Hotels to take at least two years to see signs of revival, believe analysts

The nationwide lockdown to contain the COVID-19 pandemic is expected to impact the domestic hotels sector severely given their high fixed costs amid no revenue due to ban on travel and social activities. This is likely to increase their debt burden as cash flows dry up thereby putting pressure on their balance sheets.

Analysts believe that the impact of the pandemic will be more severe than the combined effect of global financial crisis of 2008 and the epidemic crises such as swine flu in 2009 and Severe Acute Respiratory Syndrome (SARS) in 2003. They expect hotels to take at least two years to restore the occupancy levels back to the period before the lockdown began. The revenue per available room (RevPAR) of hotels is likely to fall by 30-36% for FY21, which may continue even in FY22.

Coronavirus hit India at a time when demand for the sector was recovering gradually after a lull of over five years. It grew by 4.7% year-on-year in the December 2019 quarter. All India occupancy level improved by 2-3% to 66% and RevPAR grew by 5% to Rs 4,165.

However, the phase of recovery was interrupted with the suspension of hotel operations since March to prevent group engagements in an attempt to reduce the spread of the virus. After carefully following expansion of rooms by adopting asset light model, most of the big hotels had reduced their interest expenses as a percentage of revenues. For instance, the ratio dropped to 2-5% for leading hotels including Indian Hotels and EIH in FY19 from double digits earlier. The total expenditure, which includes a higher fixed cost component for these hotels is over 80% of the total revenue.

Given the uncertainty about how quickly the sector would be able to start generating revenue again, the fixed costs are expected to affect the profits and profitability of the sector adversely in the current fiscal. The stocks of Indian Hotels and EIH have fallen by over 45% since the beginning of March. The pressure will persist in the coming months in the absence of revenue visibility.

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