Operating metrics to return to pre-Covid levels in FY2023

Notwithstanding the potential impact on demand with further Covid waves, if any, ICRA expects the industry’s revenues and margins to return to pre-Covid levels in FY2023. The demand is expected to stem largely from domestic leisure/ transient travel, although recovery in business travel and Foreign Tourist Arrivals (FTAs) will also support occupancy. ICRA expects Pan-India premium hotel occupancy to be at 68-70 per cent for FY2023, while the ARR is expected to hover around Rs 5,600-5,800. The improved operating leverage along with sustenance of cost-optimisation measures will support margins and accruals for hotels.

The industry witnessed a healthy start to FY2023, with 60-62 per cent occupancy in premium hotels in H1 FY2023. It was up from ~40-42 per cent in FY2022 and closer to pre-Covid occupancy of 62-64 per cent in H1 FY2020. Pan-India ARR stood at ~Rs 4,800-5,000 in H1 FY2023 as against Rs 4,200-4,400 in FY2022. It still remains at a 10-12 per cent discount to pre-Covid levels on an average, although a few high-end hotels and leisure destinations witnessed ARRs spike to higher than pre-Covid levels. The demand recovery has been sharper than expected, and was aided by leisure, transient passengers, MICE/ weddings and pick-up in business/ diplomat travel and FTAs. Some cities also witnessed traffic from specific events in Q1 FY2023. While weddings/ social MICE have picked up in FY2022, corporate MICE picked up in the current year, with the opening up of the economy. While some part of it could be from pent-up demand, a majority of it is likely to sustain going forward. The logistical convenience and hygiene alertness are likely to favour hotels as far as weddings are concerned.  

Leisure destinations and gateway cities witnessed stellar occupancy in H1 FY2023. Mumbai and Delhi have consistently reported occupancy over 70 per cent since March 2022. Business travel markets like Bengaluru and Pune with a large part of the demand from service sectors have also picked up. Chennai and Hyderabad have benefitted from weddings/ social MICE and pickup in diplomat/ business travel. With improvement in demand and occupancy, ARRs have also witnessed sharp YoY increase in H1 FY2023. ARRs are likely to witness sequential improvement across markets in H2 FY2023. Although H1 FY2023 was among the best periods for the industry since the onset of Covid19 pandemic, the RevPAR remains 13-15 per cent lower than pre-Covid19 levels and at about 35-40 per cent discount to the FY2009 peak. For midscale hotels, the occupancy recovery has been slower, due to presence in Tier II markets.

ICRA expects debt metrics to go back to pre-Covid levels in FY2023 supported by better accruals. While some companies have already raised funds (predominantly by way of equity), more announcements on fund raising can also be expected for deleveraging. Nevertheless, RoCE is expected to remain a sub-cost of capital at least for the next four years.

The demand uptick has resulted in pickup in supply announcements and commencement of deferred projects in the last four-five months. However, the premium hotel supply pipeline is expected to grow only at a five-year compounded annual growth rate (CAGR) of 3.5-4 per cent, adding about 15,500 rooms to the Pan-India premium inventory of ~94,800 rooms across 12 key cities that ICRA tracks. This will facilitate an upcycle, as demand improves over the medium term, and supply lags demand. The current inventory growth is significantly lower than the growth of over 15 per cent witnessed during FY2009-2013, after the global financial crisis.

Rebranding of midscale hotels has added to premium supply. Further, a significant part of recent inventory through management contracts/ operating leases. Also, not many acquisitions were witnessed during the Covid19 period, as ECLGS has supported liquidity hoteliers, and very few hotels have been shut down permanently. However, some projects by players with weak financial profiles and those in markets like Bangalore, where demand pickup has been slower, have been shelved. The per room cost has increased by 10-15 per cent because of cost inflation, leading to higher project costs for the same inventory.