Hotel stock investors fear June quarter due to coronavirus impact

With stringent curbs on foreign tourists’ travel by India up to April 15 due to coronavirus, stocks of major hotel players like Indian Hotels, Lemon Tree Hotels, Chalet Hotels and EIH, among others plunged by 10-20 per cent in Thursday’s trading session and hit their 52-week or all-time low. The decline was much higher than the 8 per cent fall in leading indices such as the BSE Sensex amidst bearish sentiment.

Companies such as Indian Hotels and Chalet Hotels, which relatively have a higher share of foreign tourists, could see sharper impact on their topline and operating profit. While foreign tourists account for around 35 per cent of overall business of Indian Hotels, which operates properties in India and countries such as US, UK, etc, it is over 50 per cent for Chalet Hotels, as per Edelweiss estimates.

However, even the domestic business segment would now feel the heat of coronavirus. According to Archana Gude, analyst at IDBI Capital, “Domestic hotel players would see lower occupancies for foreign as well as domestic travel segment owing to coronavirus.” In fact, some hotel players with lower share of foreign tourists have also witnessed a sharp decline in occupancy levels in the initial period of March.

 

The news is discouraging considering that December data had shown average room rates (ARR) and occupancy level for the industry improving, with demand rising amidst limited supply of new capacity.

In view of the current situation, experts say, while the March quarter would see an impact of the pandemic, June quarter is likely to be even worse as the coronavirus spread has started catching up in India in the current month. And, inability to contain coronavirus could lead to an extension of restrictions on foreign tourists’ arrival.

This clearly indicates the degree of impact the travel advisory could have on the hotels industry. Additionally, MICE segment (meetings, incentives, conferences and exhibitions) segment is also seeing cancellations, fuelling further worries, Gude cautioned.

 

Nihal Jham, analyst at Edelweiss Securities, also believes that even though the companies take price cuts, it is unlikely to push demand in the current situation.

This apart, the leverage position adds to these concerns of demand and profitability for some hotel companies. Although a few players are moving to an asset-light model, any significant dent on their topline would weigh on their outstanding leverage/debt servicing ability if the coronavirus situation gets prolonged.

In the above backdrop, hotel stocks are likely to remain under pressure until the situation comes under control. Thus, despite the sharp correction in these stocks, investors are recommended not wait till the clouds clear.