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Motilala Oswal performs hotel industry analysis in the midst of COVID-19 lockdown

Tuesday, April 28, 2020, 15:14 Hrs  [IST]
HBI Staff | Hyderabad

With India in midst of a lockdown owing to the Coronavirus (COVID-19) spread, Motilal Oswal Institutional Equities interacted with hotel players and experts to get an understanding of the demand scenario and measures deployed to reduce fixed cost. The company has also performed scenario analysis in this note. Some of the key insights they projected,
Severe first-order impact of COVID-19

•         Given the various travel restrictions imposed by the Indian Government as well as countries globally, the most visible and immediate impact of COVID-19 is seen in the hospitality and tourism sector. Almost all segments/verticals – inbound, outbound and domestic/leisure, adventure, heritage, MICE, cruise and corporate – have been impacted.
•         Forward bookings for various conferences and leisure travel bookings to foreign destinations have already been cancelled.
•         However, on a positive note, the 1H of the financial year is typically a lean season (40-45% revenue contribution) for the hospitality industry. Thus, hotel players would get ample time to prepare for the peak season and minimize business loss by reducing fixed costs.
•         Even if the lockdown is lifted on 3rd May’20, the recovery in the hospitality sector is expected to lag as corporate travel would pick up at a slow pace and leisure travel would also get postponed until the situation normalizes. Note that domestic travel demand would recover faster vis-à-vis foreign travel.
•         Additionally, lower Foreign Tourist Arrivals (FTAs) in India would weigh on occupancies as well as on the average room rate (ARR). Typically, foreign customer mix for IHIN stands at 35-40% and for LEMONTRE at 10%.
•         According to our interaction with a hotel expert, travel demand would be under pressure until a vaccine for COVID-19 is out and made available at affordable rates.
Impact on 1QFY21 to be severe in comparison to 4QFY20

•         Performance in 4QFY20 was mixed. While Jan-Feb’20 recorded RevPAR growth, Mar’20 witnessed an escalation in the spread of COVID-19. 
•         Thus, March witnessed severe occupancy decline, which has dragged overall 4QFY20 performance across hotel players.
•         Assuming the lockdown continues into May’20, hotels would have had negligible revenues for two consecutive months (Apr-May’20). RevPAR for Jun’20 too is expected to decline significantly, which should lead to overall revenue decline of >75% for 1QFY21. Further, fixed costs are also likely to lead to EBITDA losses across major hotel players. Should the lockdown extend beyond May’20, hotel players would be further impacted.
•          Large conferences and exhibitions generate demand for hotel rooms. These would also be affected as large gatherings would be avoided for 4-6 months. As a result, food and beverages (F&B) income would also get impacted.
•          Management contract income for brand owners would also remain under pressure. This is because a major part of the management contract income is linked to the operating profit of a hotel. Also, asset owners are high net worth individuals/real estate developers; hence, the segment would be under pressure due to the liquidity crisis.

Hotels Fixed cost rationalization need of the hour

Fixed cost accounts for 60-70% of the total costs for hotel players. With occupancy severely impacted due to the current crisis, players have started pruning fixed costs. 
First-hand cost saving measures deployed by hotel players include termination of contractual labor (accounting for 20-30% of the total employee mix), requesting permanent employees to avail balance paid leave, pay cuts for employees at senior levels, requesting 3-month waivers for annual maintenance contracts (AMCs)/fees/charges for activities that are fixed in nature, postponing negotiations for AMCs (usually due in March) and several other initiatives.
Hotel players are consolidating guests (in the same city) into one property, which would aid in cost savings as only one hotel would be in operation.
Additionally, hotel players are trying to save on the lease rent cost by negotiating with owners, invoking force majeure for hotel properties and deferred partial lease rental (e.g. 50% in 2QFY21 and rest in 3QFY21). 
Note that few fixed costs would be eliminated as significant portion of the hotel property would not be under operation; for instance, complete shutdown of hotel would save on power costs. ? Thus, all of above would provide partial relief to hotel players.
Availability of credit lines in such trying times is of utmost importance for survival in the near term. Scenario analysis for IHIN and LEMONTRE 
We have analyzed four scenarios, factoring in occupancy recovery for different time periods (refer exhibit 1 & 2). Also, revenue, EBITDA, net debt, debt to equity and target price have been shown under each case separately. We have factored in base case assumption into our numbers for IHIN and LEMONTRE for now. Estimates would be revised based on further clarity. 
In the bull case, MOFSL has factored in occupancy recovery from 3QFY21 and have shifted recovery by one quarter in our base, bear 1 and bear 2 scenarios. 
? Base case for IHIN: Modeled 15% occupancy for 1QFY21 and increased it to 40% for 2QFY21; for subsequent quarters, it has been increased to 50% and 55%. Thus, occupancy for FY21/FY22 stands at 42.5%/62%. Also, ARR decline of 10.5% for FY21 and growth of 5% for FY22 has been factored in. 

Base case for LEMONTRE: 

Recovery in occupancy is likely to be faster for LEMONTRE as it operates in the mid-market segment. Thus, we have built in 45.5%/65% occupancy for FY21/FY22. Change in room inventory mix should drive ARR growth of 9.5% for the LTP brand in FY21. 
Additionally, hotel players are likely to defer their capex plan. Valuation and view ? The impact of COVID-19 would not be restricted to just 4QFY20/1QFY21; it would have implications for the major part of FY21. Resumption in business travel may take longer as corporates may cut down on travel spends, MICE business would moderate as large gatherings would be avoided and leisure travel would be deferred/canceled as a precautionary measure.
Additionally, some business travel demand would also be lost as people accustomed to video conferencing would now travel only when of utmost need.
However, in the current scenario, hotels are likely to witness demand for rooms emerging from new segments like (a) hospitals tying up with hotel players to keep its staff safe during a pandemic, (b) employees of IT companies residing at hotels for running operations efficiently (markets like Hyderabad, Bangalore and Pune are likely to benefit), (c) employees working in industrial area would prefer hotels in the vicinity, (d) foreigners stuck in India due to the lockdown, and (e) rooms being provided for quarantine purpose (according to the government’s fixed rate). 
MOFSL has adjusted our models factoring in the impact of COVID-19 into our numbers. Accordingly, MOFSL has cut our revenue estimates by 47%/22% and EBITDA estimates by 95%/40% for FY21/22E for IHIN. MOFSL has a Buy rating on IHIN with SOTP-based TP of INR106. 
MOFSL has cut the revenue estimates for LEMONTRE by 50%/32% and EBITDA estimates by 73%/39% for FY21/22E. In our view, high debt remains a key overhang for the stock. However, note that capex for all LEMONTRE’s own hotels has already been completed, barring the Mumbai Airport hotel. MOFSL has a Buy rating on the stock with TP of INR23.

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