Hotels' Covid learnings boost upcycle as demand shows no sign of abating

• The hotels sector has been growing due to recovery in leisure and business travel as well as weddings.
• After the pandemic, hotels use digital keys, QR code menus, hire contractual labour – that’s made them operationally efficient.
• Hotels are also being cautious with expansion, going for asset-light models that will help grow their core business.

The pandemic hit the hotel sector hard as travel came to a standstill. However, the prolonged hardships gave rise to some necessary cost rationalisation by improving digital efficiencies and that is helping the sector, which is on an upcycle, grow faster.

For the last four quarters, the sector has been growing, thanks to recovery in leisure and business travel as well as weddings. And, there are more triggers ahead. The country will see two big events in the next few months — Cricket World Cup as well as G20 summit conferences which will spur the demand for upscale to mid hotel rooms across the country.

Moreso, the demand supply dynamics is skewed towards the branded hotel chains. Even as most of them are expanding, supply is expected to grow at 5-6% for FY23-FY27, but demand is expected to grow at 8-10%.

Foot on the pedal

Even as the post-pandemic boom effects have been waning, the revenge travel trend is showing no signs of weakening. “The consumption picture has been hazy but the services sector is holding up with good pent up demand in travel and hospitality,” said Madan Sabnavi, chief economist at Bank of Baroda in a webinar on ‘State of the Economy’.

Business travel has grown but is not yet at pre-pandemic levels of FY19, and is also growing across tier-2 and tier-3 cities — giving the sector a longer runway for growth.

The sector which has been enjoying the boom effects for the last four quarters — has seen the stocks performing well with most giving returns over 40%. Yet, there is still a good run up ahead, according to analysts, as they foresee further growth in room rents, and most of them are adding keys to their portfolio.

Industry level occupancies recovered to 60% in 2022 are estimated to reach 66% in 2023, as per HVS Anarock. They are further expected to grow to 68% in 2024 and 70% in 2025.

“Industry average room rent (ARR) which stood at ₹6,100 in 2022 is estimated to reach ₹7,106 in 2023, ₹7,639 in 2024 and ₹7,983 in 2025,” said a report by ICICI Securities.

A report by J M Financial said that they build in higher occupancy levels and 8-10% average room rent growth. It estimates that revenue to grow at a compounded annual growth rate (CAGR) to be anywhere between 12.5-21% revenue over FY23-26. The brokerage covers Indian Hotels, Lemon Tree Hotels and Chalet Hotels.

Stock	One year return
Indian Hotels	43%
Lemon Tree Hotels	52%
Chalet Hotels	45%

Source: BSE

How the pandemic helped

The testing times for pandemic has also made hotels more efficient, both financially and operationally. The Covid-19 pandemic has forced hotel operators to rethink their cost structures. They have downsized, and now lean towards multi-tasking and hiring of temporary/contractual labour. Thanks to strict social distancing norms, hotels have been re-imagined with fewer touch points, like digital keys, digital payments and menus on QR codes. They have now turned mainstream and are also operationally efficient.

“During the pandemic, hotels have also converted some of their fixed expenses to variable or partially variable expenses. Contracts were aligned towards potential earnings and more investments were made in new-age forecasting tools to limit surplus of food and overage of staffing,” J M Financial says.

Even as most of the branded hotels are going for adding more keys to their portfolio, this time around they’re choosing asset-light models. Lemon Tree management said recently that it targets to add 20,000 rooms by 2028, and the asset- light model will make up for 70% of these additions. Indian Hotels has a pipeline of around 9,900 rooms, and 74% of it is asset light.

“Indian Hotels and Lemon Tree have been careful about portfolio expansion, and have built a pipeline heavily inclined towards asset light additions. Consequently, with a much leaner balance sheet, they still have adequate headroom to grow through outright acquisitions to tap into the continued strength in demand,” says J M Financial.

With growth in demand and operational efficiencies woven in, the sector is paving way to generate free cash flows – a rate feat in a business that’s known to be tough with high capital expenditure.