Hotel industry on an upward swing; expected to return to pre-Covid levels in FY2023: ICRA

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 there will be gradual recovery in business travel and foreign tourist arrivals (FTAs). ICRA expects pan-India premium hotel occupancy to be at 68-70% 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.

Giving more insights, Ms. Vinutaa S, Vice President and Sector Head, ICRA says, "The industry witnessed a healthy start to FY2023, with 56-58% occupancy in premium hotels in Q1 FY2023. It was up from ~40-42% in FY2022 and closer to pre-Covid occupancy of 60-62% in Q1 FY2020. Pan-India ARR stood at ~Rs. 4,600 - 4,800 in Q1 FY2023, as against Rs. 4,200-4,400 in FY2022. It still remains at a 16-18% 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 in the last few months. The demand recovery was aided by leisure, transient passengers, MICE/weddings and gradual pickup in business travel and foreign tourist arrivals (FTAs). Some cities also witnessed traffic from specific events. While leisure destinations and gateway cities witnessed healthy occupancy, cities largely dependent on business travelers, like Bengaluru and Pune will take a few more months to recover. Although Q1 FY2023 was among the best quarters since the onset of Covid-19 pandemic, the RevPAR remains 20-22% lower than pre-Covid levels and at about 45-50% discount to the FY2009 peak. For midscale hotels, the recovery has been slower, due to the dependence on business travel. Further, cost inflation can also have a bearing on mid-scale hotel demand."

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 sub-cost of capital at least for the next 4 years.

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 - with supply anticipated across markets. This is despite the anticipated rebranding and upscaling in the midscale and upscale segments, which will add to organized supply in the sub-5-star category. This will facilitate an upcycle, as demand improves over the medium term, and supply lags demand. The supply addition in the mid-scale segment is broadly expected to be similar to that in the premium segment. Construction activity has restarted in majority of the deferred projects. However, the per room cost has increased by 10-15% because of cost inflation. Also, acquisitions/consolidation of smaller hotels have been significantly lower than expectations due to the demand revival and improvement in liquidity.

Ms. Vinutaa adds, "Our sample of 11 listed companies reported a ~38% growth in revenues on a Y-o-Y basis in Q4 FY2022, better than ICRA's estimates. While it remained weaker on sequential basis compared to Q3 FY2022, partly due to the Omicron wave, it was one of the best quarters for the industry since the onset of the pandemic. The operating margins were also healthy at 16% in Q4 FY2022 (vis-a-vis an operating loss in Q4 FY2021), benefitting from improved operating leverage and cost-saving initiatives. Hoteliers are expected to report stable performance in Q1 FY2023, aided by a strong leisure segment, and improvement in business travel and FTAs. Coverage metrics improved considerably in H2 FY2022 since the start of Covid-19 and are likely to remain at similar levels in Q1 FY2023 aided by healthy operating profits, despite hardening of interest rates. ICRA currently has a stable outlook on the industry. About 55% of ICRA's ratings are on stable outlook currently."

Source : Equity Bulls

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