Seminar Paper-2

IMPACT OF COVID ON PREMIUM HOTELS IN

INDIA

by
Pranav Patil
Roll no-097
JBIMS MMS-1
Contents
Summary .............................................................................................................................................................................. 3
OVERVIEW OF HOTEL INDUSTRY............................................................................................................................. 4
Market size of premium hotels in India.............................................................................................................. 4
Classification of hotels in India .............................................................................................................................. 4
Industry characteristics ............................................................................................................................................ 5
IMPACT OF COVID-19 ..................................................................................................................................................... 7
Impact of COVID-19 on premium hotels ............................................................................................................ 8
Profitability of premium hotels .......................................................................................................................... 10
MITIGATION STRATEGIES AND EMERGING THEMES................................................................................... 12
Result and Discussion .................................................................................................................................................. 14
APPENDIX ......................................................................................................................................................................... 15

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Summary

The impact of Covid-19 from its first reporting on 31st January, 2020 has worsened significantly contrary
to the belief many had. In December, 2020 India and the world are still grappling with the Covid-19, with
close to 68 million cases and 1.5 million deaths recorded till date. While the death rate in India is one of
the lowest stringent lockdowns in the first quarter of FY21 and subsequently slow and staggered manner
of opening up of the economy has affected the resounding bounce back of the economy. Travel and
tourism have been one of the worst hit sectors in the course of this pandemic due to restrictions on
movement of people, income erosion and sharp nosedive in discretionary spending due to the lurking
uncertainty of the pandemic and recovery. The hotel industry was among the worst affected industries
within this sector.

The premium hotel industry in India which was long dependent on foreign tourists (both leisure and
corporate) was slowly seeing a shift towards domestic populace (particularly with increasing share of
MICE, short for meetings, incentives, conventions and events and corporate travel). But come Covid-19
and each of these traditional demand segments remains muted. Demand took a major hit as airlines were
grounded, travel embargoes imposed by countries across the world and MICE (meetings, incentives,
conferences and exhibitions) activities got cancelled. Although the impact was visible from mid Feb and
early March, the adversity of the impact was greater in the first half of FY21.

With the restrictions now easing and a vaccine in sight, the hotel industry is crippling back to life with
close to 20-30% of the business YOY. Through this seminar paper we intend to study the gravity of the
impact of Covid-19 on the premium segment hotels, the initiatives taken by the players in the industry to
survive the unprecedented financial burden on the lost business and the new emerging business models in
the hotel industry.

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OVERVIEW OF HOTEL INDUSTRY

Market size of premium hotels in India

In fiscal 2019, CRISIL Research reported that the premium hotel industry had grown by 7.4% to reach Rs
348 billion from Rs 324 billion in fiscal 2018. This came at a time when the macro-economic
environment (in India as well as globally) was gradually improving and the hotel industry's protracted
cyclical downturn was nearing its culmination. The overall hotel industry since then is also expected to
grow mirroring the growth in the premium segment as well the mushrooming mid-market segment.
The demand for the premium hotels to have increased by nearly 5% y-o-y during fiscal 2019. This
coupled with relatively moderate growth in supply (4-5% during fiscal 2019) helped occupancy rates to
remain nearly at par (on-year) vis-a-vis their decadal lows of fiscal 2014. The average room rates (ARRs),
however, have seen an improvement despite the intense competition prevalent in the segment and from
mid-market hotels. An aberration in 2020 due to the outbreak of the pandemic has reverted the positive
trend we were observing to pick up and a slow crippled recovery is expected going into FY22 as well,
depending on how the vaccine program pans out. The impact that the premium hotel industry in India
faced is the crux of this paper and will be delved into after covering a few important concepts and
industry structure of hotels and hospitality in India so as to develop a better holistic understanding of the
sector before we analyse the impact of Covid-19.

Classification of hotels in India

As per Ministry of Tourism in India the hotel industry is classified as given below:
1. Star hotels: As per the guidelines these are further classified into 1-star, 2-star, 3-star, 4-star, 5-
star and 5-star deluxe depending on the various facilities and services extended by these hotels to
their guests. The ministry revises this list every 5 years. Below is a snapshot of the same:

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 2. Heritage hotels: Heritage hotels include old palaces, forts and havelis that have been converted
into hotels. Heritage hotels are further classified into:

● Heritage basic: This category covers residences, havelis, hunting lodges, castles, forts and
palaces built prior to 1950 and subsequent to 1935. The hotel should have a minimum of five
rooms (10 beds) as an eligibility criterion.

