June 2020

Premium Hotel Industry

For Internal Use Only – Not For External Distribution

Growth calls revised downwards in line with worsening global dynamics

Base Case Extended Case

Growth FY 20 E FY 21 P Growth FY 20 E FY 21 P

Revenues 4-5% (42-45)% Room Revenues 4-5% (45-55)%

RevPAR (pan-India)
ARR 1-2% (10-12)% ARR 1-2% (12-14)%

OR 0% (35-40)% OR 0% (45-50)%

Factors like vaccine development and social distancing norms will remain monitorable
to gauge the extent of demand revival

Note- Base case implies lifting of lockdown from mid- June 2020
Extended case implies a staggered lifting of lockdown till July/August 2020 along with social distancing
norms in place 2
Key Highlights
Covid-19 pandemic to hit premium hoteliers hard

• Restricted travel and lockdown to decline demand by (30-35)% in FY 21

Demand • Adverse order of impact- Foreigners>> MICE activities>> Corporate & leisure
travel
• Demand to soften even after H1 FY 21 as global economy slows down

• Premium hotel supply expected to grow at 2-4% in FY 21

Supply • Openings to get deferred, hoteliers to put expansion plans on hold
• Prompt domestic chains to speedup their asset light strategy

• Severity of impact in FY 21 as revenues to decline by 40-45% (base case)

• OR to decline by 32-35%
• ARR to decline by 10-12%
• F&B revenues to remain lackadaisical in FY 21
Profitability
• Erosion of operating margins to 10-11% (base case)
• Pressure on hoteliers & developers with high gearing to service debt,
liquidity pressure could lead to closure of some properties
• Players like SAMHI and The Park will defer their IPOs amidst market volatility

3
Note- Base case denotes Covid-19 lockdown to cease from Second half of June 2020
 Hotel demand to be hit by declining corporate revenues & travel restrictions
Covid pandemic to slow global & domestic travel Downward pressure on corporate revenues, aggravated by lockdown

30%
Base line breach
the base line is

Revenue outlook
20%
expected to
continue in FY 21
10%

0%
Q1 FY Q2 FY Q3 FY Q4 FY Q1 FY Q2 FY Q3 FY Q4 FY Q1 FY Q2 FY Q3 FY Q4 FY
-10% 18 18 18 18 19 19 19 19 20 20 20 20
FY 18 FY 19 FY 20
-20%

-30%

-40%
FTA Dometic passengers International passengers
-50%
indicates mildly adverse impact
Note- Domestic & international traffic is across Mumbai, Delhi, Chennai, Bengaluru, Kolkata, Hyderabad,
indicates highly negative impact
Ahmedabad, Cochin, Goa, Jaipur, Pune, Trivandrum and Agra airports
Source: AAI, PIB, CRISIL Research Source: CRISIL Research

Oct 19 Nov 19 Dec 19 Jan 20 Feb 20 Mar 20

Foreign
tourist 944 1,092 1,226 1,118 1,016 328
• Even pre-covid, slowdown in some sectors translated to
arrivals lackadaisical demand in FY 20
(‘000)
• Cancellations started from Feb end, with pace fastening in
Source countries of FTAs like US (13-15%), UK(9-10%),Canada (3-5%), Germany, March and eventual restricted travel and lockdown from last
France, Australia (6-9%) have also been severely impacted from Covid-19 week of March

4
With traditional demand drivers adversely impacted, premium hotels explore new
avenues
Type of
demand IMPACT New demand verticals

Foreign travelers
Most countries have placed travel restrictions on their citizens, along with grounding of
flights These are temporary in nature
and is expected to cease once
• Inbound foreign travel will take nearly a year to recover as economies worldwide enter
some sense of normalcy returns

into recession

• Prospects of medical tourism also remain bleak

1 Tie up with
Adversity of impact

hospitals for
• Shift in consumer behaviour- hit on MICE (social events, weddings etc) and F&B quarantine business
revenues
MICE

• Capacity restrictions & social distancing to result in more smaller MICE events in near 2
term, large conferences are expected to revive in latter part of H2 Medical
professionals

• Once travel restrictions are significantly relaxed, recovery is expected first to be to

