50% of hotels in India in danger of getting sick over the next six months, says Patanjali Keswani, CMD, Lemon Tree Hotels

Fifty percent of hotels in India, according to a top hotelier, are in danger of getting sick over the next six months. And this is mainly due to leverage and liquidity related issues.

Expressing concerns on the overall health of the Indian hospitality industry, Patanjali Keswani, chairman and managing director, Lemon Tree Hotels Ltd, said, ”Short term demand destruction over the next six to 12 months, without an extension of the moratorium, will certainly lead to permanent supply destruction. What this basically means for the industry is that there will be a 10% to 25% reduction in (hotel rooms) supply in the branded hotels space in India by next year. While some of them may come back but new supply will be impacted severely. As far as I know, very few people, if at all, are building (new) hotels or are continuing to build hotels. Right now there are 165,000 hotel rooms and my reckoning is that two years from now there will be anywhere between 130,000 to 140,000 rooms operating.”

And if that happens, added Keswani during an earnings call earlier today, I reckon that hotels that remain operational will not witness a big drop in room rates. “So, maybe this October the pricing (rates offered to corporate clients) will remain the same or may decline marginally compared to last year. However, next October the room rates will certainly bounce back significantly,” he said in response to an analyst’s query on the outlook for corporate rates that get renegotiated annually during this period.

Keswani said that any hotel company that has operating hotels two and a half years from now, will be in a market scenario where supply would have reduced significantly. “While I cannot speculate on the increase or decline of demand for hotel rooms, I know for sure that there will be an enormous reduction in supply of branded hotel rooms in India. Also, whichever corporate that I have spoken to, all their employees are of the view that that cannot go to work. My expectation is that from October next year the market will witness a very large amount of domestic travel. Fear has to go, cure has to come, vaccine(s) may or may not come but domestic travel will kick-start and there is no doubt in my mind,” he said.

The current market scenario has got every organisation in the cash conservation mode. However, there are also talks about an opportunity for companies sitting on cash to acquire hotels that are under financial stress.

”We already own 5,200 hotel rooms and are building another 700 plus rooms so we will be closer to 6,000 guestrooms soon. I don’t think we have an appetite to acquire assets. Having said that, a fund is already in talks with us to manage their hotel assets portfolio. The hotels will be acquired by the fund and we will be managing their properties. We are looking at that opportunity and are hoping that in the next two months we will be able to do a term sheet with them to manage their hotel assets. This (deal) will significantly expand our managed hotels portfolio under the Fleur Hotels joint venture,” said Keswani adding that the focus going forward will be on growing through management contracts, lightening the balance and moving owned assets into Fleur Hotels and its possible listing in the next few years.

Lemon Tree Hotel is also envisaging delays in construction activities as a result of which opening of hotels that are currently under development will take longer. The hotel chain has been developing a five-star deluxe hotel under the Aurika brand, located in the vicinity of the Mumbai International Airport. The largest hotel in Lemon Tree’s portfolio in terms of the number of guestrooms, this property was to open in the third quarter end of calendar year 2022.

“However, for the last five months hardly any work has been done at the site. At Rs 2 crore a month, the expenditure today is not very significant as we are building the shell of the hotel in the vicinity of the Mumbai International Airport. We have kept the project work on with an expectation that it will be delayed by six to nine months. We will take a call in December this year based on what we see because our existing hotel Lemon Tree Premiere in Andheri, Mumbai is already doing 60% occupancy at an average room rate (ARR) of close to Rs 4,000. So, if we feel Mumbai is recovering, and it normally recovers first, we will accelerate the project development.

On the business front, the country’s largest mid-market hospitality chain has operationalised close to 90% of its hotels in the portfolio. It is currently witnessing occupancy levels of about 38%. The hotel chain was operating 3,700 hotel rooms in the first quarter and the number of guestrooms increased to 4,600 in the second quarter.

”While rooms inventory has gone up by 900, we are hoping occupancy to pick up over the next two to three months,” said Keswani adding that business form quarantine guests witnessed a slight de-growth in July. “But that was compensated by pick up in online bookings,” he said adding that market sentiments are undergoing a change and business from quarantine guests is only a filler now.

Online booking stood at 70 per day in April 2020, however it has picked up gradually and currently stands at 300 bookings on a daily basis across Lemon Tree’s hotels network, said Kapil Sharma, chief financial officer, Lemon Tree Hotels Ltd.

