Pick-up in leisure travel helps hotels post sequential revenue growth

Cost cutting initiatives by Indian Hotels, EIH helps restrict loss at the operating level

The December quarter results of the largest hospitality stocks, Indian Hotels and EIH indicates a sequential uptick in revenues led by a pick up in the leisure segment. With the gradual pick up in economic activity, the two companies reported a doubling of revenues over the September quarter. The pace of revenue decline in the first two quarters which was over 80 per cent is down to 60 per cent as compared to the year ago period.

The improvement was on the back of rising revenues per room which was reflected in higher occupancies and average room rates. For Indian Hotels, revenues in December have recovered to 60 per cent of the year ago levels. Revenue per available room in the domestic segment more than doubled to Rs 2,573 in Q3. 

A large part of the gains have come from the rise in occupancies to 45.6 per cent from 28.2 per cent in the September quarter. Room rates too gained by 50 per cent to Rs 5,643 on a sequential basis. The company highlighted that most of the gains have come from leisure travel with Goa reaching almost 80 per cent of the year ago levels. Business travel, however, continues to be impacted with revenues still at 40 per cent or lower levels as compared year ago period for cities such as Bengaluru, NCR and Mumbai. EIH also indicated a 50 per cent increase in average room rates for Oberoi Leisure Hotels as compared to the previous quarters. Occupancy growth on a sequential basis was led by Kerala in India and Dubai in its international operations. 

While Indian Hotels posted losses at the consolidated operating profit level dragged down by international operations, cost cutting initiatives helped it to turn profitable at the standalone level. Around 86 per cent of the company’s domestic hotels are making money at the operating profit level. For EIH, the share of fixed and variable costs were down by 30-56 per cent as compared to the year ago period. 

The share of food and beverages (F&B) have gone up for Indian Hotels as well as EIH in the quarter. While room rents accounted for 50 per cent of EIH’s revenues and F&B was at 37 per cent a year ago, the share of F&B has gone up to 55 per cent now while room rate share is down to 28 per cent. Indian Hotels’ F&B share has increased from 34 per cent in the September quarter to 43 per cent in the December quarter. 

Given the stress on the operational front, strong balance sheets would be critical if the top players are to ride out the pandemic and the cumulative losses they have been posting for the past three quarters. Rashesh Shah of ICICI Securities says that EIH is best placed on the balance sheet front with the recent fund raising of Rs 350 crore through a rights issue. At the end of the December quarter, the company’s net debt stands at Rs 250 crore and its net debt to equity ratio is at a comfortable 0.08 times.

For Indian Hotels, its net debt stood at just over Rs 3,079 crore with leverage ratio at 0.71 times. “While Indian Hotels has a strong promoter backing, its debt/equity is 0.7 times, which combined with capex requirement could lead to further rise in the leverage ratio to 0.9 times if current Covid issue persists for a longer period.” Lemon Tree Hotels has strong institutional backing for liquidity support, however it is in the capex mode and hence more leveraged than its peers.  

Given the pressures on business segment, investors should await a further improvement in occupancies before considering the stocks.