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ICRA revises outlook for hotel industry to stable from negative in March ’22

ICRA (International Credit Rating Agency) estimates pan-India premium hotel occupancy to be ~40-42% in FY2022, up from ~26-28% in FY2021.

While demand was impacted in Jan-22 and for the first two weeks of Feb-22 because of the Omicron wave, the industry has witnessed a healthy recovery post aided by leisure, transient demand, MICE/weddings, and a gradual pick-up in business travel.

hotel chart ICRA revises outlook for hotel industry to stable from negative in March '22
Hotel industry posts sharp recovery

The recovery has been sharper than that witnessed post-Covid 2.0. Pan-India premium hotel ARRs stood at ~Rs. 4,200 – 4,400 in FY2022 and were at a 25-30% 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.

With significant improvement in demand, RevPAR is expected to improve to pre-Covid levels in FY2023, as against the earlier expectation of pre-Covid levels only by FY2024. While the possibility of a fourth Covid wave cannot be ruled out, the increasing vaccination coverage and reducing disruption with each Covid-19 wave provide comfort. ICRA expects that a month of complete lockdown could impact FY2023 pan-India occupancy by ~5 percentage points.

Vinutaa S, Assistant Vice President, and Sector Head, ICRA
Vinutaa S, Assistant Vice President, and Sector Head, ICRA

Says Vinutaa S, Assistant Vice President, and Sector Head, ICRA Limited, “Easing restrictions, the high pace of vaccination and pent-up demand resulted in recovery in leisure travel within the country in Q2 and Q3 FY2022. Domestic business travel also started picking up, mainly to project sites/manufacturing locations from specific sectors, in Q3 FY2022.”

ICRA’s sample of 11 large listed entities reported ~50% growth in revenues on a QoQ basis in Q3 FY2022, better than ICRA’s estimates. Owing to improved operating leverage and sustenance of some of the cost-saving initiatives, the operating margins also jumped closer to pre-Covid levels.

She added, “Despite the Omicron impact, we expect Q4 FY2022 revenues and margins to be better than Q2 FY2022. The staff-to-room ratio continues to remain significantly lower than pre-Covid levels aided by redeployment of staff, reskilling employees, and centralisation of business functions. With improvement in operating performance, coverage metrics are likely to be the best in H2 FY2022 since the start of Covid-19. While Q4 FY2022 interest coverage is likely to witness some sequential moderation because of the Omicron wave, it is still expected to be better on a YoY basis.”

Leisure markets continued to report strong occupancy in H2 FY2022. Goa’s occupancy has been better than pre-Covid levels since September 2021. While Gateway cities like Mumbai and the NCR region have also witnessed healthy improvement in occupancy, Bengaluru and Pune were laggards because of muted business/IT sector travel.

However, it is expected that sequential improvement in occupancy will occur in these markets over the next few months. The recovery has largely been occupancy-driven, with ARRs lagging in most markets.

ICRA expects the hotel industry to clock ~60% of pre-Covid revenues in FY2022, despite almost four months of impact because of Covid 2.0 and Covid 3.0. Further, the industry is also likely to report operating profits in FY2022 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, ICRA expects the industry to return to pre-Covid levels in FY2023, as against FY2024 earlier. The demand in the near term is expected to stem largely from domestic leisure travel, although there will be a gradual recovery in business travel and FTAs.

Hotels are likely to report pre-Covid margins at 85-90% of revenues going forward. Accordingly, ICRA has revised its outlook on the Indian hotel industry to Stable from Negative in March 2022, following the swift demand recovery. About 49% of ICRA’s ratings are on a stable outlook currently.

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. ICRA expects equity fundraising/asset monetisation to support further capital structure improvement going forward. Despite the improvement in operating metrics, lenders and investors continue to be cautious, and incremental external funding is largely based on promoter comfort.

Compared to the previous downcycle in FY2009, which saw untimely supply increases of over 15% of the inventory at the bottom of the cycle in FY2009-2013, the current pipeline inventory is about 3-4% for the period FY2022-FY2025.

This will facilitate an upcycle, as demand improves over the medium term, and supply lags demand. The financial loss from Covid and the preference for larger brands will result in some consolidation in the industry.

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