74% of hospitality sector face negative credit profile, 2nd wave delays recovery: ICRA

-CB Edit Desk

Three out of four companies in the hospitality sector have faced negative rating actions regarding their credit profiles because of the impact of the pandemic, and the second wave has derailed the industry’s recovery by almost three quarters, according to a report from ICRA.  Being one of the high contact sectors, hospitality has been one of the first and worst-hit sectors because of the pandemic, and the second wave has only added to their woes as it has come at a time when the industry was on its path to recovery.as reported by ConstructionWeekOnline.

Since mid-April, the industry has been affected by the pandemic-related lockdowns/restrictions on mobility by various states and increased wariness to travel due to fear of infection contagion, ICRA said in statement. “We continue to maintain a negative credit outlook on the hospitality sector, as their credit profiles have weakened in the last 12-15 months, with 74% of the entities faced negative rating actions,” rating agency ICRA said in a report.

The report also noted that the second wave has derailed the industry’s recovery by 6-8 months, and a return to the pre-pandemic levels is now expected by the financial year 2023-24. The report noted the impact of the second wave of the pandemic on the industry in the first quarter of FY22 after two quarters of sequential recovery in Q3 and Q4 of FY21 till mid-March this year. It warned that weak operating performance and part-funding of the losses through debt are likely to result in stretched coverage metrics in FY22 as well.

ICRA sector head and assistant VP Vinutaa S said the intensity of covid 2.0 has been far steeper than the first and it has put a temporary brake on the industry’s recovery path. It expects a significant scale back in FY2022 pan-India RevPAR (Revenue per available room) estimates to Rs 1,300-Rs 1,500, from an earlier estimated RevPAR of about Rs 2,500. FY2022 RevPAR is likely to be at a 60-65 per cent discount to pre-covid levels.

Although this will be an improvement from the low base of FY2021, the pandemic timelines pose downside risks to the estimates. The situation is still evolving and remains contingent on the pace of vaccination, efficacy of vaccines, high infection rates and possibility of a third Covid wave. All-India average room revenue was at Rs 3,600-3,700, about 8-10% on a year-on-year basis, although the demand slowdown has impacted it since the onset of the pandemic.

It expects a long road to recovery, with the revenue recovery to pre-covid levels expected only by FY2024. ICRA continues to maintain a negative credit outlook on the sector. Pencilling in a long road to recovery, the report said improvement in room occupancy and rates is expected only by FY24. It added that debt/ operating profit ratio is expected to surpass 2019-20 levels (of 5x) by FY24, leaving the ‘return on capital employed’ at sub-cost of capital at least until FY25, despite minimal capital expenditure.

Demand slowdown has significantly impacted the first quarter occupancy and average room rates, although it is better than year-ago quarter levels. As against a 10-12 per cent occupancy in April-June 2020, it was higher at 26-28 per cent in April-June this year with demand in May largely coming from quarantine business for mildly infected patients. ICRA said the pick-up in demand in the second half of 2020-21 was largely led by leisure travel, ‘staycations’, wedding MICE and higher F&B revenues. Some business travel in specific sectors also aided recovery.

However, with demand and occupancy declining severely in Q1 FY2022 due to cancellation of several events, travel restrictions, revenues are expected to witness a drop of 50-55 per cent quarter-on-quarter basis, although the decline would be lower than Q1 FY2021, which was marred by the pan-India complete lockdown, it said.

Icra’s industry sample is expected to report operating losses in FY2022 as well, although it will be lower at low-single digit, compared to the 23% operating loss witnessed in FY2021. This will be supported by better operating leverage and sustenance in fixed cost saving initiatives undertaken in FY2021, the ratings agency added.

The debt levels rose in FY2021, owing to incremental borrowings for meeting financial and operational commitments and push-back of debt repayments because of availment of the RBI-provided moratorium. Given the second wave, and a delayed recovery, it expects the industry sample to report cash losses in FY2022 as well.

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