Single window clearance for hotel projects will improve operational ease, reduce delays

Indian Union Budget 2022: The Omicron variant of COVID-19 after Delta has hit the hospitality sector hard

The hotel industry reported operating losses in FY2021 and is expected to report cash losses in FY2022 as well. High capital intensity and relatively high fixed costs have led to a significant contraction in profits and cash flows, in the last 18-24 months.

The sector has remained among the worst-hit segments from the COVID-19 pandemic, with RevPAR at a 50-55 percent discount to pre-pandemic levels for 9M FY2022. The ongoing Omicron wave has only dampened industry sentiments again because of lockdowns/restrictions on mobility by various states and increased wariness to travel due to fear of infection contagion.

Cancellations in hotel bookings

With the sharp rise in infections in the last few weeks and several states imposing partial lockdowns, hoteliers are witnessing cancellations in bookings and the enquiries for the next few weeks have come down. Given that the travel and tourism industry accounted for 6.9 percent of the Indian gross domestic production (GDP) and for about 8.8 percent of employment in the country in CY2019 (Source: World Travel and Tourism Council) pre-pandemic, its importance to the economy cannot be neglected.

Reduction in GST rates can make room rates attractive

ICRA expects announcements to boost consumption/spending and significant spend on safety and health in the upcoming Budget. The hotel sector will be an indirect beneficiary of the improved optimism arising from health/safety spends and announcements to boost consumption and spending. Infrastructure and connectivity improvement measures will also positively impact hotel demand over the medium term, given the sharp pickup in drive-to destination travel in the last year. Reduction in GST rates can make room rates/F&B competitive with other overseas destinations. This could help the industry capitalize on international demand and MICE as soon as it starts picking up.

Small hotel projects need infra status, too

Infrastructure status is available to hotel projects of over Rs 200 crore currently. However, smaller hotel projects do not enjoy the benefits. Infrastructure status will give existing hotels benefits of lower taxation, electricity rates and a simplified approval process for projects, apart from a favourable repayment structure. Further, given the number of approvals required for new hotels, single-window clearance for hotel projects will improve operational ease and reduce delays in hotel commencement for new hotels, helping upcoming supply.

No sops in Budget 2021

Liquidity is paramount for the hotel industry, given the demand vagaries and cyclicality. The industry has been a key beneficiary of the RBI moratorium and the ECLGS scheme provided as part of the pandemic relief, since March 2020. Various state governments have also provided waivers in property taxes, electricity demand charges waivers and industry status, in addition to this. However, the sector did not receive any major sops in the Union Budget 2021-22.

An increase in moratorium for the ECLGS loans taken (considering that repayment of ECLGS 1.0 and 2.0 loans have commenced already), a special resolution framework for restructuring of loans or a stimulus package would come as an instant relief for the smaller hotels, given the limited liquidity buffer currently. Lenders are cautious as far as this sector is concerned, and incremental external funding is largely expected to be based on promoter comfort.

While the larger hotel chains have had relatively easier access to funding, the liquidity issues have been compounded by funding constraints for smaller hotels. Softer interest rates, longer repayment tenor or easier access to funds by making hospitality a priority sector from a lending perspective would also be beneficial. Reducing property taxes/license fees, waivers in operational costs and tax holidays will directly add to accruals. ICRA believes that liquidity boosting measures are critical for the sector.

Overall, demand improvement and expense waivers will come a long way in reviving the COVID-battered sector over the medium term. However, immediate liquidity boosting measures are critical, as ECLGS loans dry up for most entities over the next few months.

The author is Assistant Vice President and Sector Head – Corporate Ratings, ICRA Limited. Views are personal.

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