September 2020

Premium Hotel Industry

For Internal Use Only – Not For External Distribution

Key Highlights
Covid-19 pandemic hits premium hoteliers hard

• Demand expected to decline by 50-55% in FY 21

• Lockdown and travel restrictions, sub-optimal flight capacity
• Minimal corporate demand
Demand • Deferral of corporate MICE owing to social distancing norms
• Uncertainty of covid trajectory
• Adversity of impact- Foreigners>> Corporate MICE activities>> Corporate transient >>leisure
travel
• Recession across global economies, weakens prospects of strong recovery in FY 22

• Premium hotel supply expected to grow at 0-2% in FY 21

• Openings to get deferred, hoteliers to put expansion plans on hold
Supply • Hoteliers continue to remain bullish about off beat destinations
• Domestic chains to speedup their asset light strategy
• Pressure on hoteliers & developers with high gearing to service debt, liquidity pressure
could lead to closure of some properties, sans govt support

• Severity of impact in FY 21 as revenues expected to decline by 50-60% (base case)

• OR to decline by 50-55%
• ARR to decline by 15-20%
Profitability • F&B revenues to remain lackadaisical in FY 21, hoteliers partnering with food aggregators or
launching own app to salvage this vertical
• Erosion of operating margins to 0-4% (base case), extent of erosion can be arrested via cost
rationalization techniques
• Hoteliers exploring equity infusion, rights issue, securing credit lines to tide over next 18-24
months
• Players like SAMHI and The Park will defer their IPOs, if markets turn bearish

2
Note- Base case implies staggered lockdown measures till early Q3 and pick up in corporate demand from Q3 end
 Hospitality sector yet to benefit from unlock; travel still remains lackadaisical
and revenue outlook in reds for corporates
Covid pandemic to slow global & domestic travel Downward pressure on corporate revenues, aggravated by lockdown

Base line breach is

expected for
20% entire FY 21

Revenue outlook
0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
-20% FY 18 FY 19 FY 20 FY 21

-40%

-60%

-80%

-100%
FTA Dometic passengers International passengers

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 Commercial • Even pre-covid, slowdown in some sectors translated to lackadaisical demand in
international FY 20
Foreign flights
tourist 944 1,092 1,226 1,118 1,016 328 grounded • Cancellations started from Feb end, with pace fastening in March and eventual
arrivals from March restricted travel and lockdown from last week of March
(‘000) end to Sept*
• Corporates are currently functioning via digital interface, with many extending
their work from home guidance till Dec-20
Source countries of FTAs like US (13-15%), UK(9-10%),Canada (3-5%), Germany,
France, Australia (6-9%) have also been severely impacted from Covid-19 • Cost rationalisation efforts by corporates for FY 21-22 mean pruning of travel
budgets

Note- ‘*’ denotes that the suspension of full scale international travel could be extended with exception of
air bubbles with countries like France, Germany, UK and USA
3
 With traditional demand drivers adversely impacted, premium hotels explore new
avenues
Share of
demand IMPACT New demand verticals

•
Foreign travelers

Most countries have placed travel restrictions on their citizens, along with grounding of
flights to certain destinations These are temporary in nature
and is expected to cease once
20-25%
• Inbound foreign travel will take more than a year to recover as economies worldwide
some sense of normalcy returns

enter into recession, leisure travel

• Prospects of medical tourism also remain bleak

1 Tie up with
Adversity of impact

hospitals for

10-15%
• Shift in consumer behaviour- hit on MICE and F&B revenues quarantine business

•
MICE

Capacity restrictions & social distancing to result in more smaller MICE events in near
term, esp from social events like weddings in H2 2
Medical
professionals

• As gains of corporates are wiped off, they would defer/cancel travel plans to control
3
Corporates

costs, restricting to unavoidable travel only Institutional

35-40% business from
• Corporate revenues declining , downwards trend across sectors- corporate & retail repatriates
demand to be impacted
Domestic

• Corporate demand is expected to see some revival in Q4, lower frequency travel with
4
longer length of stay BCP employees

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

Leisure

15-20% drivable destinations as well as staycation business

• Outbound leisure will be curtailed for some time, it could translate into domestic leisure
travel within India (could be a saving grace esp for leisure destinations in H2)- revenge travel 4
 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 80%

