- Recovery is almost three quarters away and it could take two-three years for things to return to normalcy.
- The desire to spend holidays with family members or close friends, and stay away from strangers is likely to raise the demand for private villas.
With leisure and business tourism halted due to the COVID-19, Indian hotel business is facing the biggest crisis ever.
The mounting credit stress due to a steep decline in demand might force many hotels to shut down permanently and hurt the balance sheets of those operating.
The growing popularity of remote-working culture has made firms realise they can operate without making their employees travel, which will continue to hurt the lucrative business travel segment in the future.
Given the extent of the fall in demand, questions loom over the significance of RBI’s debt servicing holiday of six months for an asset-heavy sector such as hospitality.
“In the current state, ICRA expects a significant increase in credit distress to rise in the coming months with several hotels shutting shop permanently,” shared Pavethra Ponniah, Vice President and Sector Head, ICRA with The Blue Circle.
According to the ratings agency, recovery is almost three quarters away and it could take two-three years for things to return to normalcy. The recovery should start on the back of business travel in the last quarter of this fiscal year. In the coming 90 days, the probability of travel picking up is meagre.
At present, the hospitality industry in India is operating in a 10-15% occupancy bracket. With high operating and financial leverage, estimated cash break even occupancy for a typical 200-room premium hotel is at about 35-40%. It is expected that there will be a 50-60% revenue loss during FY2021, as per ICRA.
As Hotel Chains Open
The hotels failed to earn any money in the two months before June 8, the day when the government allowed opening hotels in certain areas. However, many were working as a part of quarantine centres but different state rules have kept the owners waiting for payments.
Suhail Kannampilly, CEO, Concept Hospitality said that the chain is operating with 44 hotels at present of a total of 80. He told The Blue Circle that they witnessed a 9.5% occupancy rate in the first week after opening in June and ended the month with 17%. The increased occupancy rate has been on account of marriage bookings, in a batch of 50 people, and a little uptick on the leisure front.
This leisure demand segment will largely lead the sales for the hotels in the coming 2-3 quarters till the business travel returns to a normal level. He believes that easing of restrictions will increase the occupancy by at least 10%.
“I am surprised why hotels are not allowed to open fully since we are known to adhere to strict hygiene and cleanliness practices,” said Kannampilly adding that hotels have mapped and reviewed them in detail and devised controls and protocols to remove health and safety threats for the guests and employees.
The Small and Independent Hotels
The last five years have seen a tremendous supply growth in this sector. People converted their small guest houses into homestays and backpackers hostels. Millennials with a knack of travelling got affordable hotels and owners earned good money.
According to hospitality consulting firm, Hotelivate there are a total 2.72 million rooms in India, as of September 2019 and 72% belong to the independent or unbranded segment.
Alternate accommodations such as Home Stays, Guest Houses and Backpackers Hostels contribute another 15% of the total number of room inventory. Hotelivate estimates that close to 2.4 million people are employed by the industry in total out of which almost 81% are employed by the independent/unbranded category.
Independent operators in India primarily operate through the property leasing model, wherein they take up a property on a long-term lease with fixed monthly payments, invest in its renovation and then manage and operate it with their own staff. In this segment, more than 60% of the cost of running such a property is fixed. In a situation where there are no revenues and such high fixed costs, sustainability becomes a question.
In a country like India, only a very good performing hotel, with great reviews, good staff and a control over operating costs, can manage a year-round occupancy of 55-60%. Typically hoteliers draw profits for 6 months, cover costs for 4 months and suffer a loss for the remaining 2 months.
The Covid Impact
Small companies have little or no cash reserves to survive the delayed effects of the pandemic. The landlords still require rentals and the staff need their salary to feed their families. The utility bills, bank EMIs, necessity expenses, software costs are very much still due.
While the bigger firms can invoke “Force Majeure” and hold up any invoices, a chunk of the industry does not have such negotiating power.
There is no likelihood of inbound tourism resuming in India for at least another 2 quarters, domestic tourism, however may revive in the next 3 to 4 months. This means that operators are now facing the possibility of little business for a period of 5 to 6 months with massive fixed costs, low business reserves and a big question mark on their own survival itself. This could lead to a mass scale closure of independent properties with 10-15 rooms across India.
This would also mean a large-scale unemployment of people without professional degrees or certifications.
The flip side is the business downturn could lead to a realignment in property rentals across the country with rentals dropping anywhere between 20-30% from the current levels. Some of the most popular tourist hotspots in India like Goa, Dharamshala, Mussoorie today are also the most expensive for hotel operators from an operational feasibility point of view.
Due to this, most of the well-functioning brands target an average occupancy of 65%-75% while charging lower Average Room Rates(ARRs) to earn profits.
Till a year back, an independent operator had the option of partnering with hospitality management companies like Oyo, Treebo or Fab Hotels and either sign an agreement of minimum guarantee or a commission based structure. However the future looks quite dim for these companies as well which is highlighted by large scale job and salary cuts across these companies along with funding freeze. Venture Capital is going to be tough to come by and this is going to have a trickle-down effect on small hoteliers and asset owners as well.
In premium hotels, about 40% of the cost is fixed in nature. Now facing a liquidity crunch, they will try to convert those fixed costs into variables.
Big hotels such as Hyatt have laid off up to 1300 employees as per an article in The Economic Times.
Kannampilly said that the layoffs can reach up to 50% if the government fails to come up with debt-restructuring measures or the RBI doesn’t extend the moratorium period.
He mentioned that the industry is lobbying really hard and the state governments need to look into this matter more seriously. The uncertainty around the government’s decision and the lack of a concrete plan has been worrying.
Efforts to Mitigate the COVID Storm
While restaurants are working at half the occupancy, many hotels have started home delivery services within a 10km radius.
According to a report published in Outlook India, Sheraton Group has launched its ‘save now, stay later’ scheme across 90 hotels in South Asia. The guests can book now, till June 30, 2020, choose between three complimentary offers, and avail of their bookings anytime over the next 12 months.
Looking at the growth in the work-from-home culture, hotels are open to the idea of making some part of their property, a workspace for firms to house their employees.
The desire to spend holidays with family members or close friends, and stay away from strangers is likely to raise the demand for private villas.
The next 6 months are going to be extremely tough for business and only the ones who have operated with a tight leash on their finances and guest experience might survive.
(Edited by Anu Choudary)
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