Leisure

drivable destinations as well as some revival in the staycation business 3 Institutional

business from
• Outbound leisure will be curtailed for some time, it could translate into domestic leisure repatriates
travel within India (could be a saving grace esp for leisure destinations in H2)
Domestic

• As gains of corporates are wiped off, they would defer/cancel travel plans to control 4
Corporates

BCP employees
costs, restricting to unavoidable travel
• Corporate revenues declining , downwards trend across sectors- corporate & retail
demand to be impacted

• Corporate demand is expected to be revive post September, lower frequency travel

with longer length of stay 5
Steep decline in traditional demand to reflect on revenues; recovery dependent
on decreasing covid cases and effective vaccine
0%
(40-45)%
revenue growth
Premium

(45-55)%
(%)

Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21

Lockdown
Scenario &
Base case
social distancing Pessimistic case

Pessimistic
• National lockdown (complete/partial) likely to • Extended vulnerability to the virus with
partial lockdown measures as well social

Case
Base
Case

continue through Q1 with some after effects

in Q2 distancing norms continuing through Q2
• Deferred corporate travel likely to resume • Deferred corporate travel likely to resume
from end of Q2 from Q3 & leisure will take more time to
resume

Revenue decline will be more sharper for MICE centric hotels

 In a low demand scenario, hoteliers would be led to adopt price correction to
salvage OR
ORs and ARRs for premium segment hotel rooms to see significant dip in fiscal 2021

• Previous downturn had seen huge rate cuts V-shaped recovery, but normalcy to prior levels
• Supply additions drove OR further down will take time

70 30%

60 20%  OR under strain in the near term

10% owing to Covid-19 and subsequently
50 owing to the adverse impact across
0% sectors
40
-10%
30
-20%
20
-30%
 The lean half of the fiscal will see
10 -40% no respite from corporate or MICE
activities (which are either postponed
0 -50%
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 E FY21 P FY22 P FY23 P FY24 P or cancelled)
Occupancy rate (LHS) ARR growth (RHS) RevPAR growth (RHS)

Nearly 40,000 keys added over the course

Growth  RevPARs across all destinations

FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 E FY 21
(%) CAGR FY 20-24 is expected to witness sharp decline,
stress to remain till global
Room
demand
downturn persists
8% 10% 10% 7% 5% 5% 2-3% (30-35)% 0-1%

ARR -5% 0% 1% 1% 2% 3% 1% (10-12)% (0-1)%

OR -3% 2% 3% 3% 2% 1% 0% (32-35)% (3-4)%

Expected to be one of the longest
down cycles in the sector
RevPAR -7% 2% 4% 4% 4% 4% 1% (40-45)% (4-5)%
Note: Only premium segment rooms across 12 destinations have been considered
7
Source: CRISIL Research
 Pace of supply additions in the premium segment also to slow down with
lackluster demand
Premium segment room supply across 12 key Indian destinations Premium room inventory dominated by international chains

Brands like Marriott,

Hilton, IHCL, ITC likely to
add supply in FY 21
Shifting focus towards mid-
100,000 market 18%
16%
90,000 CAGR 2-3% 16% Planned
80,000 14%
70,000 Operational
11% 12%
60,000 41%
10% 52%
50,000 48%
8%
40,000 59%
4% 2-4% 6%
30,000 4%
3% 3%
20,000 4%

10,000 2%
Domestic International
- 0%
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24
E P P P P
Room supply (LHS) Supply growth (RHS)

Note: Only premium segment rooms across 12 major destinations in India have been considered
Source: CRISIL Research
 Premium supply to slow down till demand picks up , properties near
completion are expected to be opened to avoid cash outflow  Even as future expansion slows down, domestic chains (sans developers) may
be driven towards operating assets by selling off few properties
 Supply growth was expected to be 2-4% in FY 21 but uncertainty looms
over openings, driving it downwards  Resilience of mid-market is better to such adversities, as recovery would be
delayed for high priced hotels
 Continued liquidity pressure & absence of support for hoteliers may
lead to closure of some properties, especially single owned properties

8
 But changing supply trends expected to continue in the medium term

Diversification of hotel brands across customer segments Asset heavy domestic chains to continue focus on asset light
via MC / franchisee
International chains