60 60%  OR under strain in the near term

owing to Covid-19 and subsequently
40% owing to the adverse impact across
50
20% sectors
40
0%
30
-20%
20
-40%
 The lean half of current fiscal (H1)
10 -60% saw no respite from corporate or
MICE activities
0 -80%
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 E FY21 P FY22 P
Occupancy rate (LHS) ARR growth (RHS) RevPAR growth (RHS)

Nearly 40,000 keys added over the course

 RevPARs across all destinations
is expected to witness sharp decline,
FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 E FY 21 FY 22 stress to remain till global
Room downturn persists
demand
growth 8% 10% 10% 7% 5% 5% 2-3% (50-55)% 50-55%
(%)

ARR -5% 0% 1% 1% 2% 3% 1% (15-20)% 7-10%

growth
(%)
59% 60% 62% 64% 65% 66% 65% (32-38)% 45-50%
OR Recovery on a low base, down-cycle
could persist from 2-4 years
RevPAR
growth
-7% 2% 4% 4% 4% 4% 1% (60-70)% 50-55%
Note: Only premium segment rooms across 12 destinations have been considered
5
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-
1,00,000 18%
16% market
90,000 16% Planned
80,000 14%
70,000 11%
Operational
12%
60,000 41%
10% 52%
50,000 48%
8%
40,000 5% 59%
4% 6%
30,000 4%
3% 3% 0-2%
20,000 4%
2%
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
 Gross supply growth was expected to be 0-2% 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

6
 But changing supply trends expected to continue in the medium term

Diversification of hotel brands across customer segments

Business : leisure Asset heavy domestic chains to continue focus on
hotels
asset light via MC / franchisee
International chains

Wyndham 100% 37% 16%

IHCL 58:42 ~18,200 keys
Accor 13% 87% 69% 14%

InterContin… 34% 66% 79% 17%

Owned : Managed
EIH 70:30 ~3,800 keys
Marriott 63% 37% 70% 11%

Carlson 73% 27% 46% 13%

Hilton 80% 20% 72% 22%

Chalet Fully Owned ~2,400 keys

Hyatt 90% 10% 71% 11%

Bharat 30:70 ~2,450 keys
Premium Mid-market & economy
Hotels
Lemon Tree 2% 98% 62% 8%

Sarovar 15% 85% 36% 16%

Lemon Tree 56:44
Domestic chains

Royal Orchid 19% 81% 36% 13%

Concept Hospitality 46% 54% 30% 14%

IHCL 62% 38% 55% 12%

The Park 63% 37% 73% 10%

ITC
 Recent hotel openings have been in offbeat locations- focussing
69% 31% 57% 11% on religious, niche tourism – places which could see some traction in
Pride 79% 21% 59% 10% H2
Bharat Hotels 93% 7% 53% 22%  Recent signings have been by brands like Wyndham, Sarovar,
Hotel Leela 100% 80% 17% IHCL, with focus on mid-market and non traditional destinations
EIH 100% 72% 14%

Premium Mid-market & economy

Note- Business destinations include Delhi NCR, Mumbai, Bengaluru, Kolkata, Chennai, Hyderabad, Pune and Ahmedabad
Leisure destinations include Goa, Jaipur, Kerala and Agra
7
Source: CRISIL Research
Revenues to decline across destinations; deferred travel could be the saving
grace once lockdown lifts
FY 20 FY 21
-Till H1,
commercial
capital, Mumbai &
national capital,
Delhi are expected
to fare better than
other
- Revival for
leisure cities from
domestic travel
expected in H2

RevPAR to remain muted, as H1 impacted by sluggish economy & Covid-19 to impact H1 and subsequent slowdown globally to keep
March saw cancellations owing to Covid-19 RevPARs in the red zone

High demand- supply gap across destinations in FY 21, aggravated by supply additions • OR in cities like Bengaluru
& Ahmedabad could see
40% huge strain from subdued
demand along with supply
20% additions

0% • Irregular demand has

Mumbai NCR Bengaluru Chennai Kolkata Hyderabad Pune Ahmedabad Goa Jaipur Kerala Agra most benefitted cities like
-20% Mumbai, Delhi and
Hyderabad
-40%
• Differences in quarantine
-60% rules & renewed spike in
Covid cases proving to be
-80% challenge for steady
operations of hoteliers
-100%
FY 20 E FY 21 P

