Coronavirus outbreak: Hotel stocks likely to see earnings downgrades

Hotel stocks are under pressure because the coronavirus outbreak could impact occupancies and, thus, drive down room tariffs

Even as the broader markets were in the green, hotel stocks hit yearly lows and shed about a quarter of their market capitalisation over the past month. On Thursday, the losers were led by Indian Hotels, which shed 4 per cent.
 
The pressure on hotel stocks — including Indian Hotels, Lemon Tree, EIH, and Chalet Hotels, among others — is because of worries that the coronavirus (COVID-19) outbreak could impact occupancies and, thus, drive down room tariffs. The sector, which is dependent on travel and tourism, will be among the most impacted because of the flurry of cancellations since the virus outbreak.
 
Pavethra Ponniah, vice-president and sector head (corporate sector ratings) at ICRA, says: “We are already seeing significant cancellations of group events, impacting MICE (meetings, incentives, conferences and exhibitions) demand and allied income for hotels. This will only intensify in the next few weeks. All non-essential business travel will also face curbs, as most companies advocate or even issue diktats against travel.” Of the broad segments, experts believe the luxury segment will be most impacted, followed by the mid-scale and economy segments. Within the listed pack, EIH, which runs luxury (Oberoi) and five-star (Trident) hotels, would be most impacted. The stock, which is down 39 per cent from its highs of last year, hit its 52-week low on Thursday.
 
The other stock that will be impacted is Indian Hotels (Taj group), given its international properties in the UK and the US, as well as five-star properties in the country.
 

Business hotels such as Chalet, with two-thirds of revenues coming from the Mumbai market, may not be impacted as much. Hetal Gandhi, director at CRISIL Research, says while major hotels have been improving their operational efficiencies to shore up margins, a fall in occupancy below a certain level (60-65 per cent) will push up operating costs, thereby eroding margins.
 
While the impact during the SARS outbreak in November 2002 was not much on hotel occupancies in the country, analysts believe it might not be the same with COVID-19. “While cancellations have already hit the March quarter and are likely to impact the June quarter as well, monsoons and lean season would mean that the earliest period we can expect a recovery will be during the Diwali (festival) season later in the year,” says an analyst.
 
Foreign tourist arrival growth has been trending down over the past three months and a marginal growth in January. A fall in these numbers, coupled with reduced air travel, will impact the upscale segment.
 
Though some of the deferred travel, particularly related to the business segment, is likely to come back, it will be with a delay, leading to lost room nights for hotels. While brokerages have so far not cut their earnings estimates, analysts believe downgrades should follow.