Why the hotel sector affected by Covid could attract strategic investors and increase the flow of transactions

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(Representative image – Westin Goa)

Through Vishal V Singh, Siddharth Pal

The Indian hospitality industry was on the cusp of a bull cycle which started from FY16 to FY19. In fiscal 2019, the Indian hospitality sector was at an inflection point and poised for strong growth driven by healthy supply and demand prospects for the next two years with a increase in disposable income and foreign tourist arrivals (FTA). However, the Covid-19 pandemic abruptly halted the recovery of the Indian hotel industry. A marginal decrease was observed during fiscal year 2020, due to the early impact of Covid-19 in February 2020 and March 2020. Hard hit by the repercussions of the Covid-19 pandemic, the Indian hotel sector has experienced one of its weakest performances on record in fiscal year 21.

As the hospitality industry is inherently capital intensive with a long gestation period, historically hospital industry-wide debt levels have been high. With the onset of Covid-19, fiscal year 21 saw contracted revenues, massive operating losses leading to increased debt levels (companies opted for loan moratoriums and gradually borrowed for liquidity and working capital). The economic fallout from the Covid-19 pandemic has caused significant financial stress for hotel owners, potentially affecting the long-term viability of many hotel businesses.

To overcome this period of financial stress, the RBI on August 6, 2020 authorized companies to benefit from a loan restructuring for a period of two years, limited to debts in difficulty only due to Covid-19. However, most hotel companies could not meet industry-specific benchmark / threshold ratios as established by the RBI resolution framework and this framework could not provide much needed assistance to hotel stakeholders.

On June 07, 2021, RBI announced the Emergency Line of Credit 3.0 Guarantee Program (ECLGS) which provided 100% guarantee to member lending institutions offering new credit facilities to its borrowers in the hospitality industry (hotels , restaurants, wedding halls, canteens, etc.), travel & tourism, leisure and sport and civil aviation sector. This cash should provide much needed immediate support to cash-strapped hotel businesses. However, the industry needs to prepare for a much longer period of moderate demand resulting from the pandemic, with many industry experts indicating that this industry is expected to return to pre-Covid levels by FY 23/24.

All was not catastrophic in the hotel industry. Some of the hotel players have shown themselves to be nimble and have adjusted their strategies to survive during the pandemic. In FY21, some of the listed players witnessed changes in cost structures, with hotels streamlining the cost of staff per room, focusing more on increased automation, and outsourcing some of the non-cost elements. essential. Some of these cost rationalization measures undertaken during the pandemic are expected to have a lasting positive impact on hotel operating profit margins going forward. FY21 also saw an increase in the share of catering and ancillary services, with hotels increasing their services such as food delivery (via online platforms) or rental of kitchens for cooking needs. in the cloud and offering extended stay options or stay or work packages to customers.

According to market commentary, FY21 saw a strong performance from leisure hotels with a diversion of overseas leisure travel within India. This has renewed the interest of hotel companies in increasing their presence in leisure destinations in order to take advantage of growing domestic demand. FY21 also saw a change in guest behavior and preferences – most guests now prefer branded hotels for their intended stay (rather than independent, unaffiliated properties). Moderate market conditions could result in delayed openings over the next few years and some property closings causing a change in supply dynamics or negative supply growth in the short term.

These positive changes in the cost-income structure and the impact of supply and demand models have given a major boost to strategic players and investors who have a strong long-term vision of the hospitality industry and seek to expand their imprint in India.

Given the financial stress in the hospitality industry that has been exacerbated with Covid-19, lenders and hotel owners may be looking for an exit or ways to reduce debt. Lenders can initiate a series of insolvency proceedings against hotel companies. There could also be ad hoc loan settlement opportunities in hotel assets, hotel loan portfolio transactions, proprietary transactions and strategic opportunities with banks and financial institutions. FY21 did not see any large-scale hotel transaction activity, however, with prolonged weakness observed in the sector, the spread between supply and supply prices is expected to narrow. significantly and hospitality merger and acquisition activity may accelerate in fiscal years 22-23. There could also be opportunities to acquire an appropriate portfolio of hotel assets in key markets to increase the footprint. With customer preference for branded hotels, there could be a huge opportunity for Indian operators to enter into management contracts and focus on a thin asset model. Strategic players and investors with strong liquidity could benefit from a lower acquisition cost and probably more advantageous conditions.

(Vishal V Singh is Partner at Deloitte India and Siddharth Pal is Associate Director at Deloitte India. The opinions expressed by the authors are their own.)

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