Hotels are the biggest borrowers followed by airlines. Hotel chains such as Indian Hotels, Chalet Hotels, Lemon Tree Hotels, and Asian Hotels (North) accounted for around 50 per cent of the combined borrowings of firms that Business Standard analysed. (See the adjoining chart)
The analysis excluded unlisted large borrowers such as Air India and defunct companies such as Jet Airways, Cox & Kings and Kingfisher Airlines.
Among individual companies, SpiceJet was the most indebted in the industry. The airline had total outstanding debt of around Rs 8,800 crore at the end of September 2019, against Rs 1,217 crore a year ago. It was followed by Coffee Day Enterprises, which had debt worth Rs 6,500 crore at the end of September 2019, up from Rs 4,410 crore a year ago; Indian Hotels (Rs 3,500 crore); and, Mahindra Holidays (Rs 1,770 crore).
Airlines are facing the brunt of the disruption caused by COVID-19 as countries restrict air travel and travelers themselves cancel holiday plans. A prolonged decline in air travel is likely to hit SpiceJet’s finances, given its highly leveraged balance sheet. Its debt of around Rs 8,800 crore at the end of September 2019 was backed by a negative net worth of Rs 461 crore, putting the airline and its lender in a financially vulnerable position.
In comparison, market leader Interglobe Aviation that runs IndiGo had total outstanding debt of around Rs 622 crore at the end of first half of financial year 2019-20 (H1FY20), backed by net worth of around Rs 6,200 crore. This gives it a greater resilience to survive the downturn.
In the hospitality or hotel industry, smaller chains such as Lemon Tree Hotels, Asian Hotels (North), and Asian Hotels (West) look more vulnerable to a downturn than their larger peers such as Indian Hotels, EIH and Chalet Hotels. In the first nine months of FY20 (9MFY20), these smaller hotels chains had much lower interest coverage ratio (ICR) — a measure of the company’s debt servicing ability — than larger and well established chains.
For example, Lemon Tree Hotels, which reported total borrowings of Rs 1,285 crore at the end of September 2019 has ICR of 1.6x compared to 3.3x for Indian Hotels and 6.5x for EIH. Similarly, Asian Hotels (North) reported ICR of 0.6x, which was close to a default, while Asian Hotels (West) had ICR of 1.5x during 9MFY20. A company with ICR below 1.5x is treated by rating agencies as being close to default.
Coffee Day Enterprises could also face financial difficulty. The café chain operator reported total debt of around Rs 6,500 crore at the end of March 2019, backed by net worth of around Rs 2,530 crore. This translated into an uncomfortably high debt to equity ratio of 2.6x at the end of March 2019.