Rating agency ICRA said the hotel industry is witnessing improvement in sentiment as demand rebounds and pan-India premium hotel occupancy may be nearly 40-42 percent in FY22, up from about 26-28 percent in FY21.
ICRA has revised its outlook on the Indian hotel industry to 'stable' from 'negative' in March 2022, following the swift demand recovery. About 49 percent of ICRA’s ratings are on a stable outlook currently.
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 that aided by leisure, transient demand, MICE/weddings and a gradual pick-up in business travel, said ICRA.
The recovery has been sharper than that witnessed post-Covid 2.0. Pan-India premium hotel ARRs stood at nearly ₹4,200 – 4,400 in FY22 and were at a 25-30 percent 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, RevPARs are expected to improve to pre-Covid levels in FY2023, as against the earlier expectation of pre-Covid levels only by FY24. 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," said ICRA.
ICRA expects that a month of complete lockdown could impact FY23 pan-India occupancy by nearly 5 percentage points.
“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," said Vinutaa S, Assistant Vice President and Sector Head, ICRA.
"Owing to improved operating leverage and sustenance of some of the cost-saving initiatives, the operating margins also jumped closer to pre-Covid levels. Despite the Omicron impact, we expect Q4 FY2022 revenues and margins to be better than Q2 FY2022."
ICRA underscored that 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 YoY basis,” said Vinutaa.
ICRA expects the hotel industry to clock nearly 60 percent of pre-Covid revenues in FY2022, despite almost four months of impact because of Covid 2.0 and Covid 3.0.
Vinutaa added that the industry is also likely to report operating profits in FY22 aided by improved operating leverage and sustenance of some of the cost-optimisation measures undertaken in FY21. 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 FY24 earlier.
ICRA further underscored that the debt metrics are expected to return to pre-Covid levels in FY23, 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 FY09, which saw untimely supply increases of over 15 percent of the inventory at the bottom of the cycle in FY09-FY13, the current pipeline inventory is about 3-4 percent for the period FY22-FY25. 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," ICRA said.
