Hospitality Sector
Content
Hospitality Sector
India – known the world over as the land of hospitality – is today in the defining stages of the business of hospitality. The Indian Hospitality Industry is one of the fastest growing sectors of the Indian economy. Riding on the economic growth and rising income levels that India has witnessed in recent years, the sector has emerged as one of the key sectors driving the country’s economy. The current market size is US$ 23 billion, accounting for 2.2% of India’s GDP. Rising disposable incomes and increase in double-income households have also played a part in this growth phenomenon. As per the Travel and Tourism Competitiveness Report 2009 by the World Economic Forum, India is ranked 11th in the Asia Pacific region and 62nd overall. It is ranked the 14th best tourist destination for its natural resources and 24th for its cultural resources. India also bagged 37th rank for its air transport network. The India travel and tourism industry ranked 5th in the long‐term (10‐year) growth and is expected to be the second largest employer in the world by 2019. The contribution of travel and tourism to gross domestic product (GDP) is expected to be at 6.0 per cent (US$ 67.3 billion) in 2009 rising to US$ 187.3 billion (Rs 8,500 billion) by 2019 which is nearly three times of current contribution. Real GDP growth for travel and tourism economy is expected to be 0.2 per cent in 2009 and to an average 7.7 per cent per annum over the coming 10 years. Export earnings from international visitors and tourism goods are expected to generate 6.0 per cent of total exports (almost US$ 16.9 billion) in 2009, growing (nominal terms) to US$ 51.4 billion in 2019. The Indian Hotel industry was hit hard during the past one year by the global economic slowdown which resulted in decline in foreign tourist inflows. The Mumbai terror attacks and the Swine Flu had effected severely to the industry. The Indian Hotel Industry has gone through all possible risks and concerns namely economic slowdown, terrorist acts and health scare in past one year. Today hospitality sector is one of the fastest growing sectors in India. It is expected to grow at the rate of over 8% till 2016. Many international hotels including Sheraton, Hyatt, Radisson, Meridien, Four Seasons Regent, and Marriott International are already established in the Indian markets and are still expanding. Nowadays the
travel and tourism industry is also included in hospitality sector. The boom in travel and tourism has led to the further development of hospitality industry. With successive Governments committed to reform, a strong manufacturing sector and a private sector that already has a critical mass that is needed to drive growth, it is unlikely that the strong growth in GDP is likely to be reversed. The rising middle class is also becoming increasingly affluent, mobile, Internet savvy and more sophisticated in terms of what is demanded in terms of tourism products and services, and more importantly the price they are willing to pay for it.
Economic growth in tier II and tier III cities have put these on the hospitality industry map. ARR are likely to harden in these cities in next 2-3 years due to shortage of room. Niche areas like health tourism and spiritual tourism are emerging as lucrative business opportunity for the industry. The overall buoyancy in the market is attracting increased interest from investors and higher inflow of capital in the industry is expected. The growth for hotels is also likely to come from proliferation of Special Economic Zones. Last year, the domestic market in India recorded 562.9 million travellers as compared to only 5.37 million international travellers. This highlights the potential of domestic tourism in the country, which is more than 100 times that of international arrivals. India is fortunate to have a domestic market that supports the growth of the tourism industry even when the world economy is experiencing a downturn. Domestic tourism has never been given its due. Even today, the statistics on foreign travellers that garner attention; however, the less represented domestic travellers form the major component of revenue generators for the Indian travel industry. Hotel industry is influenced by business cycle which includes demand‐supply mismatch, business confidence etc. The various leading economic indicators such as GDP, IIP etc are correlated to the performance of the hotel industry. The hotel industry along with the airline industry are amongst the first to be hit by an economic downturn and also are amongst the slowest to recover since the spending on travel is considered as discretionary for most leisure travellers and some businesses as well.
According to HVS – a global Hospitality consultancy firm, 114,000 rooms are being built across hotel categories in coming years. India requires investments worth 600 billion rupees over the next five years to cope with the severe shortage of about 150,000 rooms, according to FICCI- Evalueserve.
The industry can be classified into four segments: 5 Star and 5 Star Deluxe. These are mainly situated in the business districts of metro cities and cater to business travellers and foreign tourists. These are considered to be very expensive. These account for about 30% of the industry. Heritage Hotels: These are characterized by less capital expenditure and greater affordability and include running hotels in palaces, castles, forts, hunting lodges, etc. Budget Hotels: Budget hotels cater mainly to domestic travellers who favour reasonably priced accommodations with limited luxury. These are characterized by special seasonal offers and good services. Unclassified: These are low-priced motels spread throughout the country. A low-pricing policy is their only selling point. This segment accounts for about 19 % of the industry.
