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Second wave to put brakes on domestic recovery in Q1FY22E…

While the Q4FY21 performance showed a strong rebound in tourism demand, the pace of recovery started losing steam from April 2021 onwards with rising incidence of Covid-19 cases and state induced localised restrictions. This again led to a fall in demand for leisure destinations that during H2FY21 remained a key driver for revenues for hotel space. Major corporate clients have continued with their work from home policy. This has continuously kept demand from the corporate segment muted in Q1 as well. Overall, we expect Q1FY22E to witness a temporary moderation in demand. However, with subsiding of Covid cases along with increased vaccination drive, we expect a strong recovery, going ahead, though a full demand recovery would be visible only post full resumption of domestic as well as international flights as foreign tourists’ arrivals especially from the US and UK remains a top contributors to the revenues of premium segment hotel rooms. In terms of individual performances, we expect premium segment hotel players to report QoQ revenue de-growth of 24% while mid-scale players like Lemon Tree are expected to report revenue de-growth of 32% QoQ. On a YoY basis, revenues for I-direct universe are expected to improve sharply over 227% YoY due to a very low base.

Reduced fixed overheads to help keep losses under check

A majority of costs of the hotel industry are fixed (i.e. ~70% of total costs), with power/lighting and employee costs taking a major share. With a drop in room rates, hotel players have re-aligned their cost base to survive in this extremely challenging environment. Hence, we expect over 42% reduction in operating costs from pre-Covid levels, which would help companies to narrow down their losses. During the quarter, we expect EIH to report operating loss of | 37.2 crore. With stringent cost control measures initiated by Lemon Tree, we expect the company to make operating profits of | 18.4 crore during Q1FY22E while some traction in the international portfolio of Indian Hotels should help the company report EBITDA of | 20.9 crore.

Strong promoter/institutional backing to alleviate b/s concerns despite ongoing challenges

In our coverage universe, EIH Ltd is the best placed on the b/s front. The fund raising of | 350 crore thorough rights issue would improve debt/equity mix to 0.1x from 0.2x. While Indian Hotels has a strong promoter backing, its debt/equity is 0.7x, which combined with capex requirement could lead to raise D/E further to 0.9x if current Covid issue persist for a longer period. Lemon Tree Hotels, being on a capex mode, is highly levered vs. peers but also has strong institutional backing for liquidity support.

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