With covid cases diminishing and mobility restrictions lifted, the hospitality industry, significantly harmed during the pandemic, is ready for a strong recovery. The resumption of scheduled commercial international flights, as well as a predicted increase in business travel as firms organize more offline meetings and conferences, are reasons that are likely to enhance demand.
The stock market reflects this optimism in the hotel industry. For example, the Indian Hotels Co. Ltd saw its stock hit a 52-week high on the NSE on Wednesday.
There is also an unmet leisure and wedding demand resulting from the Omicron coronavirus strain, which forced many such plans to be postponed.
“According to the India Hospitality Industry Overview 2021 by HVS Anarock, industry level occupancies are expected to touch pre-covid levels of 66% in CY22E/FY23E and reach 70% in CY24E,” said analysts at ICICI Securities in a report on April 6.
Due to a lack of significant supply addition in the last two years, coupled with strong demand, pricing power has increased. As a result, in FY23E, the average room rate is expected to return to pre-covid levels.
It also benefits Indian Hotels that the business recently funded 2,000 crores through a qualified institutional placement issue completed on March 25. This signifies that the balance sheet is debt-free.
The restrictions enforced to contain the spread of coronavirus over the last two years have harmed Indian Hotels’ cash flows, resulting in a 0.9x consolidated net debt to equity ratio in H1FY22, up from 0.4x in FY20. As a result, the free cash flow generated might be used to deal with anticipated covid wave interruptions or to boost operations.
On the back of bids to lower fixed costs and staff-to-room ratio, ICICI Securities forecasts Ebitda margins to climb to 29% in FY23E from 22% in FY20. But, even yet, considerable margin pressures exist.
“Sharp rise in margin is likely to be curbed by wage inflation. Many employees were let go in the past two years as covid impacted operations of the sector. As demand recoups, the workforce has to be increased which means there will be additional costs involved in bringing back the employees and training them,” said Vikas Ahuja, an analyst at Antique Stock Broking.
The possibility of demand not returning to predicted levels and a resurgence of covid cases could depress attitudes. Moreover, given that Indian Hotels’ stock is trading near all-time highs, sharp near-term upsides may be capped.