Typical Development Cost:
Hotel Type Luxury Upper Upscale Upscale Mid Market Budget Economy
Typical Development Cost per Key (INR) 12,500,000 and above 8,500,000 to 12,500,000 6,000,000 to 8,500,000 3,500,000 to 5,500,000 2,500,000 to 3,500,000 2,500,000 and below
SWOT Analysis for Hotel Industry
STRENGTHS: 1. Natural and cultural diversity: India has a rich cultural heritage. The "unity in diversity" tag attracts most tourists. The coastlines, sunny beaches, backwaters of Kerala, snow capped Himalayas and the quiescent lakes are incredible. 2. Mostly internal demand: Out of 560 million travellers last year, less than 1% were international travellers. There has been a very strong demand from rising Middleclass for various family functions like marriages, birthday celebrations etc. 3. Government support: The government has realized the importance of tourism and has proposed a budget of Rs. 540 crore for the development of the industry. The priority is being given to the development of the infrastructure and of new tourist destinations and circuits. Additionally, massive money is being spent on SEZs, regional airports, highways etc. The Department of Tourism has long back started the "Incredible India" campaign for the promotion of tourism in India. 4. Increase in the market share: India's share in international tourism and hospitality market is expected to increase over the long-term. New budget and star hotels are being established. Moreover, foreign hospitality players are heading towards Indian markets.
WEAKNESSES 1. Poor support infrastructure: Though the government is taking necessary steps, many more things need to be done to improve the infrastructure. The total expenditure made in this regard does not equal even one tenth of that done by China. 2. Slow implementation: The lack of adequate recognition for the tourism industry has been hampering its growth prospects. Whatever steps are being taken by the government are implemented at a slower pace. 3. Susceptible to political events: The internal security scenario and social unrest also hamper the foreign tourist arrival rates.
OPPORTUNITIES 1. Rising income: Owing to the rise in income levels, the middle class is now having more income at their disposal. This has resulted in increasing expenditure on tours, travels and dining outs. 2. Demand-supply gap: Indian hotel industry is facing a mismatch between the demand and supply of rooms leading to higher room rates and occupancy levels. With the privilege of hosting Commonwealth Games 2010 there is more demand of rooms in five star hotels. This has led to the rapid expansion of the sector. More than 150,000 rooms are needed across all the categories in next 3-5 years. 3. New Avenues of Growth: MICE (Meetings, Incentives, Conventions and Events) is a new concept which many hospitality companies including travel trade are adapting to. The inbound MICE segment is growing at 15% to 20% annually. Countries like Singapore and Malaysia have grown exponentially in the MICE segment. India gets close to 0.96% share of the world’s meetings which though miniscule, has ample room for growth.
THREATS 1. Fluctuations in international tourist arrivals: The total dependency on foreign tourists can be risky, as there are wide fluctuations in international tourism. This has become important in wake of recent 26/11 attacks. Hence, domestic tourism needs to be given equal importance and measures should be taken to promote it. 2. Cost of Land: Land prices in India constitute almost 25% of the cost of the property, whereas it accounts for only 15% to 20% of project cost overseas. This cost has only been on the upward side. The rising land cost and low Floor Space Index (FSI), adds to the industry’s financial dilemma
3. Increasing competition: Several international majors like the Four Seasons, Shangri-La and Aman Resorts are entering the Indian markets. Two other groups the Carlson Group and the Marriott chain - are also looking forward to join this race. This will increase the competition for the existing Indian hotel majors. 4. Skilled Manpower Shortage: The hotel sector is labour-intensive with an average employee-to-room ratio of 1.8: 1 in India, compared to 1.5: 1 globally. However, there exists a huge gap in manpower availability, especially in the budget hotel segment. Other reasons contributing to the manpower worries include: Bright and educated younger generation has never considered hotel industry as a progressive employment option There is more demand overseas for trained hospitality workers
