Stock Fundamentals

Long haul awaits lockdown-hit hotels sector

Anand Kalyanaraman | Updated on April 26, 2020 Published on April 26, 2020

Demand destruction due to the lockdown is taking a heavy toll on the hotels sector

Among the sectors hit hardest by the coronavirus is hotels. What began as a promising calendar year — with the upcycle in the sector continuing — is turning out to be annus horribilis for hotels across the spectrum in India.

Demand growth for hotel rooms in the country was expected to exceed supply growth in 2020, and parameters such as occupancy levels, average daily rates (ADRs) and revenue per available room (ReVPAR) were poised to be healthy. But then the virus struck like a bolt from the blue, and the key demand drivers of hotels — travel, trade, tourism, social events and MICE (meetings, incentives, conferences, exhibitions) — have been laid low by the lockdown put in place to contain the scourge.


Demand for hotel rooms has been badly squeezed, and so has revenue. But hotels continue to incur fixed costs that, on an average, account for 30-50 per cent of their expenses. Losses are mounting, and the outlook is bleak — there is no saying when the lockdown will be fully lifted, and even after it is, it could take quite some time for the sector to get back on its feet again.

International air travel and foreign tourist arrivals seem unlikely soon, domestic travel could restart but in a curtailed avatar, business trips could reduce with virtual meetings, and people will likely travel only if they have to. Leisure travel and non-essential business travel could shrink. Domestic travel and tourism will be key to the revival of the sector, but progress on this front could be long-drawn due to health concerns and a likely consumer shift from spending to saving. Overall, occupancy levels could come down sharply and so could room tariffs.

Hotels may try discounting of rates to drive up business, but whether this will help is uncertain.

The damage could be extensive and the hotels sector could see major changes — with shake-outs, restructuring and re-purposing of offerings to also cater to segments such as staycations, senior living and student housing.

Stark prospects

Industry experts paint a bleak picture. A recent report from real-estate consultancy JLL says that at an all-India level, the third week of March 2020 saw a 67 per cent decline in occupancy levels year-on-year, and that the second and third quarters of 2020 are likely to be similarly impacted.

It estimates that at least 30 per cent of the hotel and hospitality industry revenue could be impacted if the situation doesn’t improve by the end of June 2020. As of April 10, more than 60 per cent of branded hotels across various segments are shut, and several others are operating with single-digit occupancies.

Many hotels across India are operating with a gross operating loss, the report says.

HVS ANAROCK Hotel Advisory Services, in its late March report, predicted the second quarter of the year to be the worst-hit. Based on data as on March 23 and on two scenarios (demand picking up in July or October-November), it estimates the overall occupancy in the branded hotels segment in 2020 to decline 16.7-20.5 percentage points over 2019, and ADRs to decline 7-8 per cent. As a result, RevPAR will fall 31-36.2 per cent.

The advisory says that the overall revenue of the Indian hotels sector is set to decline by anywhere between $8.85 billion (about ₹62,000 crore) and $10 billion (about ₹70,000 crore) in 2020, an erosion of 39-45 per cent y-o-y. The unorganised segment of the market is estimated to take a bigger beating than the branded and semi-organised ones. It adds that the magnitude of the impact can change drastically if the virus outbreak is not contained. Hospitality consultancy Hotelivate said late last month that the total annual revenue typically generated by India’s branded and organised hotels sector is approximately ₹37,000 crore, and this could be eroded by at least ₹11,000 crore (best-case scenario) and possibly up to ₹30,000 crore (if the industry suffers for the remainder of this calendar).

The debt of hotels across the organised space was more than ₹45,000 crore as of January 2020, and debt servicing runs into thousands of crores of rupees.

This, along with other fixed costs such as payroll, employer contribution to EPF and ESIC, property tax, insurance, and renewal of licences and permits, would amount to ₹12,000-15,000 crore, says Hotelivate.

To help the industry tide over the unprecedented crisis, hotel players are asking for urgent relief measures including working capital, reduction/deferment of fixed costs including statutory dues and debt servicing and tax holidays.


Stocks hammered

Given the turmoil, hotel stocks such as Indian Hotels, EIH, HLV, Lemontree and Chalet Hotels have been hammered, pushing down their valuations(see table). Unlisted players such as OYO would also have taken a beating on their valuations.

Published on April 26, 2020
This article is closed for comments.
Please Email the Editor