Thursday, March 31, 2016

Indian Hotels reboots by going asset-light

Last month, Tata Sons-promoted  Company, or IHCL, announced its exit from a property in Jaisalmer, the Gateway, which it had managed for the last several years. This was the hotel chain's third exit in four months after it ended management contracts for properties in Ahmedabad and Jodhpur. The company, which operates hotels under the Taj, by and Gateway brands, has also checked out of three Taj properties in the last two years.

While has been adding new properties every year, this attrition has not escaped the attention of analysts and rivals. IHCL did not provide reasons for moving out of the Jaisalmer, Ahmedabad and Jodhpur properties, but speculation is rife that it could be an effort to shore up the company's bottom-line.

With stuck investments, churn in senior management, no profits since 2011-12 (annual and consolidated), and a huge debt burden of over Rs 5,000 crore on its books, the 114-year-old IHCL needs to do all it can to bounce back at a time when competition is increasing by the day - the combine is set to add over 70 new hotels across segments in the next five years in the country.

Indian Hotels reboots by going asset-light

Hotel chains like IHCL make real money at the top end of the market with their luxury properties. However, Taj, the country's oldest and amongst the most popular luxury hospitality brands, seems to have slackened its pace of expansion. Only one new property under the Taj banner (Taj Santacruz, Mumbai, which opened last year) was added in nearly five years (the Falaknuma Palace, which opened in 2010, was the previous opening).

While IHCL has said it will add seven new properties (excluding which runs Ginger) in 2016-17, these will all be under the Vivanta by Taj and Gateway brands only - no new Taj hotel is expected to open during the year.

The reason is not hard to find: a luxury hotel can cost upwards of Rs 1 crore a room, which can strain IHCL's balance sheet further. Abroad too, the luxury plans of IHCL seem to be on hold.

Stuck in China
A strong footprint in China, the world's largest luxury market, was one of IHCL's ambitious projects. In 2008, it became the first Indian hospitality company to forge a partnership in China for setting up luxury properties there.

A management contract was signed by an IHCL subsidiary, Taj International Hong Kong, to run the Temple of Heaven Park property in Beijing. In close proximity to the Temple of Heaven, constructed in 1420 and used by Emperors of the Ming dynasty, it was to be a 46-room luxury hotel.

Indian Hotels reboots by going asset-light

A further three hotels were also planned in China including a 500-key luxury resort with 40 villas on the Hunan Island. However, for unspecified reasons, none of these properties has been inaugurated till date. An IHCL spokesperson did not answer questions on the China projects.

Meanwhile, having waited for several years, IHCL was forced to abort its plans to take over Bermuda-based Orient Express Hotels (now Belmond), thanks to the lack of interest from the target company. Last month, it started liquidating six- to eight-year-old shares in Belmond at a price which is bound to raise eyebrows.

At an average selling price of $9.4 a share, IHCL took a massive haircut compared to the average purchase price of $35 a share. The sale price was also lower than the $12.63 a share offered by it to buy Belmond in 2012. IHCL had collectively paid around Rs 1,200 crore for the Belmond shares.

The share sale was to release money locked in an unproductive investment. IHCL needs money urgently to cut its debt which jumped to Rs 5,337 crore by the end of December from Rs 4,075 crore on March 31, 2015, at the gross consolidated level. The company did not disclose details of debt repayment coming up in 2016-17 when contacted through email.

Another such investment is the Rs 680 crore IHCL paid to acquire Sea Rock Hotel in Bandra, Mumbai, in 2009: redevelopment plans have been stalled for six years following some public interest litigation. IHCL had planned to combine the existing Land's End Hotel with Sea Rock to form the largest hotel in the city. 

In an interview in April, IHCL Managing Director & Chief Executive Rakesh Sarna had said that investments such as Sea Rock cannot be allowed to remain non-performing and a decision will be taken on it. "We are committed to take that piece of land and either have a performing asset or not. We are really hopeful of bringing this to some sort of a conclusion," he said.

Losses abound
IHCL has been under financial duress for the past three years. High finance cost has eroded its margins, even as the company stares at possibly its fourth consecutive yearly loss at the consolidated level when it closes its books on March 31. Sarna had indicated that profits would be two years away.

Then there are the external factors. The mega merger of Starwood and Marriott announced in November will hurt Indian hotel companies, especially IHCL, believe market experts. With a combined inventory of 18,000 rooms in India, Starwood-Marriot is way ahead of IHCL which has just under 14,500 rooms.

"Starwood and Marriott have properties in important cities like Delhi, Mumbai and Bengaluru, which are the main revenue drivers. With their huge base of loyalty memberships, these will become benchmark properties in the coming period," says a Mumbai-based analyst. Marriott and Starwood have a combined membership of 75 million, which will help them market their inventory aggressively.

In a recent interview to Business Standard, Starwood Hotels and Resorts President (Asia Pacific) Stephen Ho said: "India has some great local brands like Taj, Leela and Oberoi, but their presence is largely in India. Outside the country their presence is not significant. Our global loyalty programmes and marketing strength will help us drive our India business."

Meanwhile, the IHCL stock has been range-bound over the past year, trading between Rs 115 and Rs 90. The appointment of Sarna, who is rated highly in the industry, as managing director in 2014 and the shake up in the organisational structure in order to give more powers to general managers have added stability to the stock.

An added silver lining is that the business environment is picking up. Foreign tourist arrivals are hitting new highs every quarter. In the October-December quarter, arrivals stood at more than 2.4 million, the highest for any quarter, according to the Union ministry of tourism. With the global economy on the mend, arrivals are expected to continue their upward march in the coming quarters.

To seize the opportunity, IHCL will look to add new resorts and hotels at popular tourist spots. "The group will expand its portfolio to include four new hotels in four new destinations with over 300 rooms by December 2016. These will be Meghauli Serai, a Taj Safaris lodge in Chitwan, Nepal; Vivanta by Taj Amritsar; The Gateway Resort Ajmer and The Gateway Resort Corbett," said a recent statement from IHCL.

New properties will be opened through management contracts rather than through ownerships, which has been the traditional route for the company. IHCL is going asset-light to expand without increasing its debt burden.

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