The Covid-19 pandemic has hit the domestic hospitality sector hard. The extended pan-India lockdown since March 24, 2020 has resulted in a sharp fall in occupancy levels that began from the end of March and has continued in April and May as well. The demand has declined to the lowest levels that the industry has ever witnessed; it is clear that this is the biggest crisis ever by the sector. As per an ICRA note, the situation has changed radically within the last three months, after a positive start in 2020. The signs became visible since January 2020; the country began feeling the impact of Covid-19 with the start of cancellation of MICE business as the globe reacted faster to the pandemic than India. Glimpses of travel decline started in late February; till then pre-booked business and even domestic leisure traffic continued. But by March it was clear that hotels would be facing their toughest times, since the global financial crisis (GFC) of 2009.
Commenting on this, Ms. Pavethra Ponniah, Vice President and Sector Head, ICRA says, “The pandemic and the containment measures introduced by Governments globally and in India resulted in a severe drop in foreign and domestic travel across the world, in both the business and leisure travel segment. This will leave a lasting impact on the credit profile of airlines and hospitality companies. Globally, airlines and hotels have acknowledged the depth of this decline with recovery stated two to three years from now. Drastic cost control measures, stocking up of liquidity, preliminary reopening plans, and a sharp reduction in future supply addition are in the offing. The supply increases previously anticipated for 2020 and 2021 will get pushed back by at least 12 months. Projects that are in the initial stage of development will be cancelled as developers and lenders turn risk averse, particularly from a new construction perspective.”
ICRA notes that like the USA and China, the Indian hospitality sector is largely domestic, with 77% of guest in hotels coming from inside the country. India’s share of business travel is fairly high at 59%. With this context set, it remains to be seen how an Indian recovery could potentially look like. In case of China, it has seen first recovery in drive-to leisure destination, followed by mid-scale business travel. However, in India business travel is likely to recover first, with mid-scale and economy before luxury. Group business cancellations will continue well into the end of 2020, if not longer. The start of the recovery is about three to four quarters away and contingent on a cure or a vaccine. Normalcy could be much further away, over to two to three years.
On the airlines side, IATA predicts that passenger traffic recovery to pre-COVID levels will happen only by 2025 and in the meanwhile, airlines capacity reduction and/or failures will result in reduction in supply. WTTC says that they expect a 58% to 78% reduction in international travel in 2020. Unlike airlines, hotels are largely permanent supply and the only way to reduce supply is to convert them into apartments and office spaces, but India has not witnessed this trend in the past. With limited scope to fix the supply side of the equation in the immediate term, almost all previous down cycles in recallable history have led to deep discounting. The fragmented nature of the industry defeats cohesive action.
As for the financials, with high operating and financial leverage, estimated cash breakeven occupancy for a typical 200-room premium hotel is at about 38-40%. Financial leverage is high, given the asset heavy nature of the industry, with average interest cover of 2x and total debt by EBITDA of 5x in ICRA’s sample of 50 hotels across credit profiles. With the industry in India operating at 10-15% occupancy now, losses are mounting. It is expected that there will be a 30-50% decline in RevPARs during FY2021. Further, denser by design to maximize usage of square footage, hotels would have to work hard on integrating social distancing requirements, leading to increased operating cost.
Median cash flow cover to operations in June ’20 with repayment is a mere two months. The debt servicing holiday of six months is inadequate for asset heavy sectors like hospitality, given the expected duration of demand decline. “Given this scenario, ICRA expects steep increase in credit distress to mount in the coming months in the Indian hospitality industry, with several hotels shuttering shop permanently,” adds Ms. Ponniah.