Note: Only premium segment rooms across 12 major destinations in India have been considered
8
Source: CRISIL Research
Elevated financial stress on the industry for at least two years
Revenues to decline as Covid culls demand
 Revenues were on recovery mode, with players focussing on MICE activities
60-70%
 But revenues declined in FY 20 owing to sluggish economy and lockdown in
March

3% 3% 10% 6% 6% 8%  In FY 21, decline in F&B revenues will be far greater, even as hotels cater to
-5% small MICE and extend into home delivery vertical
FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 P FY 22P
(50-60)% Q1 FY21- Revenues declined by ~87%, owing to ~40-50% fall in room rates and OR
falling to 10-20%
Margins to dip in FY 21

24% 24% 25% 25%  Hotels usually have stronger margins in H2 of fiscal
21% 21% 20-22%
19%
 Despite lackadaisical demand, industry margins remained range bound in FY 20
due to IndAS 116

 In FY 21, major part of fixed cost would turn variable in nature

0-4%
Q1 FY21- Low occupancy levels amidst high operating leverage would translate to
losses at the operating level, margins fell to -250-400%
FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 P FY 22P

Debt / EBITDA Ratio & Interest coverage

 Sharp fall in demand would impact operational sustenance of hotels
6.1
4.6 4.2 3.6 3.7
2.3 3.0  Dependence on bank limits, additional debt will increase interest & debt
obligations
1.7 1.2 1.6 1.8 1.8 1.7
1.0
FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 P FY 22P
 With lower utilisation, Debt / Ebitda could witness increase to >5x

Companies considered- Advani Hotels & Resorts (India) Ltd, EIH Associated Hotels
Ltd, EIH Ltd, Oriental Hotels Ltd, Taj GVK Hotels & Resorts Ltd, The Indian Hotels
,Chalet Hotels Limited, Asian Hotels (East) Ltd , Asian Hotels (North) Ltd, Asian
Hotels (West) Ltd, 9
Debt / Ebitda ICR 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 OR

5-7%

Reduction in total costs

15-20%
8-10%
25-30%
3-5%

30-35%

Source: Company documents, CRISIL Research

Some of the methods used by hoteliers to reduce the cost- 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%
• 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 revenue per room of
• Renegotiation of AMC contracts and lease rentals ~Rs 6,000day 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 exploring attracting more equity infusion or credit lines from finance C) Companies considered set-Advani Hotels & Resorts Ltd, Asian Hotels (East) Ltd, Asian
institutions to tide over liquidity mismatches , with some also looking towards asset Hotels (North) Ltd, Asian Hotels (West) Ltd, EIH Associated Hotels Ltd, EIH Ltd, Taj GVK
monetisation Hotels & Resorts Ltd, The Indian Hotels Company Ltd, Viceroy Hotels Ltd

Source- CRISIL Research

10
 Hotels affiliated brands are highly leveraged as domestic brands become
asset light
FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20

3.5

Interest coverage ratio

Ebitda margins (%)

2.6 2.7
2.5
2.3
2.1
24% 23% 1.7
20% 22%
19% 19% 20%
40% 1.1
34% 1.0 1.0
30% 30% 0.8 0.8
25% 27%
20% 0.3 0.4

FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20
FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20
• 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

FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20
Debt / Equity

8%

1.3 7% 7% 7% 7%
1.3
1.2 6%
1.0

RoCE
5%
0.9
0.7 0.8
0.6 7%
0.4 6%
0.3 0.3 0.3 5% 5%
0.2 0.3
3% 3%
1%
FY 14 FYDomestic
15 FY 16
chains FY 17 FY 18 FY 19 FY 20 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20
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,
11
Source: Company documents, CRISIL Research
International experience suggest fiscal stimulus vital to ease pain for the sector
% of T&T % of labour
in GDP force in T&T
9% 11%
 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
12
9%
.5  Government announced € 330 million package for the hotel industry and catering trade
Germany %
 One time aid of € 2,000 per full time employee

10
%
9%
 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

6. 6
2 %  Tax exemption for 6 months
Indonesia %
 ~USD 13 million of fiscal incentives for airlines, travel & tourism agencies

13
.7 12%  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

13 14.9%
%  Freeze over lay-offs for at least 2 months
Italy
 Unemployment insurance to employees in the sector

9% 11%  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

Note- T&T denotes travel and tourism sector, and shares include both direct & direct contribution
Source: WTTC, Secondary sources
12
 Ratings downgrade for some hotel players; 80% entities below BBB grade

