per cent of revenues going forward. The improvement in profit margins will also  improve income for operators compared to pre-Covid19 levels.

In FY2021, the sector received funding support through the RBI moratorium and the Emergency Credit Line Guarantee Scheme (ECLGS). Though a significant number of companies had applied for restructuring before the ECLGS announcement, the actual number of restructuring cases was minimal. Some companies also raised funding through equity and debt tie-ups before ECLGS announcement. We expect further equity fund raising/ asset monetisation to support capital structure improvement for the industry going forward.