One of the worst hit sectors during the pandemic, hospitality industry is slowly making a comeback. Thanks to the demand from leisure segment and small and medium enterprises (SMEs), the industry is recording occupancies of 40-50 per cent, especially in the organised market.
Even though the occupancies are gradually picking up - from close to 10 per cent during lockdown to 30 per cent in September, and over 40 per cent now - the average room rates (ARRs) continue to remain low (nearly half of the pre-COVID level), which is affecting the revenues of the industry. Take InterGlobe Hotels, which operates 17 properties under the Ibis brand, for instance. The chain expects revenue to contract by 60 per cent this year, and 40 per cent in the next year.
"With every passing month, revenues are picking up for us. It's so difficult to predict. We do monthly projections. If the market starts to pick up from August, the pain may lessen. I think the growth rate we are seeing right now will hold out by October," says JB Singh, President and CEO of InterGlobe Hotels.
Singh says the industry is ripe for acquisitions and growth, and there could be new entrants entering the industry. In the recent months, the number of acquisition proposals have grown manifold. For instance, prior to COVID-19, if he was getting 8-10 hotel deals per month, the number is now close to 20 deals, most of which are coming from individual hotel owners.
"We expect it to grow. Because of the loan moratorium given last year, the money was carried forward into the next financial year. But this year will be tough for organisations that were over-leveraged, or run inefficiently, or even over-leveraged in other businesses," he says.
For organised players who are well managed, this also presents an opportunity. How? For example, a hotel takes about 5-6 years to open up from the point of conceptualisation to the launch. This lead time can go down drastically in case of acquisitions. But then there are two things that need to happen before the serious players can go about acquiring hotels: banks to start funding, and policy changes.
While policy changes could be a long-term process, the need of the hour is the liquidity which must come in for serious businesses.
"The banks are sitting on cash. Right now, we are running everything on pure equity. The banks have really slowed down. We believe that the banks should start funding credible businesses that have shown enough commitment by putting personal equity to keep the industry going," says Singh.
In terms of policy, the industry expects changes on multiple fronts. Take car parking provisions for instance. The current rule in Delhi mandates a hotel to build as many car parking as the number of rooms in that hotel. But not every hotel is focussed on weddings or convention demand, and therefore, its requirement for car parking would be just 10 per cent of the total rooms.
Similarly, the industry has been hit by Goods and Services Tax (GST) since the civil structure of a hotel project is considered immovable property, and hence no input credit is offered. This has jacked up the cost of building a room by about 10 per cent. Hospitality sector is particularly upset since a real estate player can pass this cost to the end-user either in the form of sale price or lease rents.
Then there are issues with the number of licenses (about 1,900) required for hotels and their costs. In Hyderabad, for example, the liquor license costs Rs 40 lakh a year. In Bangkok, it costs about 1,000 Thai baht (or Rs 2,422).
"The industry can become 10-20 per cent more efficient just with good policies. There are huge policy bottlenecks that slow down the pace of development. The policy needs to be agile to recognise the purpose of the business," says an industry expert.