● Heritage grand / heritage classic: This category covers residences, havelis, hunting lodges,
castles, forts, palaces built prior to 1935. The hotel should have a minimum of 15 rooms (30
beds) as a minimum requirement.

Industry characteristics
To better study and understand the industry characteristics we classify hotels in two categories – business
and leisure. Under both these categories, cyclicity and seasonal nature of the industry is exhibited. It must
be noted that while these business and leisure destinations are not mutually exclusive, the demand
dynamics are quite different and explained below:

Cyclicity

The hospitality sector is cyclical in nature. During positive cycles, the industry witnesses periods of
sustained growth and healthy average room rates (ARR) and occupancy rates (OR). This trend continues
until the economy undergoes a downturn or when there is excess supply in the sector.

Business destinations are more sensitive to macroeconomic factors i.e., RevPAR (revenue per available
room) growth in business destinations is more sensitive to macroeconomic indicators such as GDP
growth. On the other hand, Leisure destinations are more sensitive to non-economic factors such as
crimes/terror attack and health related travel warnings.

Seasonality
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 The nature of demand in the hotels industry is seasonal. Though the peak season (January-March) is the
same for both business and leisure destinations, the two segments exhibit a markedly different behaviour
during the rest of the year. Generally, OR at business destinations remain relatively constant from April to
November. On the other hand, leisure destinations witness low OR (around 55-70%) during the May-
October period, while occupancy is good (above 70%) during December on account of holidays.

Monthwise Foreign Tourist Arrivals in India

Revenue streams:

1. Room: Room revenues comprise revenues received as room tariffs. These amount for about
50-55% of total revenue pie of a hotel. The total room revenues for a property can be calculated
by –
Room revenues = Room nights sold * Average room rate, where, Room nights sold = Number
of rooms * Occupancy rate * Time period (days)

2. Food and beverages: Food and beverage (F&B) revenues include revenues from restaurants
and banquets and contribute close to 35-40% of the hotel’s revenues. Various factors like
occupancy rate, probable destination and setup for banquets, marriages or conferences and
location of the hotel determine overall F&B revenues.

3. Others: Other revenues include revenues from spa services, telecommunication services, laundry
services and transport facilities offered by hotels which constitute for about 5-10% of the total
revenues.

Major costs:

Hotels have high fixed costs. Primarily they incur fixed costs in the form of employee salaries for
reservations and housekeeping staff. Adding to this is the rent and maintenance and continuous
furnishing of the properties. These costs remain largely at the same level irrespective of low or high

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occupancy levels. As a result, the marginal cost per
extra guest is low and thus, the break-even point is
very critical in this industry. Hotels usually roll out
offers and discounts reducing room tariffs if the
occupancy rate falls below a certain benchmark.

In this very nature of the hotel industry lies the hint

of why hotel and hospitality industry were one of the
most severely impacted due to Covid-19.
Discretionary spending plummeted close to zero, and
travel almost came to a standstill for a few months
due to the lockdown, which meant no revenue for the hotels but continued cash outflow in terms of the
fixed costs cost the companies and industry overall dearly. Facets of the impact of Covid-19 on the
premium hotel segment in India is discussed in detail in the paper further.

Few of the companies in Hotel industry and their performance:

Nprofit
S.No latest Sales Sales in Operational
. Name CMP Rs. Mar Cap in Cr. Qtr in Cr. Latest Qtr year Rs.Cr. margin ROA %
1 Indian Hotels Co 147.35 17529.7 -91.3 615.02 1575.16 -22.97 -8.56
2 EIH 117.8 7379.84 -48.87 216.26 497.08 -70.95 -8.7
3 Chalet Hotels 189.75 3890.32 -25.96 97.83 294.39 1.02 -3.38
4 Mahindra Holiday 284.65 3807.69 -10.17 465.41 1729.96 13.37 -0.16
5 Lemon Tree Hotel 43.75 3466.08 -16.82 95.08 251.72 22.75 -4.92
6 ITDC 400.4 3435.95 -10.45 44.22 190.66 -27.13 2.67
7 Barbeque-Nation 907.1 3403.6 6.19 226.35 507.08 9.15 -8.98

IMPACT OF COVID-19
The count of cases from 1 on 31st January, 2020 has drastically increased beyond 1 crore total cases in the
country as of 30th December, 2020. The consolidated figures worldwide are even more disappointing.
Nearly all countries reported confirmed cases of Covid-19, its implications on the global economy are
more threatening than was envisaged initially.

