Hospitality: one of the worst hit sectors due to covid on road to recovery

Covid first appeared in early 2020, causing the economy to go into lockdown and severely affecting our industrial sector. Most operations were closed as covid wreaked havoc, and almost all sectors were impacted due to curfews and restrictions imposed by states, except for a few that grew despite the pandemic.

One of the hardest hit sectors was the hospitality sector, which accounts for a sizable portion of India’s GDP. But, despite increased efforts to break the infection chain, the economic damage to this sector has a cascading effect on the medium-term growth outlook.

Restaurants, bed and breakfasts, hostels, service apartments, pubs, bars, nightclubs, and other businesses are included in this sector. Because of the partial suspension of travel and containment measures, there was a drastic decline in tourist and business travel activities, resulting in a sharp decline in the early quarters of 2020 with a much larger impact on various areas of the hospitality sector. Consider the graph below, which demonstrates the sharp drop-in hotel occupancy rates because of Covid.

 

 

 

 

COVID-19 had such an impact on the Indian hotel industry that the country’s average occupancy in 2019 was 65%. However, in 2020 and 2021, it fell to as low as a single digit in some months and locations, severely affecting the industry’s overall performance.

Drastic fall in share prices on the onset of COVID-19

 

 

 

While the situation has improved, the hotel industry is expected to generate 60% of pre-COVID revenues in FY23. As of June 2022, hotel stocks are also back in favour with investors, with occupancy levels returning to pre-pandemic levels. Let us examine the pre & post covid situation of a few well-known hotel chains in India to assess the impact on the hospitality industry and to find out how long would it take to reach pre-covid levels.

Hotels have recovered up to 70% of their pre-Covid revenue and are on track to achieve 100% recovery by FY23.

Indian Hotels Company Ltd., founded in 1902, by the Tata Group’s founder, Jamshedji Tata, and its first hotel, The Taj Mahal Palace, opened in Bombay in 1903. The Indian Hotels Company Limited (IHCL) is now the largest hospitality company in South Asia by market capitalization and is publicly traded on stock exchanges.

While Mahindra Holidays is an Indian Hospitality company founded in 1996. It is a part of the Mahindra Group and provides holidays on a timeshare basis. It has a market cap of Rs 4,012 crores and is the market leader in the family holidays segment.

The Oberoi Group’s main company, EIH Limited (Market cap Rs 7,795 crores), is one of India’s major luxury hotel chains. EIH Ltd is a company that operates and manages luxury hotels, restaurants, management contracts, and travel and tour operations.

The Oberoi Lombok, a luxury resort in Indonesia, and Motor Vessel Vrinda, a luxury cruise ship in Kerala, were the company’s first forays into the international market. Airline catering, restaurant and airport bar management, travel and tour services, vehicle rentals, project management, and corporate air charters are all part of their service range.

 

 

 

 

Lemon Tree Hotels is the largest upmarket hotel and resort chain in India. It has a fitness Centre, a swimming pool, a business Centre, on-site eateries, and meeting rooms, all at moderate rates. It has a market cap of Rs 4872 crores. The company owns and operates 84 hotels, with 8300 rooms in 52 cities of India.

When their respective revenues over the last five years are compared, Indian Hotels, EIH & Lemon Tree Hotels are currently operating at 70% of pre-covid levels, while Mahindra Holidays is on track to reach pre-covid levels in next few Quarters. The graphs above tell the same story. The reason for this was the frequent occurrence of covid waves, which prevented hotels from operating at full capacity.

The government restricted hotel operations or we can say the operations of the entire hospitality industry to a certain extent, except for essential or emergency needs, causing hotel revenue to plummet sharply. Even, despite the subsequent opening of the economy with the removal of all restrictions, people were still hesitant to leave their homes and had trust issues with the hygiene level of hotels, so they preferred to stay at home with the fear of contracting Covid. Thereby severely affecting the revenue of hotel chains.

However, if we look at the companies’ profitability profiles, Mahindra Holidays made a loss of Rs 134 crores in FY20 even before the outbreak of the pandemic, and its profits were already on the decline from FY18. While it made a strong comeback in FY22, with profits nearly reaching pre-covid levels.

When it comes to other Hotels, the companies have yet to recover from their losses. The reasons for this were, first and foremost, the high capital costs that companies were unable to recover due to a halt in operations, and secondly, the advertising expenses that the company had to incur in order to regain people’s trust, as well as the reduced room rates to gain traction from customers which thereby affected their profit margins.

Tourism Industry and its connectivity with Hospitality industry

“The travel market in India is projected to reach US$ 125 billion by FY27 from an estimated US$ 75 billion in FY20. In FY20, tourism sector in India accounted for 39 million jobs, which was 8.0% of the total employment in the country. By 2029, it is expected to account for about 53 million jobs.”

The above statement clearly explains why the tourism industry is so important. Furthermore, its significance for the hospitality industry is also crucial because it generates a lot of revenue for a multitude of areas under hospitality such as hotels, restaurants, and bars.

The fall in the tourism is also one reason for the decline in top & bottom lines of players in Hospitality industry as their customer base got drastically curtailed due to mobility limitations, making it impossible for them to function at full capacity.

Outlook for FY23

The Indian travel market is expected to be worth $125 million by the year 2027. In 2020, due to the pandemic, foreign tourist arrivals (FTAs) in India decreased by 75.5% year on year to 2.68 million, while arrivals via e-Tourist Visa (Jan-Nov) decreased by 67.2% year on year to 0.84 million.

While the industry recovered significantly in FY21, the year was not without pandemic-related setbacks, as the appearance of a new COVID strain caused temporary stumbling blocks in the industry’s recovery. Travelers and hotel industry players, on the other hand, have continued to adapt to the changing environment and find new ways to move forward. Average room rates began to improve after the second wave, owing to a strong recovery in demand, and gradually approached pre-COVID levels.

So, if there are any more covid waves in the future, it may have an impact on the hospitality sector again, but the likelihood of any further waves is extremely low given India’s high vaccination rate and improved immunity levels. Even on a global scale, as the pandemic subsides, it is expected that the Indian tourism industry will be revitalized and return to pre-pandemic levels, which will be beneficial to the hotel industry given their complementary nature.

Our View

Many of the companies in the hospitality industry have already begun to return to pre-covid levels, it will take some time for them to restore to 100% pre-covid levels. Analysts anticipate that by the end of FY24, the majority of them will have reached or exceeded pre-covid levels. This is also reflected in their stock prices, which have already surpassed pre-covid levels for most of them and are likely to increase more in the future as long as covid stays under control.

As the global economy improves & travel and tourism return to normal, hotel operators will gain traction and be able to compensate for the lost growth.