The travel and tourism industry has been one of the worst pandemic-hit sectors globally, and unlike several other industries which are already witnessing a strong uptick, the recovery in high-contact discretionary sectors is some time away. In fact, ICRA expects a revert to pre-COVID levels only by FY2023-24 in two to three years.
The industry hit an all-time low pan-India occupancy of 18-20 percent in 8M FY2021. Coupled with highly discounted ARRs, RevPARs contracted by 70-75 percent. Barring a few established leisure markets like Goa, pockets in Rajasthan, Uttarakhand and Karnataka, RevPAR recovery is expected to start only in FY2022, with FY2021 to remain weak. ICRA expects industry revenues (sample) to contract by around 65 percent in FY2021, before a recovery in FY2022. Massive operating and net losses in FY2021 are expected to wipe out the cumulative profits of the past four years. As the vaccinations drive percolates down to the masses, FY2022 will witness the beginnings of a widespread turnaround and the industry is expected to grow over 120 percent in revenues.
Operating margins are likely to claw up to 13-15 percent (FY2019: 22 percent) supported by a pick-up in revenues and some continued benefits of the large-scale cost rationalisation measures, undertaken during the pandemic, particularly in staffing. However, these optically high growth numbers for FY2022 will only place the industry on a recovery path to pre-COVID levels in two to three years.
The face of demand has undergone a significant change in the past 12 months. From a heavy corporate skew, supported by big-box MICE, demand moved almost entirely to quarantine and medics in Q1 FY2021. Building from there, demand recovered to drive-to leisure and then added short-haul leisure in Q2. Social Meetings, Incentives, Conferences and Exhibitions (micro weddings), staycations, and workstations picked up in Q3 FY2021. But the big-ticket corporate demand has all but disappeared. SME travel and small-meeting businesses (board meetings, strategy meetings), new joinee trainings, seafarers group, and hybrid meetings are picking up some of the slack.
Occupancies will recover rapidly once vaccination progresses and pent up leisure and non-discretionary business travel returns. The ARRs will, however, require all engines firing—the corporate, MICE and leisure.
Industry supply will feel the pain (depending on which side of the construction phase you are), as incremental room additions slow down drastically over the next one to two years—a silver lining for incumbents though.
Asset-heavy and capital intensive, debt levels in the industry have been historically high. Total debt/OPBDITA has been upwards of 5x and RoCE has stayed sub-cost of capital for over 10 years, since the last peak of FY2008-2009. With demand plummeting, hotels have resorted to drastic cost control measures and retrenchments in FY2021. Interest costs were, however, sticky and have since ballooned, with most players resorting to liquidity under the ECLGS schemes. The significant weakening in the performance of the industry has led to a sharp increase in ICRA’s negative rating actions.
As against ICRA’s portfolio-wide 27 percent moratorium (under the RBI provided window) availment, the hospitality portfolio saw 73 percent of the companies availing of a moratorium and 23 percent requesting for a restructuring (as against 2 percent in the wider portfolio). Failing to meet the Kamat Committee requirements for restructuring, most applicants eventually fell back on the ECLGS window only.
The industry is in dire need of a helping hand. Unfortunately, Union Budgets do not have a track record of extending direct benefits to the hospitality industry. However, this time around, given the situation, industry requirements and expectations are high. The oft-repeated budgetary requirement from the hospitality industry, on infrastructure status, has been raised again in 2021, more so since states like Maharashtra have recently conferred it.
A pan India roll-out of infrastructure status with a much lower cap on investment (as against the Rs. 200 crore cap now), applicable to a broader set of stakeholders is required to mitigate not just immediate term pressure but also to enable long-term growth with right-tenured capital. Infrastructure status will provide the industry with benefits like longer-tenured debt to match asset life and lower cost of capital. In the immediate term, the application of industrial tariffs, as against the current commercial tariffs, will reduce the cost of several utilities like power, water and taxes.
The industry is also pushing for a rationalisation of the multiple GST slabs (12-18 percent) and the re-introduction of the input tax credit for restaurants. This will have an immediate impact on consumer billings and coax footfalls.
The pandemic saw several states step forward to support their local hospitality industry, with notable support from Kerala, Maharashtra and Uttarakhand, to name a few. While this will provide immediate succour, placing the tourism industry on the concurrent list will enable better synchronisation of recovery efforts and formulation of marketing strategies, particularly relevant as borders turn porous ones again.
On the long trudge to recovery, much depends on government support extended to the beleaguered industry.
—The author, Pavethra Ponniah, is Vice President, ICRA Limited. Views are personal
(Edited by : Ajay Vaishnav)