Hospitality Industry: Heading

Towards Hospitable Territory

June 14, 2022 l Ratings

Overview:
After an abysmal FY21, the Indian hospitality sector made a steady recovery in FY22 as successful vaccination
drives and reduction in Covid cases have helped improve travel sentiment. Though the Omicron wave caused a
temporary blip, FY22 has witnessed a sharp rebound in revenues. The revival can be largely attributed to pent-up
demand for leisure and business travel, supported by increased bookings on account of weddings and significant
uptick in MICE (meetings, incentives, conferences and exhibitions). The sector also saw some green shoots from
international travel, after a lull of nearly two years.

As envisaged in our earlier report “Hospitality Industry: Survival Before Revival”, which was published in September
2021, the sector is on track to achieve or even surpass the pre-Covid level occupancies in FY23. Demand for leisure
travel, business travel for client meetings as well as project work are gaining steam. Although the uncertainty
around new variants of the Covid virus may continue to linger for some more time, CareEdge expects domestic
travel (leisure and business) demand to remain strong during the year as travellers and hoteliers have embraced
the new normal. The resumption of international flights in March 2022 should also give impetus to foreign leisure
travel.

CareEdge believes that with demand outlook improving coupled with the large-scale infrastructure push by the
government, the sector is well poised to put the pandemic’s destruction behind it. Further, realignment of cost
structures by the industry players form a strong base for the profitability of the hospitality sector in the coming
months.

Industry RevPAR’s Inching to Pre-Covid Levels

Chart 1: FY22 Performance Review

44-46% 11-13 pp Y-o-Y

Occupancy
FY22 19-21 pp from FY20
Hospitality
ARR Rs 4,400 - 4,590 13-14 % Y-o-Y
KPI
22 - 24% from FY20

RevPAR Rs 1,900- 2,100 55-59 % Y-o-Y

45 - 47% from FY20

Source: CareEdge, HVS Anarock, Industry data.

pp: percentage points, ARR: Average room rate, RevPAR: Revenue per occupied room

CareEdge had, in the last release in September 2021, forecasted average room rate (ARR) of Rs.4,414 and
occupancy of 51% for FY22. As per the estimated data available for the hospitality industry, the fiscal year 2022
closed at ARR in the range of Rs.4,400 - 4,590 and occupancy of 44-46%. The performance of the industry improved
significantly despite the temporary roadblock caused due to emergence of the third Covid wave (Omicron). The
recovery, while slow, is visible quarter-on-quarter in FY22, though the same was again marred marginally in Q4FY22
by the impact of a temporary jolt of Omicron.
 Hospitality Industry: Heading towards Hospitable territory

Chart 2: Quarterly Revival Journey

Q1FY22 Q2FY22 Q3FY22 Q4FY22

Occupancy: 27% Occupancy: 51% Occupancy: 57% Occupancy: 50%

ARR: Rs 3,572 ARR: Rs 4,239 ARR: Rs 5,350 ARR: Rs 5,200

2nd Wave Stuck Strong Vaccination Demand driven by Demand rebounded

Drive leisure & festivities post temporary setback
in Jan
• Moderation in demand • Demand rebounded • Busniesses returned to full or • Initial setback due to
• Players were proactive • Staycations and Corporate Hybrid models Omicron
• Occupancy in 2nd wave at segmnet saw tractions • Weddings and MICE stimulated • Sharp demand by leisure ,
27% Vs 16% in 1st wave of demand pick up in buniess travel
Q1FY21 • Steady recovery in feb &
March 2022

The onset of the Covid-19 outbreak in March 2020 was followed by a nationwide lockdown to contain the pandemic.
The lockdown, which was implemented on March 24, 2020, continued till May 31, 2020, leading to a significant
deterioration in the operating parameters of hotels in FY21. The occupancy plunged to 33% in FY21 from over
65% earlier. ARRs dropped by 35% in FY21. FY22 has been a promising year for the sector wherein the revival in
the occupancy and RevPAR’s has led to green shoots for the industry players. The decline in Covid cases, resumption
of international flights from March 2022, and strong leisure and wedding demand are the positive factors that
should lead to growth in occupancy and ARRs in FY23.

Chart 3: Occupancy Inching Back to Pre-pandemic Levels

7000 80%
5768 5973 6061
5527 5671 5400 - 5500
70%
6000
5000 4400 - 4590 60%
66% 67% 65%
Occupancy%
63% 65% 4013 65 - 66% 50%
ARR (Rs.)

4000
40%
3000 44 - 46%
30%
2000 33% 3500 - 3600 20%
1000 10%
3499 3675 3790 3984 3964 1328 1900 - 2100
0 0%
FY16 FY17 FY18 FY19 FY20 FY21 FY22 (Est) FY23 P

ARR (Rs.) RevPar Occupancy%

Source: HVS Anarock, CareEdge

Uptick in Foreign Tourist Arrivals

The sudden emergence of the Covid-19 pandemic forced countries to close their borders and suspend their
international airline services, leading to an unprecedented fall in international tourism. According to CareEdge, the
annual air passenger traffic in India registered a healthy compounded annual growth rate (CAGR) of 14% during
FY17-FY19, thereafter, the same remained stagnant in FY20 and witnessed a steep decline during FY21 following
Covid-19-induced disruptions. Foreign tourist arrivals (FTAs) witnessed a y-o-y de-growth of 94% during FY21. The
impact began from March 2020, and on March 02, 2020, the government also started issuing travel restrictions in
a phased manner.

