With increasing number of cases, it is time to relook at some of the industries:
While industries like Hospitality (EIH, Chalet, Lemon Tree), Travel (IRCTC, Indigo, Spicejet), Media Entertainment (PVR, Inox) may see huge downward pressure and stock prices of some of these companies/industries may remain muted for a long time, some may go insolvent as well!!
Yes, there is a possibility, especially in the Hospitality industry, since the industry has had the following characteristics:
- Over capacity since the last few years (Stagnant/Declining Occupancy Rate); The Indian organized hospitality sector recorded an occupancy rate of 66% at an average rate of approximately INR 6,000, the highest in a decade!!
- Pricing pressure (RevPar = Revenue per Available Room) has been declining. Room rates have declined while you may
have upgraded yourself. Think about some of the deals which you continue to get? - Capital Expenditure continues to be on the rise, since most hotels want to keep adding up and showcase their strength by increasing the number of rooms, they have added year-on-year.
- Homestays have created formidable competition. OYO, despite having no tangible assets of its own is valued more than the entire hotel industry in India!! By the way, this phenomenon is here to stay. Airbnb got listed during pandemic times at a valuation of USD 100 billion+
- Business economics of the hotel industry has always remained unfavorable. Exorbitant Real estate development costs combined with long gestation period makes it a very unattractive industry financially (After all, all that glitters is not gold). Average Return on Capital Employed (ROCE) for the industry has been sub 8% since multiple years.
- Think about restaurant/hotel as a manufacturing company with a sales room attached to it. The manufacturing plant is the kitchen/pantry, whereas dining room and the guest rooms act as the sales room. Given the fact that the industry is primarily a real estate business, wherein they are renting spaces, mostly in locations one would never dream of putting a manufacturing plant. The real estate costs along with highly intensive labor cost makes the industry a very inefficient business!! The economics of the hospitality business are such that if one does not have any revenues, one just can’t keep the lights on. No wonder, the industry has not really made money for the shareholders over a long period of time.
So, IMPORTANCE of the news around Covid-19 is frankly not relevant for this industry, since most players in the industry were never investment worthy to begin with, despite the pandemic. Investment KNOWABILITY was more important in this case!!
In case you are still invested, you may rethink!! This may be your last chance!!
Disclaimer: Please note that these are my personal views. While, I am NOT a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014, all investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action.