The room rates from online bookings, Keswani said, is between Rs 2,800 to Rs 4,000. “A large part of the bookings is in the Rs 2,800 bracket as these are people looking for a break and are staying at the hotel with wife and kid(s) over the weekend. It’s the micro, small and medium enterprise (MSME) segment that’s picking up 100-150 rooms a day and paying north of Rs 3,500,” said Keswani.

Business from online bookings stood at between 35% to 37% for the hotel chain during pre-COVID times. Another 35% was coming from large corporates, business from MSMEs was at 30% and 10% was from other categories like meetings, conferences and incentives.

“Contrary to what I have been reading about complete distress in the market, I find that while the large corporates have not started travel, their business continuity teams are travelling and staying in our hotels in Pune, Bengaluru and Hyderabad. However, the MSME sector has started travelling and to me that is an early indication of something to look forward to,” said Keswani.

Lemon Tree Hotels is also planning a rights issue though there is no timeline finalised for the same as yet. While a board approval for the rights issue is already in place and the company management planning to hold a board meeting next month and take a final call on this. “It should roughly take two to three months,” said Sharma.

(The writer is a Mumbai-based independent business journalist and has extensively covered diversified consumer businesses over the last two decades. He can be reached at hello@ashishktiwari.com)

Liquidity issues add to worries of cement dealers in Tier I and II centres across 13 Indian states

Trade channels, accounting for approximately 60% of annual cement sales, stare at around 30% demand contraction

With April and May becoming a total wash out months due to the COVID-19 pandemic, cement dealers in the country are headed into a vicious cycle. Delay in new construction activities, gloomy business outlook, fear of income loss, labour shortage and uncertainty with respect to resumption of normalcy were among some of the reasons cited.

In fact, a significant decline in cement sales followed by prolonged credit period and higher working capital requirements have already made life difficult for the fraternity thus adding to their survival challenges. The trade channels account for approximately 60% of annual cement sales.

According to Rahul Prithiani, director, CRISIL Research, the cycle of recovery of retailer dues is expected to extend by four to six weeks over and above the usual four weeks. “This will potentially increase the working capital requirement of dealers by 12-17%, even as they reduce credit exposure, infuse capital and curb non-essential expenditure,” said Prithiani.

Courtesy: CRISIL Research

A recent CRISIL Research survey with over 100 dealers across Tier 1 and 2 centres in 13 states, indicated a significant decline in volumes and an extended lockdown can only worsen the overall situation. A whopping 93% of the respondents said they expect volumes to shrink 10-30% in fiscal 2021 in the base case scenario, i.e. the lockdown easing in May.

The survey pointed that over 60% of dealers are holding low inventories (two to four days), but spoilage concerns persist. Dealers are hopeful of liquidating inventory by offering discounts as soon as the lockdown eases, to contain spoilage and get volumes going.

Additionally, payment delays from retailers appear inevitable considering these players are small and fragmented, and most likely to delay payments amid liquidity crunch, gloomy demand outlook and cement spoilage concerns. That, in turn, would stretch the receivables cycle and negatively impact cash flows of the dealers, as much as 95% of whom offer credit, CRISIL said in the report.

The elongated working capital cycle could last at least a couple of quarters, and the risk of retailers defaulting on payment dues would aggravate the financial pain. However, the collateral-free MSME loans announced by the government on Wednesday will come as a big relief, since it will help cement dealers access working capital debt.

Over 90% of the dealers surveyed are hopeful of manufacturers’ support in terms of better margins/ incentives, or liquidity support to weather the hard times. But chances of a swift revival post ease in lockdown remain bleak, with 58% of the respondents believing it will take over three weeks for operations to normalise, said the CRISIL report.

Guranchal Singh, associate director, CRISIL Research, said, “An intermittent rise in daily wages, freight cost, and construction material prices will deter restart of construction activity. Return of labour, freight disruption and dwindling consumer confidence will weigh on resumption of normalcy in the near term.”

Improvement is envisaged in the second half as demand picks up and receivable days gradually decline. But even here, recovery in urban areas may take longer due to extended lockdown, slowdown in real estate construction and higher dependence on migrant workforce.

A few dealers, though, are optimistic that the labourers, who have not been able to earn wages for nearly two months, would return quickly post-kharif sowing to capitalise on pent-up demand and halted construction activity.

Courtesy: CRISIL Research

(The writer is a Mumbai-based independent business journalist and has extensively covered diversified consumer businesses over the last two decades. He can be reached at hello@ashishktiwari.com)