Wyndham 100%
IHCL 58:42 ~25,150 keys
Accor 13% 87%

InterContinen… 34% 66%

Owned : Managed
EIH 70:30 ~3,800 keys
Marriott 63% 37%

Carlson 73% 27%

Hilton 80% 20%

Chalet Fully Owned ~2,400 keys

Hyatt 90% 10%

Bharat 30:70 ~2,450 keys
Premium Mid-market & economy
Hotels
Lemon Tree 2% 98%
Sarovar 15% 85%
Lemon Tree 56:44
Domestic chains

Royal Orchid 19% 81%

Concept Hospitality 46% 54%
IHCL 62% 38%
The Park 63% 37%
ITC 69% 31%
Pride 79% 21%
Bharat Hotels 93% 7%
Hotel Leela 100%
EIH 100%

Premium Mid-market & economy

Source: CRISIL Research

9
 Revenues to decline across destinations; deferred travel could be the saving
grace once lockdown lifts
FY 20 FY 21 FY 24

RevPAR to remain muted, as H1 impacted by sluggish economy & Covid-19 to impact H1 and subsequent slowdown globally to keep Recovery in rates & OR expected in medium term, on a low base.
March saw cancellations owing to Covid-19 RevPARs in the red zone Recovery at business destinations could precede leisure

High demand- supply gap across destinations in FY 21, low demand aggravated by supply additions across select destinations
20%

10%

0%
Mumbai NCR Bengaluru Chennai Kolkata Hyderabad Pune Ahmedabad Goa Jaipur Kerala Agra
-10%

-20%

-30%

-40%
FY 20 FY 21 FY 24
-50%

Note: Only premium segment rooms across 12 major destinations in India have been considered
10
Source: CRISIL Research
All financial parameters will witness strain as revenues dip sharply
Revenues to decline as Covid culls demand
 Revenues were on recovery mode, with players focussing on MICE activities
8% 8%
4% 5% 7%  But revenues declined in FY 20 owing to sluggish economy and lockdown in
0% March
(4-5)%
FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 E FY 21 (P)  In FY 21, decline in F&B revenues will be far greater, even as hotels cater to
small MICE and extend into home delivery vertical

Margins to dip in FY 21 (40-45)%

 Hotels usually have stronger margins in H2 of fiscal

24% 23-24%
 Despite lackadaisical demand, IndAS 116 kept margins range bound in FY 20
21% 20% 22%
20%
19%
 In FY 21, fixed costs proportion increases to 45-48% of costs as variable costs
declines by 40-45%
10-11%

FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 E FY 21 (P)

Debt / EBITDA Ratio & Interest coverage

 Sharp fall in demand would impact operational sustenance of hotels

3.4
3.0 3.0
3.5  Dependence on bank limits, ECB will increase to meet interest & debt
2.6 2.7 obligations
2.1
5.0
3.8 3.4 3.3 3.1
2.3
 With lower utilisation, Debt / Ebitda could witness increase to >5x
2.3

FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 E FY 21 Note- Companies considered Advani Hotels & Resorts (India) Ltd, EIH Associated Hotels Ltd, EIH Ltd, Oriental
Debt/Ebitda ICR (P) Hotels Ltd, Taj GVK Hotels & Resorts Ltd, Asian Hotels (East) Ltd , Asian Hotels (North) Ltd, Asian Hotels
(West) Ltd, 11
Source: CRISIL Research
 Higher proportion of fixed costs raises concern over sustenance of hoteliers

Hoteliers can achieve Ebitda breakeven at 43-45% with existing cost

structure
Variable costs Fixed costs
Occupancy rate

5-7%

Reduction in total costs

15-20%
5-10%
25-30%
3-5%

30-35%

Source: Company documents, CRISIL Research E.g. :- For a hotel functioning at an occupancy rate of 50%, would have to reduce its
costs by at least 20% to obtain ebitda margins upwards of 30%
Some of the methods used by hoteliers to reduce the cost-
• Pay cuts to reduce employee costs

• Deferring renovations and associated costs for the near term

Note- A)The above sensitivity analysis has been done assuming average rates of Rs 7,500-
• Renegotiation of AMC contracts and lease rentals 8,000/day and higher room rates would require lesser OR to break-even

