74% of hospitality sector companies face negative credit profile, 2nd wave delays recovery: Report

Three out of four companies in the hospitality sector have faced negative rating actions with respect to their credit profiles due to the impact of the COVID-19 pandemic, and the second wave has derailed the industry's recovery by almost three quarters, according to a report.

Being one of the high contact sectors, hospitality has been one of the first and worst-hit sectors due to the pandemic, and the second wave has only added to their woes as it has come at a time when the industry was on its path to recovery.

Since mid-April, the industry has been hit by the lockdowns or mobility restrictions by various states and increased wariness to travel due to fear of infection contagion.

"We continue to maintain a negative credit outlook on the hospitality sector, as their credit profiles have weakened in the last 12-15 months, with 74 per cent of the entities faced negative rating actions," rating agency ICRA said in a report on Wednesday.

The report also noted that the second wave has derailed the industry's recovery by 6-8 months, and a return to the pre-pandemic levels is now expected by the financial year 2023-24.

The report noted the impact of the second wave of the pandemic on the industry in the first quarter of FY22 after two quarters of sequential recovery in Q3 and Q4 of FY21 till mid-March this year. It warned that weak operating performance and part-funding of the losses through debt are likely to result in stretched coverage metrics in FY22 as well.

Pencilling in a long road to recovery, the report said improvement in room occupancy and rates is expected only by FY24.

It added that debt/ operating profit ratio is expected to surpass 2019-20 levels (of 5x) by FY24, leaving the 'return on capital employed' at sub-cost of capital at least until FY25, despite minimal capital expenditure.

The intensity of the second wave has been far steeper than the first one, and it has put a temporary brake on the hospitality industry's recovery path. "We expect a significant scale back in FY22 pan-India room rentals at Rs 1,300-Rs 1,500, from an earlier estimate of Rs 2,500, as this fiscal it is likely to trend at 60-65 per cent discount to pre-pandemic levels," the report said.

Demand slowdown has significantly impacted the first quarter occupancy and average room rates, although it is better than year-ago quarter levels. As against a 10-12 per cent occupancy in April-June 2020, it was higher at 26-28 per cent in April-June this year with demand in May largely coming from quarantine business for mildly-infected patients.

All-India average room revenue was at Rs 3,600-3,700, about 8-10 per cent higher on a year-on-year basis, although the demand slowdown has impacted it since the onset of the pandemic.