Hospitality has been one of the worst impacted sectors post the Covid-19 outbreak and the same is reflected in the stock prices. Even as the market recovered in April, the BS Hotel Index, which measures the performance of top hotel stocks, has been lagging way behind. While the Sensex gained 21 per cent since March 23, the BS Hotel index fell 7 per cent over the same period.
The reason for the underperformance of the sector is the expectation that recovery time could stretch to two years, one of the highest across all sectors. The delay is on account of gradual recovery from zero occupancy at present, the high fixed costs involved in the business and the rise in leverage, which was showing signs of coming down over the last couple of years. Nihal Mahesh Jham of Edelweiss Securities believes that the slowdown is much deeper and the impact could be much worse than the sector has seen before with occupancies at single digits and FY21 revenue per available room (RevPAR) also expected to contract sharply. HVS Research expects revenues of the sector to decline by Rs 90,000 crore in 2020 down by 57 per cent compared to the previous year and RevPARs to fall by 58 cent.
The major hurdle for hotels is high fixed costs, which are pegged at 60-70 per cent. Employees are a key component of the same accounting for half of the fixed costs. Companies are already curtailing a large part of the costs, be it contractual labour, pay cuts for senior management, waiver of annual maintenance costs and other fixed costs. With quite a bit of costs staying constant, losses at the operating level in the absence of revenues after the lockdown extension are expected to increase pushing up debt and leverage ratios. If hotels open up in June, analysts expect revenue per room for the April-June quarter to fall by as much as 75 per cent. Once the lockdown is withdrawn, availability of credit given the weak operating metrics of the hotel sector will also be important.
One of the key segments that will get impacted in addition to leisure is meetings, incentives, conferences and exhibitions. Sumant Kumar and Darshit Shah of Motilal Oswal Financial Services says that large conferences and exhibitions generate demand for hotel rooms and would be impacted as large gatherings are likely to be avoided for the next two quarters. In addition to room revenues, food and beverage segment, which contributes 40 per cent to the top line, will also be impacted. Income from management contracts will also see a dip as the share is linked to operating profit.
Lower foreign tourist arrivals will also impact the occupancies and realisations per room of the sector. EIH (which runs the Oberoi and Trident brand of hotels) and Chalet will be the most impacted as their share of foreign guests are upwards of 50 per cent. The share of foreign nationals account for 40 per cent of the customer mix for Indian Hotels and about 10 per cent for Lemon Tree. Most brokerages believe that the business from foreign customers will take longer to recover than domestic travellers and companies which depend more on foreign consumers will see a bigger hit on their occupancies and profitability.
While the only consolation for the sector is that first half is the lean season with revenue contribution of about 40 per cent, the recovery time will be critical. Given the losses expected from the sector in the next couple of quarters and chances of increase in leverage, investors should avoid the sector.