The Maturing of Indian Hotel Markets About a decade ago, there were really only a handful of major hotel markets in India, namely the four metros and possibly a Bangalore or a Goa, a result of businesses primarily being based in and needing hotel rooms in these cities. Thus, while visitors to these major cities had a choice of several luxury and upscale hotels, affiliated with both domestic and international brands, the availability and quality of hotels declined significantly when venturing to the smaller cities. In the last decade, as the major cities developed rapidly, real estate prices soared, and the cost of setting up and sustaining business operations in these cities became prohibitive. Companies, therefore, started looking at other cities in the country where costs were lower which resulted in the ascent of cities such as Hyderabad, Pune, Jaipur and Ahmedabad. As a result of these dynamics, there are currently about 10 to 12 main hotel markets in the country, all of which offer a variety of branded product offerings across different positionings. The emergence of these secondary and tertiary cities led to an aggressive increase in hotel development activity and provided avenues for expansion of hotel brands, which were previously dependent on new opportunities in just the five main cities. Another trend that has now emerged in the various major markets is the growth of micro-markets, especially in the primary cities. As commutes in larger cities are increasingly measured in amount of travel time rather than distance, people are choosing to stay at hotels that are located closer to their place of work, thereby saving crucial travel time that might otherwise have been wasted in traffic. Thus, while it might have been feasible previously to build only one Holiday Inn or one Marriott in the market, the presence of independent micro-markets now allows the existence of multiple hotels with the same brand affiliation without fears of cannibalization of demand. Key Game Changers: Emergence of secondary and tertiary cities Emergence of micro-markets Continued marketing of Brand India Continued improvement of infrastructure in Indian cities and towns Ease of attaining Indian visas Development of India’s image as a safe, secure and friendly destination Development and marketing of niche tourism like medical tourism, religious circuits, adventure tourism etc.
Growth Drivers
Demand Supply Imbalance India currently has approximately 114,000 hotel rooms spread across the various hotel categories and is facing a shortfall of 156,000 rooms. This is especially the case with mid-segment and budget hotel categories that face a large gap in supply.
Rising GDP The Indian economy has been growing at a rate of 9.6% and 9% in 2006-07 and 2007-08 respectively. Despite the slowdown, the GDP growth for 2008-09 is at 7.1% and 7.5 % for 2009-10. The hospitality sector is expected to contribute up to 2.2% to the GDP.
Foreign Direct Investment (FDI) Inflow Of the total FDI inflow between 2000 and 2008, the hospitality sector attracted 1.56%, amounting to US$ 1.07 billion. The hospitality sector still requires over US$ 10 billion in the next two to three years for which the Government is relying partly on FDI.
Changing Consumer Dynamics & Ease of Finance India is the second fastest growing financial cards market in the Asia-Pacific region. The credit card base in 2009 is estimated at 25 million and is expected to grow at 20% to 25% per annum. Driving this growth is the increased use of credit cards for the purpose of purchasing, due to attractive and consumer friendly schemes being offered by various banks. Travel, hotel and dining category accounts for 35% of credit card usage
Increasing Domestic & International Tourist Arrivals There has been an increase in tourist flow, both domestic as well as international. From 310 million domestic visits in 2003, the number rose to 529 million in 2007, a CAGR of 14%. The Ministry of Tourism’s vision is to achieve
a level of 760 million domestic visits by the year 2011, with an annual average growth of 12%. Foreign Tourist Arrivals (FTAs) were up by 5.7% during 2008 and clocked 5.37 million compared to 5.08 million during 2007. Foreign exchange earnings increased by 8%, to US$ 11.5 billion in 2008 from US$ 10.7 billion in 2007. The Ministry of Tourism aims to achieve a figure of 11 million foreign tourist arrivals by 2011.
Both these figures went down as expected in 2009 owing to adverse economic conditions and 26/11 terror attacks ; but the worst seems to be behind now.
