Check-In: How India’s Hotels Got Leaner In The Pandemic

“We need to rethink the organisation structure and what the structure of the industry will be like in terms of manpower ratio. We seriously need to look at the productivity ratios in the industry.”

This was the management of Chalet Hotels, which operates Marriot and other brands, at the peak of the Covid-19 crisis, in an interview with BloombergQuint.

While daily life is nowhere back to normal, there are early signs that the hospitality industry may be hurt less than was imagined earlier, and some players could recover lost ground a lot more than others.

There is a near week-on-week improvement with significant traction in corporate travel and pick-up in demand from individual-based business travel. Costs have been pushed down strongly, with some companies seeing an over-40% reduction in fixed costs. That makes this a good time to analyse the sector dynamics.

Do Valuations Provide A Clear Picture?

In the current flux, investors should be cautious in weighing valuation assumptions for such a deeply-cyclical industry. The estimates from various brokerages diverge more than align, and show how the projections for FY23E (which could be the first full year of normalised earnings) are being gauged very differently.

Indian Hotels, for example, trades anywhere between 16.5x to 19.5x FY23E Ebidta currently, even as the assumptions are below the longer-term average of around 20x.
Chalet Hotels has a large commercial project share in its earnings, alongside hospitality. Thus, the sum-of-the-parts math varies significantly between brokerages.
Lemon Tree has been listed for a mere three years, so without long-series data, a comparison of its nearly 17x FY23 EV/Ebidta multiple with longer-term EV/Ebidta averages is impossible.

Cost Structures Getting Vacuum Cleaned

For months now, the industry has cut down on fixed costs, and may make it the new normal. Let’s recap some of those numbers:

Indian Hotels, over the nine months of FY21, has brought down its fixed costs by 27%! In the latest press release, ITC has mentioned that fixed costs of its hotel business were down by 44% in Q3FY21.
The staff-to-room ratio, even for luxury hotels, is a lot more rationalised. Indian Hotels has brought down the staff-to-room ratio from 1.53 in April 2020 to 1.14 in December 2020, and the same for Chalet Hotels was at 0.73 in December 2020 versus 1.18 in December 2019.
This, plus improved utilisation has led to an uptick in Ebitda numbers for the quarter. Ebitda for the sector was positive in December, and the hotels business delivered Ebitda-breakeven in Q3. Indian Hotels was Ebidta positive for Q3, after being in the red for the first two-quarters of FY21.

Brands Have An Advantage In Post-Covid World

The trend of ‘big getting bigger’ might play out with somewhat of a twist in the hotel industry. Having a larger room count might actually be seen as crowded and hence hazardous. That said, there is anecdotal evidence of customers willing to pay a premium for perceived safety in the hands of larger players.

An Indian Hotels presentation quantifies that shift, stating that the premium that the Taj brand is able to generate versus the industry is now at 1.59 times, higher than the pre-Covid premium of 1.4 times. That combination of higher revenue per room. with lower fixed costs for the property is a very potent one, and augurs well for the company, as well as others that customers identify as premium brands.

Meanwhile, India continues to have the lowest proportion of branded hotel rooms compared with major Asian hotel markets, as per an Anarock study. Shanghai and Beijing are nearly 10 times the size of our major hotel markets, that study says, and therefore on a relative basis, presenting opportunity for further formalisation.

Right-Sizing Supply

Ambit Capital finds that some upcoming projects have been shelved or converted into mixed-use development, which would help players survive in the mid-term (4-5 years). Also, expect distressed properties to be available for sale over the next 2-3 quarters. Simply put, a long-term reduction in supply of 15-20% implies that the industry recovery upcycle will last longer.

The Recovery Playbook

Did tourists that were unable to travel overseas during the pandemic pivot towards spending the same amount of money on domestic stays? Marriot International’s December earnings presentation found this being the case in China, but the Indian market shapes up some what differently.

The guest composition in India’s top seven cities is very heavily skewed towards business travelers; especially in Mumbai, Bengaluru, Kolkata, and Pune; while New Delhi and Chennai are relatively evenly distributed. Beyond the big cities, leisure travel has shown a pick-up, as evident by occupancies in Mahindra Holidays and Resorts (Q3 occupancy at around 75%), and that Goa continues to be the leader in revenue-per-available-room in absolute terms (despite a decline of 33.3% in October-December of 2020 compared to the final quarter of 2019, as per a JLL report).

What Will Drive Demand?

Business travel is starting to show some uptick. Chalet Hotels’ investor presentation says the company finds visible green shoots, with significant traction in project-based corporate travel. Normalisation in that segment will mean a lot of the listed hotel companies will see an uptick in occupancies and revenues. The other domestic trigger is weddings. As per a report from SKP Securities based on channel checks that they conducted, hoteliers’ yield per marriage in Oct.-Dec. 2020 was at par or better than even last year. The first half of 2021 does have a large number of wedding days, which, Covid-permitting, could help the industry combat the low occupancy scene.

Normalcy Vs Covid Resurgence

Most analysts cite upside risks to estimates if normalcy returns to India sooner, with better-than-expected occupancies, average daily rates, and the early completion of upcoming projects. This is provided there is no large new wave of the coronavirus that could potentially destabilise operations. Needless to say, the hotels space remains sensitive to a prolonged reemergence of cases, restrictions by authorities and precaution from consumers.

Niraj Shah is Markets Editor at BloombergQuint.