The Cost of Closure – India’s Hotel Industry

by Apr 20, 2020Covid-19, Hotel Operations, Strategic Advisory, Travel & Tourism

India is under a nationwide lockdown for 21-days, at least. What no natural calamities, dreaded wars, socio-economic and geo-political crises could do in centuries of civilization, COVID-19 has done in just a couple of weeks. The mammoth Indian Railways are shut. Every last flight has landed, every interstate bus service sealed. Intracity Metros and even the unstoppable Mumbai locals have been brought to a grinding halt. Schools, Colleges, Offices, Malls, Cinema Halls, Factories, Farms – padlocks on every last door. Time seems to have come to a complete standstill. Reality does indeed prove to be stranger than fiction. As we all move towards adjusting to this new normal, businesses grapple with the challenge of attempting to answer the near impossible question – How long will this last, and will our enterprise survive long enough to see light at the other end of the tunnel?

Even as we penned an article about COVID-19 & its impact on the Indian Hotel Industry just a week ago, it seems as though we may had written it in another lifetime. This article digs deeper into just how gruesome the cost of closure may be for India’s organized hotel sector. Much like most other businesses, hotels have certain variable costs that they are able to mitigate and maneuver in tough times. There are, however, some fixed liabilities that they must bear, even when their ability to generate revenue slides down to naught. Presently, the government directive allows hotels to remain functional through the lockdown period. That offers no solace to Hotel owners and operators; the very idea of operating these expensive undertakings makes scant sense when the citizens of our nation are prohibited (understandably & for good reason) from stepping outside their homes. That does not, however, wish away the following fixed costs that hotels must pay for:

  • Debt outstanding – Principal & Interest payments
  • Salaries & Wages
  • Provident Fund – Employer Contribution
  • ESIC – Employer Contribution
  • Property Tax & Insurance
  • Annual Licenses, Permits & Renewals
  • GST liability (for the little business that does get realized)

Our previous article quantified the total revenue typically generated by India’s branded & organized sector to be approximately INR 37,000 Crore (US$ 5 Billion). It also shed light on the high likelihood of this being eroded by at least INR 11,000 Crore (best case scenario) and possibly up to INR 30,000 Crore (if the industry suffers for the remainder of this calendar).

A near-annihilation of revenue earning capacity does not come with a moratorium on costs. The total debt outstanding by the thousands of existing (and under-construction) hotels across the organized space in India was north of INR 45,000 Crore as of January 2020. Just the monthly obligation of principal & interest repayments therefore runs into thousands of crores. A deferment of these obligations for a six to nine-month period is an urgent need and lending institutions (with the aid and direction of the government) really should give this immediate consideration.

Salaries, Wages & other direct payroll related expenses typically end up being anywhere between 17% to 22% of the toplines for most hotels. These costs are largely fixed. Just the branded sector employs close to 200,000 people in India, with millions more being on the rolls of the large mass of unorganized hotels, lodges and guest houses. Hotels are in a pressing need for working capital to ensure salaries continue to be paid.

The employer’s contribution to Provident Fund (PF) and Employees’ State Insurance (ESIC) are statutory and compliance related matters that must be adhered to on an ongoing basis. When calculated as a percentage of overall revenue in a typical year, these make up about 2% to 3% of the pie. However, in a year like this, when the total revenue may be eroded by up to 75% to 80%, this amount could swell up to almost 8% to 10% of the collections for the year. Similarly hotels incur costs related to property tax and insurance annually. These amount to 1% to 1.5% of total revenue in normal years. Again, given a fraction of that revenue being likely achievable this year, costs associated with property tax and insurance would only further add to breaking the back of these businesses. Intervention and assistance from the relevant bodies to aid the sector in these regards would make a compelling argument.

Most branded hotels have to contend with the periodic renewal of several licenses and permits. Just a sample list would include the Fire NOC, Excise, Trade, FSSAI, Labour Cess, Police NOC, Star classification, DG set approvals, load sanctioning. Health NOC, Police NOC, etc. This is but a small sample of all the various annual approvals required and while this list is by no means exhaustive, it does set context about the sheer number of permissions that a hotel must not only avail of, but also pay for, in order to remain legally operating. This too can cost anywhere between 1% to 3% of total revenue generated in normal years. A deferment of some of these compliances (at least the ones that do not pose an immediate health, hygiene or safety related operating risk to establishments) by six months may be warranted. The possibility of a smooth renewal of a vast majority of these licenses and permits (perhaps a single window clearance) for those hotels that have no option but to shut shop in the days ahead would be a huge relief to the sector as well.

Last, but certainly not least, the Goods & Services Tax liability ranges from 12% to 18% for almost all the hotels in the branded & organized space. While this isn’t a cost to the hotels per se, it does create a pressing cashflow situation in these tough times. The recent announcement that defers the filing and submission of GST on the monthly portal till June 30th, 2020 is a welcome step. However, the hospitality sector will need this relaxation for a much longer period, possibly a full year.

Hotelivate has been diligently working alongside the Ministry of Tourism, the Ministry of Finance and the Confederation of Indian Industries over the past few days. We were asked to help these bodies realistically qualify and quantify the loss of revenue that our sector may witness, as well as a detailed breakdown of the kind of fixed costs these hotels may have to bear through the months ahead. It is our estimate that just the fixed costs described in this article would amount to anywhere between INR 12,000 to INR 15,000 Crore over the months ahead. For an industry that collects about INR 37,000 Crore in a good year and may see only 15% to 20% of that amount clocked this year, India’s branded/organized hotel market may completely go under in a matter of months, unless several dramatic, atypical and urgent steps are taken immediately.

Our recommendations have reached the eyes and ears of the powers to be and it remains our earnest hope that the sector shall receive the helping hand very soon. We reiterate that hotels are a capital intensive, cashflow strapped and highly volatile business to be in. They serve a key purpose in the economy and society. The impact of cyclicity and a variety of setbacks are second nature to this sector. However, the hotel industry in Indian just cannot sustain an onslaught of this magnitude. There will be almost no revenue for the foreseeable future. When this problem does get extinguished, it will still take a while before travel, trade and tourism resumes. If the sector is to survive, the cost of closure will need to be mitigated, now.

For more information, please contact Achin Khanna on [email protected]

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