International corporate travel is largely suspended till end of March 2021 with many meetings as well as
exhibitions taking to the online mode of information sharing. Since premium hotels are highly dependent
on corporate travel and MICE (meetings, incentives, conferences, and exhibitions) activities, restrictions
in these categories led to occupancies falling to 10-15% in Q1 of fiscal 2021 and have remained muted
despite select hotels deriving some revenue from irregular temporary demand and others remaining non-
operational during the period. While mild recovery is seen across premium segment hotels, it is far from
growing robustly to climb back to pre-covid levels.

Globally, premium brands like Marriott, Hilton, Hyatt had seen a revenue decline of about 72-81% in
Apr-Jun 2020. In some countries like China where in some places the number of active cases had begun

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to plateau, a strong increase in demand was seen with occupancy rate rising up to 60% by August
end. The recovery is also visible in US markets, faster for the mid-market than the premium segment. In
Europe the occupancy is still around 30-40%, due to higher dependence on international travel which
remains severely impacted.

Impact of COVID-19 on premium hotels

The global financial crisis of 2007-08 had left the hotel industry in a relatively dormant state due to very
less demand with oversupply. Hotels which tried to exploit by increasing the ARR (Average room rate)
saw a tough time to close their financial books with many pending projects. With the arrival of the
COVID-19 pandemic, the hotel industry started feeling the heat. Due to restricted travel, and other
lockdown measures, the premium hotels were the first to start taking the hit from the month of March.
Also, with the major economies like the US and Europe facing an economic slowdown, and India
following them, the near future does not look very bright for the industry which beginning to see the start
of slight recovery however, a wave of another virus cannot be ruled out.

The premium hotels, whose major chunk of customers were foreign tourists are now slowly moving
towards the domestic consumers due to the travel ban. But the domestic demand also remains very low
due to a cut down in discretionary spending. Demand took a major hit as airlines were grounded, travel
embargoes imposed between states and MICE (meetings, incentives, conferences and exhibitions)
activities got cancelled. Most premium hotels are located in major metros of the country which were
under the most stringent lockdown for the fear of virus multiplying in the densely populated cities.

For sustenance, many hoteliers are moving into a new source of income by providing quarantine spaces
to customers who have either travelled abroad or domestically. Even though the rooms are mostly on sale
for highly discounted prices, it provides a temporary relief for the players in this industry. If the demand
does not rise soon, it could lead to a high liquidity pressure on hotel owners, especially single property
owners having a single source of income, and push them to closing their businesses.

A report from CRISIL Research estimates premium hotel revenues to have grown by 4-5% in fiscal 2020
and is expected to decline by ~50-60% in fiscal 2021, as both occupancy and room rates have fallen
drastically. Shutdown and relatively low demand scenario will lead to erosion of operating margins, due to
high operating leverage of hotel business with large share of costs being fixed in nature. Though most
premium hotels in India are a chain backed by deep pocketed corporates, this will strain the finances of
hotel players who have high gearing to service debt. But those with adequate cash balances can hopefully
get through the current scenario.

It looks like the pandemic might have a much more drastic impact on this industry than did the financial
crisis of 2007, with the whole scenario being contingent on an effective vaccine for COVID-19. The
second lockdown is doing the same damage that the first lockdown had done.

Pan-India: Review and outlook

Demand in fiscal 2020 is estimated to have been at par with supply additions, growing at ~3% (on-year).
Demand was lackadaisical during the first half of the year owing to multiple factors, and it was better in
the second half, only to decline owing to Covid-19 from last week of February, when cancellations started
coming through, both for corporate bookings as well as MICE events. Some of the measures from the
government such as reduction in GST rates, relaxation of norms, revision of visa fees, etc. had enabled
improvement in demand before COVID-19.

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Some of the reasons that would push the demand for the premium hotels to decline by 45-50% y-o-y in
the fiscal year 2021 would be:

● The international flight segment being banned has impacted highly on the premium hotel
segment because much of their customers are foreigners. With the global economic slowdown
these customers do not seem to be future prospects as can be seen in the graph below.

● Any MICE activities except small ones would be banned due to the social distancing norms as
well as the regulations in the allowed capacity a hotel can accommodate
● The interaction in the corporate world has moved completely on to the online mode with the
onset of COVID-19. Companies have started utilizing platforms such as Zoom, MS Teams and
Skype. This will be a factor for the muted demand this fiscal year
● The increasing number of COVID-19 cases have also instilled a negative attitude in the minds of
consumers against travel which would affect the demand the sector

Corporate as well as leisure travels from foreign countries is bound to decline in the short run due to the
economic slowdown. In India also, the stringent measures have affected the manufacturing and
continuing productions of import as well as export dependent companies which had also contributed to
the MICE demand. The revival of demand might take time and is also highly contingent on the
availability of an effective vaccine. Hotels have ensured some revenue by catering to the quarantine
business of repatriation guests, accommodations for medical force, employees associated with business
continuity operations of companies. Demand for domestic leisure and small events like weddings have
seen better numbers in the second half of the 2021 fiscal year which would be a relief to the industry.

