April 22, 2020 TnH Global

Hotels Under Severe First-Order Impact of COVID-19

Hotel Industry is reeling under severe first-order impact of COVID-19, however its recovery is expected with a lag.

With India in midst of a lockdown owing to the Coronavirus (COVID-19) spread, Motilal Oswal Institutional Equities held interactions with hotel players and experts to get an understanding of the demand scenario and measures deployed to reduce fixed cost. We have also performed scenario analysis in this note. Key insights are below:

Severe first-order impact of COVID-19

Given the various travel restrictions imposed by the Indian Government as well as countries globally, the most visible and immediate impact of COVID-19 is seen in the hospitality and tourism sector. Almost all segments/verticals – inbound, outbound and domestic/leisure, adventure, heritage, MICE, cruise and corporate – have been impacted.
Forward bookings for various conferences and leisure travel bookings to foreign destinations have already been cancelled.
However, on a positive note, the 1H of the financial year is typically a lean season (40-45% revenue contribution) for the hospitality industry. Thus, hotel players would get ample time to prepare for the peak season and minimize business loss by reducing fixed costs.
Even if the lockdown is lifted on 3rd May’20, the recovery in the hospitality sector is expected to lag as corporate travel would pick up at a slow pace and leisure travel would also get postponed until the situation normalizes. Note that domestic travel demand would recover faster vis-à-vis foreign travel.
Additionally, lower Foreign Tourist Arrivals (FTAs) in India would weigh on occupancies as well as on the average room rate (ARR). Typically, foreign customer mix for IHIN stands at 35-40% and for LEMONTRE at 10%.
According to our interaction with a hotel expert, travel demand would be under pressure until a vaccine for COVID-19 is out and made available at affordable rates.

Impact on 1QFY21 to be severe in comparison to 4QFY20

Performance in 4QFY20 was mixed. While Jan-Feb’20 recorded RevPAR growth, Mar’20 witnessed an escalation in the spread of COVID-19.
Thus, March witnessed severe occupancy decline, which has dragged overall 4QFY20 performance across hotel players.
Assuming the lockdown continues into May’20, hotels would have had negligible revenues for two consecutive months (Apr-May’20). RevPAR for Jun’20 too is expected to decline significantly, which should lead to overall revenue decline of >75% for 1QFY21. Further, fixed costs are also likely to lead to EBITDA losses across major hotel players. Should the lockdown extend beyond May’20, hotel players would be further impacted.
Large conferences and exhibitions generate demand for hotel rooms. These would also be affected as large gatherings would be avoided for 4-6 months. As a result, food and beverages (F&B) income would also get impacted.
Management contract income for brand owners would also remain under pressure. This is because a major part of the management contract income is linked to the operating profit of a hotel. Also, asset owners are high net worth individuals/real estate developers; hence, the segment would be under pressure due to the liquidity crisis.