No comfort for Indian Hotels as washout looms

Losses seen ahead as cost cuts unlikely to offset the decline in revenues

The March quarter (Q4) performance of Indian Hotels was largely in line with estimates. However, the company is expected to face severe challenges in the near term. The extent of impact of the Covid-led disruption may be gauged from the firm’s showing in the first two months of Q4, as compared to the decline in March.

Though consolidated revenues in January and February rose 2 per cent over the yearago period, they fell 48 per cent in March. The firm sustained an operating loss for March at ~27 crore, compared to ~273 crore in operating profit for the first two months of the year. This dented its Q4 performance as operating profit fell 24 per cent y-o-y while margins dropped 225 bps to 22.34 per cent.

The situation post-march has turned for the worse, with occupancies (quarantine, medical staff ) at 20 per centlevels, indicated analysts. With the occupancy level to achieve operating cash breakeven now pegged at 50 per cent, the June quarter could be a washout, with revenues falling 80-85 per cent and the firm reporting losses at the operating level.

To improve revenues, the company is looking at multiple initiatives such as home delivery of food. While there could be near-term pressure on room rates as the company looks to improve occupancy, it is hopeful of recovery in H2FY21. Close to 60 per cent of revenues for hotels are generated in H2.

Given the revenue pressure, the firm has cut costs by 40-60 per cent. To reduce leverage and improve cash position, Indian Hotels is selling its non-core assets — considering a ‘sale and lease back’ of hotels, and renegotiating leases. It has deferred upgradation and renovation projects to preserve cash.

While ‘net debt to operating profit’ has dropped from 6.47x in FY16 to 1.69x at present, the metric could worsen given the revenue collapse. While the company indicated a slight increase in debt from current levels of ~1,857 crore, analysts believe that leverage (net debt to operating profit) could worsen, with the company starting to report losses at the operating level.

However, the hotel chain highlighted that its liquidity position continues to remain strong. In what direction the debt level moves hereon would be a function of revenue recovery as well as monetisation efforts.