• Reduction in corporate overheads B) Other costs include advertising and promotions, Commission on sales paid, Miscellaneous
Expenses, Travelling and conveyance, Printing and stationery, Postage phone and telex etc
Hotel players would explore attracting more equity infusion or credit lines from finance C) Companies considered set-Advani Hotels & Resorts Ltd, Asian Hotels (East) Ltd,
institutions to tide over liquidity mismatches , with some might also resort to asset Asian Hotels (North) Ltd, Asian Hotels (West) Ltd, EIH Associated Hotels Ltd, EIH Ltd,
monetisation Taj GVK Hotels & Resorts Ltd, The Indian Hotels Company Ltd, Viceroy Hotels Ltd

Source- CRISIL Research

12
 Hotels affiliated brands are highly leveraged as domestic brands become
asset light
FY 15 FY 16 FY 18 FY 20 E FY 21 P FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 E FY 21 P
FY 17 FY 19

4.9
Ebitda margins (%)

Interest coverage ratio

4.3
3.9 3.9
3.3
26%
22% 24% 2.6
19% 19% 20%
10-13%
1.6 1.5 1.6
1.1 1-3
20% 27% 40% 34% 30% 31% 1215% 0.7 0.8
0-1
FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 P

FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 P
• Most of these international brands have leaner cost structure owing to global brand • As domestic brands try paring debt via asset restructuring, higher debt of owned hotels associated with
standard requirements or adoption of best practices international brands indicate the capital intensity of the sector

• Presence of domestic brands precedes international brands, aiding in reduced interest rates for the former
8%
8%
Debt / Equity

1.3 1.3 7% 7%
7%
1.2
1.0

RoCE
5%
0.8 0.9-1
0.7 2-5%
0.6
0.3 0.3 0.3
0.2 0.3 0.4-0.5

1% 3% 7% 6% 5% 5% 1-4%

FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 P FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 P
Domestic chains

International chains
Note- Domestic chains-Advani Hotels & Resorts (India) Ltd, EIH Associated Hotels Ltd, EIH Ltd, Oriental Hotels Ltd, Taj GVK Hotels & Resorts Ltd, The Indian Hotels Company Ltd
Properties affiliated to International chains - Chalet Hotels Limited, Asian Hotels (East) Ltd , Asian Hotels (North) Ltd, Asian Hotels (West) Ltd,
13
Source: Company documents, CRISIL Research
Owing to the stress, nations have come forward with fiscal stimuli for the
hospitality sector

 Waiver of property costs and VAT for entire year

UK  Salary benefits up to 80% for employees in hospitality sector, along with grants worth 10,000-25,000
pounds for small hospitality businesses

 Government announced € 330 million package for the hotel industry and catering trade
Germany  One time aid of € 2,000 per full time employee

 100% rebate of property taxes for hospitality industry, SGD 90 million package for hotels & travel
Singapore companies

 Government to bear up to ~75% of the salaries of the employees

 Tax exemption for 6 months

Indonesia
 ~USD 13 million of fiscal incentives for airlines, travel & tourism agencies

 No tax levy for 6 months and exemption of service tax for hotel players & 15% discount on electricity
Malaysia charges for 6 months

 Investment of ~USD 6 million to promote & revive tourism in the country

 Freeze over lay-offs for at least 2 months

Italy
 Unemployment insurance to employees in the sector

 Unemployment insurance (max of $600/week) up to 4 months to laid of employees in hotel industry

USA  Loans for hoteliers with gross revenue greater than $35 million

Source: Secondary sources

14
 Ratings downgrade for some hotel players; 80% entities below BBB grade

35% 36%
32% 33%

23%
22%
19% 19% 20%
17% 18% 17%
16% 16% 15% 14%
9% 10%
6% 6% 7%
5%
1% 1% 3%
1% 0.3% 1%

AAA AA A BBB BB B C D AAA AA A BBB BB B C D

No. of entities BLR amount rated No.of entities Rated debt (Rs cr)

Note: The all rated universe consists of 649 entities in hotel industry with BLR of ~Rs Note: The all rated universe consists of 652 entities in hotel industry with BLR of ~Rs
471 billion as of November 2019 474 billion as of June 2020
Source: Quantix Source: Quantix

Rating action Reasons for Downgrade

• Companies with balance sheets vulnerable to slump in cash

Last 1 year (Jun 19- Jun 20) Upgrades Downgrades flows; as revenue decrease in the aftermath of Covid-19

No. of entities 34 144

Ratings of certain companies have been retained, those who can surmount the stress
because of balance sheet liquidity, unutilised bank lines, and other external financial
May + June

No. of entities 0 12 flexibilities.