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The supply addition has also stopped growing owing to a decrease in the demand. Leisure destinations
will see comparatively reduced supply additions, with premium segment inventory increasing from
~16,150 rooms in fiscal 2020 to ~17,000 rooms in fiscal 2021. The aggregate number of premium rooms
at

business destinations is expected to increase from ~61,400 in fiscal 2020 to ~63,000 in fiscal 2021.

Profitability of premium hotels

Reduction in aggregate revenue

Usually, hotels witness a better performance in the second half of fiscal (which holds true for both
business and leisure destinations), as has been the observation in the past between the quarters of the two
halves [In fiscal 2019, while H2 revenues accounted for 58% of the total revenues for the fiscal, H2
operating profits accounted for ~76% of the total operating profits for the year].

In the first half of fiscal 2020, operating margin of the set has remained the same compared to the same
period last fiscal, despite a fall in set revenues, whereas margins improved in the third quarter. This was

mainly on account of correction due to the new accounting methodology Ind AS 116.

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With Covid-19 rapidly spreading across countries, booking cancellations began by mid-February and
intensified in March, as non-essential travel stopped, which negatively impacted the occupancy rates.
Hotels saw their occupancies fall into the sub-30 category in the month of March, which will lead to
decline in revenues in Q4 FY 20.

In the initial half of fiscal 2020, the revenue of key listed players in the premium segment declined by 4%,
due to reduced demand, particularly corporate and MICE, owing to the general elections countrywide and
grounding of operations of a major airline. The growth in foreign tourist arrivals during the same quarter
was also marginal at 3.3 %. Whilst revenues for the set grew by ~2% in the third quarter via a boost in
demand from revision in GST rates, along with improvement in room rates. With the COVID-19 impact
in Q4, set revenues for the period reduced by 15-17%.

The aggregate revenue of the listed premium segment hotel companies fell by ~5% in fiscal 2020, due to
loss of business in March and February as well as lacklustre performance in the first half.

During fiscal 2021, decline in occupancy rates and room rates will lead to decline in revenues, it is
estimated that this figure will be around 50-60%. The intensity of decline in revenues is also dependent
on parameters like manufacturing of COVID-19 vaccine and change in consumer behaviour due to social
distancing norms.

This coupled with erosion of margins to 0-4% is expected to put strain on other financial parameters as
well, due to high operating leverage of hotel business with large share of fixed operating cost. Costs such
employee cost and licensing costs have to be borne by hotel owners even during times of lockdown,
when hoteliers have no business at all. However, in fiscal 2022, aggregate operating margins are expected
to jump back to 20-22%, as companies are expected to exercise cost control measures till significant
demand revival is visible.

In this low demand, hotels are cutting down on many of the cost items to ease the liquidity pressure for
some time and many have availed benefits under the moratorium period to preserve cash.

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Reduction in Bond Credit Rating

The ratings data of the hotels, as per Quantix, reveal that most of them are concentrated in the sub-
investment grade, i.e., debt rated below BBB. Cyclicality has been an inherent risk in the sector, with
aggressive inventory additions having taken place six-seven years ago which restricted growth in both
ORs and ARRs thereafter.

The reasons behind the downgrades in the sector has been majorly due to delays in debt servicing due to
weak liquidity causing cash flow mismatches due to seasonal revenue. With the Covid-19 pandemic
coming into the picture, ratings of small companies which may have trouble servicing debt have been
downgraded. The rating outlook for the entire sector has turned from stable to negative. However, ratings
of some companies have been kept on watch, who have enough liquidity in the form of cash accruals and
overdraft facilities to cover the operating costs for at least the first half of fiscal 2021.

MITIGATION STRATEGIES AND EMERGING THEMES

In order to mitigate the effect of Covid-19, the premium hotels in India have assessed the situation across
various cohorts of their customers and tried to respond with new innovative strategies to keep afloat.

1. Foreign tourists: Most countries have had some or the other form of travel restriction on their
citizens along with grounding of flights. India has been proactive in this to contain and mitigate
the spread of virus entering India, which subsequently hurt the premium hotel business segment
to which foreign leisure and medical tourism contribute immensely. The hotels then tied up with
various hospital chains for quarantine services for patients as well as medical professionals
traveling.
2. MICE: Meetings, incentives, conferences and exhibitions took a hit due to Covid and is expected
to have a long-lasting impact. Covid-19 has brought about a shift in consumer behaviour. Many
organizations have discovered the potential cost cutting benefits with online communication and
business conduct. The hotels have tried to partner with and offer lucrative long-term contracts
and incentives to gain business from corporates.

