Tourism & Hospitality Sector : Is It Ready To Party?
For many the tourism and hospitality sector may have become a long forgotten story. However, with the recent developments and pent-up demand it is now quite ready to shine again. Or it is so? Geyatee Deshpande discusses the ground realities of this sector and presents the bare facts through numbers
The corona virus pandemic was especially hard on the tourism and hospitality industry. Domestic and foreign travel was brought to a complete standstill while hotels which had geared up for seasonal business to pick up had no guests. Hence, considering the downward spiral of the sector, like an outcast the shares of companies belonging to the tourism and hospitality sector were dumped by investors from their portfolios to make space for better ones. Various reports have made rounds discussing topics ranging from airline companies being on the brink of bankruptcy to hotels closing doors probably forever. Meanwhile, many companies continue to take various measures to hold on to their business and profitability.
Recently, Asian Hotels (West) announced that it has temporarily shut down its property Hyatt Regency in Mumbai due to a major funding crunch with no money to run the day-to-day operations of the hotel or pay salaries to its employees. While the pandemic has shaken the worldwide economy, its worst ill-effect has been the stagnation in the tourism and hospitality industry with travel and hotel stays pushed to the backburner. The major brunt of this pandemic backlash has been felt by the luxury hotels. India being the third-largest globally in terms of investment in travel and tourism in 2018, KPMG in a report estimated that the tourism and hospitality sector would grow at 16.1 per cent CAGR to reach Rs 2,796 crore in 2022.
But now, World Travel and Tourism Council has predicted that up to 50 million jobs in the travel and hotel industry are at risk due to the global pandemic, several of which are likely to be in India. According to the Federation of Hotel and Restaurant Associations of India (FHRAI), the Indian hotel industry has taken a hit of over Rs 1.30 lakh crore in revenue for FY 2020-21 due to the impact of the pandemic. As per a report by global real estate consultant JLL, India’s hospitality sector witnessed a decline of 38.7 per cent in revenue per available room during the first quarter of calendar year 2021 as compared to the corresponding period in the previous year.
The revenue per available room in the top six cities has decreased by 48 per cent. This can easily be concluded from the below table wherein a few prominent names in the industry have reported net loss for Q4FY21 compared to net profit reported in Q4FY20. The sales figures have also tumbled on year-on-year basis. For example, The Indian Hotels Company posted net loss of around Rs 89.92 crore for Q4FY21 as compared to net profit of Rs 66.81 crore reported in Q4FY20. Further, during Q4FY21 Chalet Hotels witnessed a dip of 57.1 per cent YoY in net sales and EIH Limited, which is the flagship company of the Oberoi Group, saw a decrease by 47.3 per cent YoY in net sales during this period.
But there’s optimism yet. “When people look at the tourism and hospitality sector striving for limelight and growth for years now, the impact of the pandemic makes one to give up hopes but this is not the end of the story. The tourism and hospitality sector hasn’t yet seen its silver lining but that doesn’t mean there won’t be one,” says Mahir Pratap, an avid investor who has always been quite optimistic about the tourism and hospitality sector. Moreover, owners and operators are using the pandemic and the opportunity to cut costs and permanently change, or at least temporarily change, the operating model because it was already an issue.
The pandemic has additionally allowed many to see different business models while scaling back services to help curb the spread of the virus. Even with tough times, recovery in the sector is not far away. This would be seen in the domestic as well as foreign markets. US hotel occupancy surpassed 60 per cent for the first time since early March 2020, led by the top 25 markets where each hotel on an average sold 15 more rooms than the previous week. Mainly, recovery of the sector is driven by the leisure segment performing notably well. As corporate travel followed by leisure travel increases, the pace of recovery will start picking up.
A successful vaccine rollout will also provide a cushion to travellers and thereby lead to demand growth in the tourism and hospitality sector. The table below considers the same set of companies as in the first table but highlights the improved financial performance in Q4FY21 compared to Q3FY21. While net sales have seen an increase in Q4FY21 compared to Q3FY21, net loss on an average reduced during the two similar time periods as companies are now better equipped to handle any financial and business dents by aptly creating provisions.
And indeed, the recent surge in stocks belonging to the airline industry also indicates the strong confidence of investors. As the number of new infected corona virus cases continues to reduce in India, people remain optimistic about travel opportunities. Any news related to easing of travel restrictions has resulted in a rally in shares belonging to the tourism and hospitality sector. It can be seen that in spite of the pandemic, shares of InterGlobe Aviation operating under the brand name IndiGo Airlines increased by 78.11 per cent in the last one year. In the previous one month, SpiceJet gained by 14.43 per cent while it is up by 54.01 per cent in one year.
While the unlocking of economy has brought about growth in demand in the tourism and hospitality sector, government aids have also been acting as a boost. Recently, shares of hotels and tour operators showed gains after the Reserve Bank of India announced a separate liquidity window for contact-intensive sectors such as restaurants, hotels and those involved in the tourism and hospitality sector. This cheer in the sector can be seen with a positive performance by some of the companies in the sector in the last one month.
Surely, the business post the easing of lockdowns is expected to be different in 2021 compared to 2020 since it was partial this year. Primarily, sectors such as hospitality, travel and entertainment are to benefit the most from pent-up demand. Fondly referred to as India’s own Warren Buffet, Rakesh Jhunjhunwala believes that this is a temporary phase. According to him, “The pandemic is just flu, not cancer. It can affect a company’s operation for a quarter or two, but investors cannot give up on the next 10 years,” Demand may soften in the near future but companies will be able absorb it through price hikes and by improving efficiencies. So is it time for the tourism and hospitality sector to come out of the eclipse? It’s a tricky question to answer.
While the sector holds a lot of growth opportunities, another wave of the virus and subsequent travel restrictions will again stun the sector’s upward trend. Large hotels may continue to be a drag for the industry as operational expenses become a burden. That said, with the situation now returning to near normal, demand-led growth will take a big leap. Our recommendation is that now is a good time for those investors willing to take some risk to invest in shares of companies operating in this sector. However, investors looking for near-term strong returns may take a miss due to the volatility in the tourism and hospitality sector while those who believe in the ‘buy, hold and forget’ strategy can take a bet with focus on medium to long-term period for returns.