Rated debt (Rs cr) 0 1,656

15
Ratings of hotel companies worldwide have been put on negative credit watch

Company Rating Agency Rating Action

Moody Affirms rating of Baa3 with negative outlook

Hyatt S&P Downgraded from BBB to BBB- and placed on credit watch with negative outlook

Hilton Worldwide S&P Downgraded from BB+ to BB with negative outlook

Moody Downgraded from Ba2 to Ba3 with negative outlook

Wyndham Hotels Fitch Affirms rating of BB- with outlook changed from stable to negative

S&P Downgraded from BBB to BBB- and placed on credit watch with negative outlook
Marriott Fitch Downgraded from BBB to BBB- and placed on negative credit watch

Radisson Hospitality Moody Downgraded to B3 from B1

Moody Affirms rating of Ba3 with negative outlook

Four Season’s Hotels S&P Affirms rating of BB but placed on credit watch with negative implications

ICRA Reaffirms rating of AA with stable outlook

Indian Hotels CARE Reaffirms rating of AA+ with negative outlook

CRISIL Reaffirms rating of A- but with negative outlook

Lemon Tree ICRA Reaffirms rating of A-, outlook revised from stable to negative

Pride Hotels ICRA Reaffirms rating of BBB with negative outlook

16
Annexure

17
Benign impact of Ind AS 116 on operating margins in fiscal 2020

On Profit & loss statement On Balance sheet

Revenue Remains unchanged

Right of use_Asset
Other expenses- lease rent

EBITDA
Lease liabilities

Amortization

EBIT
Equity

Finance charge

PBT

Only properties on lease are impacted

18
RevPAR Breakup

Previous (FY19/20) E Near term (FY 20/21) P Medium term (FY20/24) P

RevPAR OR ARR RevPAR OR ARR RevPAR OR ARR

Pan India -34%

1.3% 0% 1% -41% -11% -4% -3% 0%
Mumbai 2% 1% 2% -43% -36% -11% -3% -2% -1%
NCR 2% 1% 1% -40% -33% -12% -3% -2% -1%
Bengaluru 3% 1% 2% -40% -32% -12% -6% -6% 0%
Chennai 2% 1% 1% -38% -31% -11% -1% -1% 0%
Kolkata -4% -5% 1% -46% -38% -12% -6% -5% -1%
Hyderabad 8% 4% 4% -35% -30% -8% 0% -1% 1%
Pune 2% -1% 3% -39% -32% -10% 1% 0% 1%
Ahmedabad -7% -6% -1% -52% -46% -12% -17% -14% -3%
Goa -5% -7% 2% -42% -36% -10% -3% -2% 0%
Jaipur 1% 0% 1% -42% -35% -10% -4% -4% 0%
Kerala 18% 19% -1% -39% -33% -9% -2% -2% 0%
Agra -3% -5% 2% -33% -26% -10% -3% -2% 0%

19
With companies adopting cost control, commercial vacancy in major cities to
increase
Vacancy levels in commercial real estate entities across Top cities

38.5% 39.4% 40.5%

33.9%

25.0%
23.1%
19.9% 19.8%

9.8% 9.4%
5.6% 6.3% 5.4% 5.5% 6%
4%

Bengaluru Chennai Hyderabad Mumbai Delhi-NCR Pune Kolkata Ahmedabad

Q1 2019 Q1 2020

Cities Bengaluru Chennai Hyderabad Mumbai NCR Pune Kolkata Ahmedabad

Planned & UC office

40 13.25 35.8 15.41 24.37 19.5 1.69 7.98
supply (msf)

 Construction is expected to delayed owing to Coronavirus and developers are expected to face credit crunch along with slowing sales
 As corporate demand weakens commercial absorption is expected to be muted in near term

Note: For Grade A offices

^ Planned and under construction supply till CY 22
msf – million square feet
Source: CRISIL Research, Secondary sources 20