40%
35%
32%
32%

23%
20% 20%
19% 19% 18%
17% 16% 15%
16% 13% 13%
12%
9% 7%
6% 6% 5% 3%
0%0% 0% 1%
1% 1% 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 BLR amount rated

Note: The all rated universe consists of 649 entities in hotel industry with BLR of ~Rs Note: The all rated universe consists of 640 entities in hotel industry with BLR of ~Rs
471 billion as of November 2019 466 billion as of September 2020
Source: Quantix Source: Quantix

Rating action Reasons for Downgrade

• Companies with balance sheets vulnerable to slump in cash

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

No. of entities 16 185

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
Apr-Sept

No. of entities 0 39 flexibilities.

Rated debt (Rs cr) 0 2,466

13
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

Accor S&P Downgraded from BBB- to BB+, maintaining negative outlook

ICRA Reaffirms rating of AA with negative 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

Fall in ratings below sub-investment grade would pose challenges to re-financing and raising additional capital 14
Is recovery in sight?

15
Post the steep fall in April & May, RevPAR has picked up with easing of
restrictions & dwindling cases across nations Sharpest fall in international travelers since
financial crisis

1462
1408
1333
1243
1197
1143
1097
1044
997
952
913 930 893
856
810
757
674 675 695 692 (60-80)%

Sub prime
crisis of 2011
320-610
2003:SARS

Note- Numbers are in millions

Source: UNWTO

Europe has been most steadfast on reopening

borders

8%
28% 26%
47% 45%

92%
92%
72% 74%
53% 55%

8%
Europe MEA Asia-Pacific South NCAC World
America
Fully closed Partially closed

Source: World Travel and Tourism Council

Source: IATA
Despite revenues declining, international players seeing strong revival in China
Experience in Covid times Revenue in Q2 2020 Mitigation strategy
 Moderation in China RevPAR, initial recovery led by  Launched gift card promotion in US & spring sale
leisure & drive to locations, business transient picking up via Alibaba for demand creation

 In NA, leisure demand has eased (overall 30-40% OR

-73%  Reduction in cash burn and raised ~USD 4.5 bn
reqd to break-even)
 System wide RevPAR decline 70% in July from 90% in  Suspended dividends and share buybacks
April

 China OR reached 65% in July vis-à-vis 25% in April  Strong liquidity position, cash on hand for ~30
months and plentiful revolver capacity
 In America, RevPAR fell by 76% in Q2 -81%  Suspended dividends and share buybacks
 35% of system wide inventory closed in Q2

 OR in China RevPAR at ~60%,led by leisure &

transient
 Eliminated non essential spending, G&A down by
25-30%, controllable costs reduced by 60%
 In America, OR at ~45% driven by leisure & limited
-77%  Suspended dividends and share buybacks
service
 Acc to management, OR in H2 could be 45-50%

 Has ~4.3 bn euros for sustaining ~40 months of

 High exposure to international travel, top 10 countries cash burn
account for 60% of management & franchisee fees
-85%  Reduced monthly cash burn by 1/3rd , cut down
60% of G&A
 RevPAR fell by 88.2% in Q2, slow improvement in July  Suspended dividends and share buybacks
 Improved trends across all markets except France

 Leisure & weekend occupancy seeing recovery, 99% of

 Cut cash outlays, has liquidity to fund ~36 months
US hotels & 93% of Asian hotels are now operational
-52% of operations
 RevPAR fell by 66% in Q2, & franchisee fees deferred till  Reduced quarterly dividends by 75%
September
 Currently, OR in China at 60%, OR in Canada at 40%,
Europe and middle east at 30% and in Latin America OR is
below 30%

Source: Company reports, CRISIL Research

Quick recovery unlikely in India given increasing penetration of Covid

0%
(50-60)%
revenue growth
Premium

(60-70)%
(%)

Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21

Lockdown Base case

Scenario Pessimistic case

• National lockdown (complete/partial) till Q1 • Extended vulnerability to the virus with

partial lockdown measures continuing
Base
Case

Extended
and staggered opening till Q3.
through Q3

Case
• Deferred corporate travel likely to resume
from Q4 • Deferred corporate travel not likely to
resume by Q4

Revenue decline will be more sharper for MICE centric hotels

Annexure

19
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

20
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 21