NEW DELHI: With leisure and business tourism coming to a standstill because of the Covid-19 pandemic, India's hospitality sector is facing its biggest crises ever. Credit Rating agency ICRA, in a note on Wednesday, said that the mounting credit stress may force several hotels to shut down their business permanently.
It said that the debt servicing holiday announced by the RBI of six months is inadequate for asset-heavy sectors like hospitality, given the expected duration of demand decline.
“Given this scenario, ICRA expects steep increase in credit distress to mount in the coming months in the Indian hospitality industry, with several hotels shuttering shop permanently,” Pavethra Ponniah, Vice President and Sector Head, ICRA said.
According to the Rating Agency, start of the recovery is about three to four quarters away and contingent on a cure or a vaccine. Normalcy could be much further away, over to two to three years.
Supply increases previously anticipated for 2020 and 2021 will get pushed back by at least 12 months; projects in the initial stage of development will be cancelled as developers and lenders turn risk averse, it added.
With high operating and financial leverage, estimated cash breakeven occupancy for a typical 200-room premium hotel is at about 38-40%. Financial leverage is high, given the asset-heavy nature of the industry, with average interest cover of 2x and total debt by EBITDA of 5x in ICRA’s sample of 50 hotels across credit profiles.
At present the hospitality industry in India is operating at 10-15 per cent occupancy and losses are mounting. It is expected that there will be a 30-50 per cent decline in revenue per available room (RevPARs) during FY2021.
Ponniah says, “The pandemic and the containment measures introduced by Governments globally and in India resulted in a severe drop in foreign and domestic travel across the world, in both the business and leisure travel segment. This will leave a lasting impact on the credit profile of airlines and hospitality companies. Globally, airlines and hotels have acknowledged the depth of this decline with recovery stated two to three years from now. Drastic cost control measures, stocking up of liquidity, preliminary reopening plans, and a sharp reduction in future supply addition are in the offing.”
On the airlines side, IATA predicts that passenger traffic recovery to pre-COVID levels will happen only by 2025 and in the meanwhile, airlines capacity reduction and/or failures will result in reduction in supply.