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 3. Leisure: While pent-up demand is sure to help this cohort of travellers as the pandemic recedes,
premium hotels have successfully communicated the steps they have taken in order to main all
the health and hygiene checks along with social distancing and premium hotels are banking on
their brand name and commitment to guests to help their business emerge stronger even in the
post COVID-19 world.

The outbreak of pandemic has seen various threats and opportunities for the hotel industry in the trends
that are visible due to an extend Covid-19 changing consumer behaviour.

1. Travel disruption vs Staycation: While it is certain that work from home is here to stay and
frequency of travel is set to reduce, the adverse impact of this is seen to be fulfilled by the
emerging concept of staycation. Work from home has evolved into work from anywhere which is
bridging the gap between work and leisure. Long term stays in popular destinations can be a
healthy source of revenue for hotels.
2. Unorganized vs Organized: The fear of spread of pandemic along with a pent-up demand is
certain to give premium hotels an edge as their brand can be trusted with all the precautions and
measures in order to provide a safe holiday or stay. For example, the WeAssure program
launched by ITC.
3. Frequent getaways vs rare luxury: As the frequency of travel has reduced and is seen to be that
way for a few more months, and thus, the budget for that one vacation has gone up. Premium
hotels have an aspirational pull that many would be attracted to more often than before. Many
hoteliers have launched long term offers and programs which is a win-win as it helps the hotels
generate cash to break even their maintenance and the customers to get good deals which can be
redeemed in the years to come.

Steps taken to minimize adversity on hotel industry

We believe that during such periods when hotels grapple for business, certain measures could help in
easing the pressure on the fiscal parameters during a low demand scenario, when the hotel industry might
as well be staring at a down cycle.

● Moratorium on interest and debt repayment for hoteliers for 9-12 months [ RBI has provided a
moratorium all debt and interest repayments till August and matter is sub-judice with the
Supreme court]

● Extension of loan tenor

(Demand revival will take time for premium hotels, even more so as the pandemic has affected
GDPs of all countries and revenues of all corporates)

● Exemption or leeway on electricity and fuel charges via reduction of electricity charges for the
next nine months (as power and fuel costs comprise ~10-15% of operating costs)

● Further downwards revision of GST rates temporarily (rates were revised to 18% for rooms
priced above Rs 7,500 w.e.f October,2019), for some respite in a low demand scenario

● Deferring of payments for licence /permit renewals

● European nations and countries like the United States, Malaysia, and Indonesia have come
forward with stimulus packages for the hospitality industry in their respective countries, owing to
not just the contribution of this sector to the country's GDP but also from an employment
perspective. In some cases, apart from providing temporary waivers from taxes and credit lines,

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 the government would also be footing the salary costs of a section of employees. In India,
however, so far there has been no sectoral revival package but small hotel owners who would fall
under the SME definition could avail the benefits which are extended to the MSME sector.

Result and Discussion

Hotel industry is one of the most important supporting factor and catalyst for an increasingly important
sector of tourism and hospitality for India. Tourism is also a potentially large employment generator
besides being a significant source of foreign exchange for the country. In FY21, 39 million jobs were
created in the tourism sector in India; this accounted for 8.0% of the total employment in the country.
The number is expected to rise by two% annum to 52.3 million jobs by 2028. However, with the onset of
Covid-19 and a strict lockdown, travel curbs, and social distancing this sector completely crumpled in
2020 and so did the hotel industry. The premium hotel industry which attracts foreign tourists as well as
lavish domestic consumption took a hit like never before. Several costs cutting measures, raising of capital
and innovative techniques to assure the guests about the safety standards, as well as capitalizing on the
emerging trends like staycations, long term offers and discounts, move to further spend on
communication of the trustworthiness of the biggest premium hotel chains in India were noteworthy.
Although the sector is slowly crippling back to normalcy, it has a long way to go before catching up to
pre-COVID-19 levels.

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APPENDIX

Glossary
Term Description
ARR Average room rate
GDP Gross Domestic Product
MICE Meetings, incentives, conferences, exhibitions
OR Occupancy rate
RevPAR Revenue per available room

Information Sources

Research Databases

● Crisil Research Database, http://www.crisilresearch.com.library.remotexs.in/

● Ministry of Tourism, https://tourism.gov.in/hotels-restaurants
● IBEF, https://www.ibef.org/industry/tourism-hospitality-india.aspx
● CMIE, https://industryoutlook.cmie.com

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