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 Hospitality Industry: Heading towards Hospitable territory

Chart 4: FTA’s Rising from the Lows of FY21

15.00
FTA's ( In Millions)

10.00
10.62 10.22
9.65
5.00
0.59 1.90
0.00
FY18 FY19 FY20 FY21 FY22

Source: CMIE, CareEdge

Though international travel continued to suffer in FY22 as well, there was a sharp recovery as compared to the
previous year. Despite the strong upward movement, FTAs remained at about 20% of the pre-Covid levels. With
the resumption of international flights from March 27, 2022, the international travel demand is expected to recover
gradually through FY23 till the end of FY24. In April 2022, the number of FTAs recovered to reach 21% of total
arrivals in FY21.

Improved Financial Performance and Tighter Cost Control Measures

The hotel industry’s financial parameters reported significant improvement in FY22 as compared to the previous
year. During the first Covid wave, apart from the room revenue, the hotel players also lost significantly on the food
& beverages (F&B) portion, which typically contributes around 35%-40% of the total revenue. The same was
restored to some extent in FY22, primarily due to the shorter impact of the second wave as well as no nationwide
lockdown. Besides looking at alternative customer segments and revenue streams, albeit weak, the industry’s focus
has shifted to controlling and reducing costs significantly which include redeployment of manpower, downward
salary revisions, renegotiating terms with utility service providers including internet, telecom, laundry, limiting buffet
menus, centralisation, and automation of business functions. Sustenance in fixed cost-saving initiatives undertaken
by all the players in the industry in FY21 and better operating leverage have been the supportive factors in FY22
as well. With the rise in occupancies, costs in FY22, though inched up marginally, the same were still lower than
the pre-covid levels. As revenues improved amidst continued cost control, the industry has been able to post profits
at the operating level this fiscal year. There has also been a marked reduction in net losses with the sector reporting
a positive net margin for Q3 and Q4 of FY22.

Chart 5: Quarterly Profitability Trend from Pre-Covid to Post-Covid

60.0
30.0 25.4
40.0 17.1 15.2 19.4 18.2
8.7 12.2 13.3
20.0 37.1
-33.5 -22.1
0.0 1.7
-20.0 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22 Q3FY22 Q4FY22
7.1 16.4 -3.4 -10.8 6.6
-40.0 -21.6
-60.0 -38.5
-80.0 -93.2 -52.5
-66.6
-100.0
-120.0
-140.0 -119.2

PBILDT Margin (%) PAT Margin (%)

Source: CMIE, CareEdge (sample set of listed players)

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 Hospitality Industry: Heading towards Hospitable territory

However, the capital structure has deteriorated in comparison to the pre-pandemic period, as the operational losses
pushed the hoteliers to mount up debt levels. Hotel companies with recent expansions or groups with a higher
portfolio of new assets compared to matured assets are expected to face additional stress on their already weak
financials. On the other hand, groups backed by strong promoters/ institutional support have been able to manage
the difficult pandemic period with comparatively lower reliance on debt. From a credit perspective, such groups
shall be better placed and are expected to have some liquidity reserves remaining post the covid years.

CareEdge View

With the pandemic leaving a long-lasting impact on consumer lifestyle and preferences, the travel industry is seeing
a renaissance in the post-Covid era. New trends such as ‘stress on sanitisation’, ‘escapism travel’ and ‘wellness
tourism’ are likely to shape the future of the industry.

According to CareEdge, the hospitality sector is slowly moving into ‘hospitable territory’, anticipating recovery of
domestic and international travel gradually through FY23 till the end of FY24 to the pre-Covid levels. For FY23,
CareEdge estimates the majority of its portfolio of hotel companies to report improved performance, largely restored
to pre-Covid levels. Domestic tourism is expected to be the key growth driver, with international travel slowly
gaining momentum, specifically post resumption of international flights. The situation is, however, still evolving and
the same remains contingent on the possibility of another Covid wave and its severity on the sector. The operational
profitability margins, which remained in the positive zone post Q1FY22, are expected to further improve to the pre-
Covid levels during FY23, owing to improved demand outlook and sustained cost optimisation measures adopted.
Growth Drivers

• Pent-up travel demand is likely to • Risk of fourth wave of Covid amid

provide impetus to the sector
• Cost containment measures to
tame operational losses of hoteliers
• Rapid and successful vaccination
drives boosting confidence
• Government’s focus on large-scale
infrastructure development
slight resurgence in infection levels
• Inflationary pressure on travellers,
considering high airfares
• The ongoing Russia-Ukraine war
has led to fewer Russian travellers
• Interest cost burden due to debt
pile-up, specifically for companies
that are ramping-up assets
Monitorables

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Hospitality Industry: Heading towards Hospitable territory

Contact
PS Bhagavath Senior Director ps.bhagavath@careedge.in +91-22-6754 3407
Ravleen Sethi Associate Director ravleen.sethi@careedge.in +91-22-4533 3251
Richa Jain Assistant Director richa.j@careedge.in +91-22-4533 3200
Mradul Mishra Media Relations mradul.mishra@careedge.in +91-22-6754 3596

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