The recovery seen during the past two quarters is set to be disrupted
A strong resurgence in the Covid cases and the ensuing restrictions by various state governments are set to disrupt the recovery seen by the hospitality sector during the past two quarters. An improvement in macro indicators in terms of business as well as recovery rate of Covid had kick-started a revival in the hospitality sector pushing up the occupancy by over 40 per cent during the third quarter. It was primarily driven by the leisure segment and ‘revenge travel’ during weekends and the festive season, weddings along with food and beverage demand.
“It was with some respite that hotels saw a month on month increase in occupancies during January to March quarter when compared with the immediately preceding quarter. However, the ARRs (average room rate) continue to be stressed and are around 60 per cent of pre-Covid levels,” said Vineet Verma, Executive Director and CEO, Brigade Hospitality. Brigade is the asset owner for Sheraton Grand, Holiday Inn and Four Points by Sheraton in Bangalore, Kochi, Chennai and Mysore.
“While we were looking at further improvement in business in the coming quarters, concerns about the second wave and increasing restrictions on movement of people have again put a dampner on our business. Our sector can ill afford another lockdown,” said Verma.
The pace of recovery, however, started losing steam from February 2021 onwards with rising incidence of Covid-19 cases and state induced localised restrictions. This led to a fall in demand for leisure destinations, which in Q3FY21 remained a key driver for revenues for hotel space, wrote Rashesh Shah, analyst at ICICI Direct Research.
With corporates continuing their work from home policy, demand from business travellers, who account for a major revenue share for upscale business hotels, was anyways muted and is likely to remain unchanged in the forthcoming quarters.
With the surge in Covid cases across the country, partial lockdown in few states and compulsory testing for travellers in most of the states are discouraging travellers to travel, this has a direct impact on room demand, said Nandivardhan Jain, CEO, Noesis Capital Advisors adding that the last three weeks hotel occupancy in metro cities has dropped by more than 50 per cent in comparison to February.
“This will be a tough quarter for the industry as there will be demand contraction. If this situation continues it will be difficult for the hotels to recover even their operating cost which has already taken a big hit in the last 12 months,” said Jain.
“Overall, we expect the first half of FY22 to be challenging for the hotel space. We would likely see a full recovery in demand only post full resumption of domestic as well as international flights,” Shah. Arrival of foreign tourists especially from the US and UK remain top contributors to revenues of premium segment hotels, wrote Shah.
ICICI expects revenue at premium segment hotels like Indian Hotels to report a quarter-on-quarter decline of 3.8 per cent in Q4 while mid-scale hotels like Lemon Tree are expected to report revenue decline 5.7 per cent QoQ.
But despite an operationally weak quarter, analysts expect hotels to trim the losses quarter-on-quarter as most of them re-aligned the fixed costs, which account for 70 per cent of the total costs, to the new normal of a challenging environment.
The strong demand from the leisure segment came to hotels’ rescue in 4QFY21. It boosted room revenues and F&B (food and beverages) business compared to 3QFY21 and 9MFY21, wrote Amit Agarwal, analyst at Nirmal Bang Securities in a recent research report.
“Since international travel, corporate travel and MICE (meetings, incentives, conferences and exhibitions) have not yet resumed, we expect the RevPar (revenue per average room) to be lower YoY. Some of the loss of international demand is expected to be substituted by staycation demand, uptake in domestic travel to leisure destinations and luxury destinations,” he wrote. Certain leisure properties are performing better and drawing higher RevPar compared to the RevPar they used to draw in the pre-Covid times, pointed out Agarwal.
“We expect RevPar for 4QFY21 to decline in the range of 43 per cent to 67 per cent YoY for Indian Hotels Company Chalet Hotels, East India Hotels and Lemon Tree Hotels. But, the RevPar is expected to improve on a QoQ basis,” he wrote.