Hotel stock investors stare at turbulent times

June quarter likely to get worse; leveraged positions add to concerns

With stringent curbs on foreign tourist travel by India till April 15 due to the coronavirus outbreak, stocks of major hotel players like The Indian Hotels Company (IHCL), Lemon Tree Hotels, Chalet Hotels, and EIH, among others, plunged 10-20 per cent in Thursday’s trading session, hitting their all-time 52-week lows. The decline was much higher than the 8 per cent fall in leading indices such as the BSE Sensex amid a bearish sentiment.

Companies such as IHCL and Chalet Hotels, which have a relatively high share of foreign tourists, could see a sharper impact on their top line and operating profit. While foreign tourists account for around 35 per cent of the overall business of IHCL, which operates properties in India and countries such as the US and the UK, it is over 50 per cent for Chalet Hotels, according to Edelweiss estimates. 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 a 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 the December data had shown average room rates and occupancy levels for the industry improving, with demand rising amid limited supply of new capacity.

In view of the current situation, experts say while the March quarter would see an impact of the pandemic, the June quarter is likely to get worse. The inability to contain the contagion could lead to an extension of restrictions on foreign tourist arrivals.

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

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

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 in their top line would weigh on their outstanding leverage/debt servicing ability if the pandemic is long-drawn-out.

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