Policy & Tax Incentives
The Department of Tourism, Government of India has initiated a number of steps as listed below: Foreign Direct Investment (FDI) allowed in all construction development projects including construction of hotels and resorts, recreational facilities, and city and regional level infrastructure Reduction of expenditure tax for upscale hotels Introduction of a new category of visa - ‘Medical Visa’ (‘M’-Visa) for Medical Tourism Tie-up with the United Nations Development Program (UNDP) to promote rural tourism. The Ministry has also sanctioned 102 rural tourism infrastructure projects to spread tourism and socio economic benefits to identified rural sites with tourism potential Issuance of visa-on-arrival by 2009 for persons arriving from specific countries under the pilot project
Trends and Future Outlook
Rapidly Changing Operating Models Unlike in the west, the franchise model has not been a success in India. What accounted for its success in the west is a consistency in the product offering along with strict regulations by the Government on hygiene and health standards, which helped the franchise model to flourish. Recent trends strongly suggest that the franchise model of business has taken a backseat and the focus is shifting to the management model. Factors driving this operating model are: Hotel operation is a critical area where efficiency has to be spot on and this is where the management model stands out There are a number of properties developing with a fewer number of operators
Emergence of Mixed Land Usage Mixed-use developments incorporating residential, retail, entertainment, hospitality and corporate offices are fast emerging in metros tier-II and tier-III cities. Some examples are as below: Kshitij introducing ‘Market Cities’, retail-led mixed-use development projects in Mumbai, Chennai and Bengaluru. Brigade group is focusing on the ‘hotel-cum-mall’ options with Brigade Metropolis, a business hotel being developed at Chennai The Leela Kempinski, Gurgaon is located in a mixed-use complex of luxury residences, retail spaces, entertainment and wellness facilities
Diminishing Brand Loyalty Guests today are becoming increasingly unpredictable and quickly switch their patronage for better deals across hotel segments, thereby reducing efficacy of many loyalty programs which hotels target towards their customers.
New Avenues of Growth Service apartments, time sharing, fractional ownership, and company hotels or guest houses, have immense potential to grow. Their growth is likely to be due to increased demand of the IT, ITES, BPO, KPO, biotechnology and medical tourism sectors. Heightened awareness of consumers towards their environment has brought into prominence the concept of ‘eco tourism’ and ‘agri-tourism’.There is an increased flow of people, especially those from the west, to India for medical services. This has also brought into limelight the concept of ‘medical tourism’. The current market for ‘medical tourism’ in India is US$ 533 million, and is expected to grow to US$ 3.29 billion by 2018. Diversification holds the key to survival in the long run. The hotel industry isn’t behind. Spas are appearing at hotel properties at a remarkable rate and are becoming independent profit centres. Cafes, lounges and bars which have high profit margins, are increasing their presence in several hotels.
Growth of Budget Hotels Heightened demand and the healthy occupancy rates have resulted in an increase in the number of budget hotels. Some of the new players entering into this category of hotels include Hometel, Kamfotel, Courtyard by Marriott, Country Inns & Suites, Ibis and Fairfield Inn. Leading groups present in this segment are Ginger Hotels, Lemon Tree, Sarovar Hotels, Fortune Hotels, Ibis and Choice Hotels. Currently, 3 & 4 star category hotels together account for 22% of the total room supply in India, which clearly indicates a huge growth potential for budget hotels. Due to the vast demand-supply gap of mid-segment
hotel rooms, an investment of US$ 835 million (Exhibit 15) is proposed for this hotel category over the next three years. Furthermore, for the Commonwealth Games in 2010, the Government is expected to provide 10,000 budget rooms while the requirement would be for 40,000 to 50,000 rooms in this category.
No longer classified as ‘commercial real estate’ The Reserve Bank of India has recently removed hotels from the commercial real estate classification. This will make larger credit available to the capital‐intensive and credit starved hospitality industry at lower rates of interest, thus bringing down the high cost of the hotel projects.
Commonwealth Games 2010 to aid recovery of the hotel industry The Commonwealth Games are scheduled to be held from October 3 to October 14, 2010. According to Assocham, India’s foreign exchange earnings from the tourism sector is likely to grow by 20% to $16.91 billion dollars in the next two years, primarily due to huge tourist inflow expected during the Commonwealth Games. Around two million foreign tourists and 3.5 million tourists from different parts of India are likely to arrive in Delhi for Common Wealth Games 2010. The event will have a bigger impact on the countrys tourism industry. There will be a high rise in the number of international passengers from 25 million last year to 45 million by 2010 and the number of foreign tourists is also expected to rise from 4.43% to 10%. As per industry estimates, currently, there is a requirement of around 30,000 rooms in Delhi and the NCR for the 2010 Commonwealth Games. IHCL, being the largest player in this segment, would be a key beneficiary of the same. Overall, this will have a positive effect on the tourism and hotel industry over the longer term.
Demand supply mismatch likely to continue During the period before the economic downturn (FY07), many hotel companies had announced expansion plans. During this period, Crisil had estimated an addition of 14,890 rooms between FY10‐FY11. The after effects of economic downturn namely lack of credit availability, delay in construction, high realty prices have resulted in many companies pushing their planned expansion by 1‐2
years. Crisil now estimates an addition of 6,214 room addition between FY10‐ FY11 which have more than halved than their earlier estimates. The industry is highly capital intensive in nature and has a long gestation period. India is reportedly facing a shortage of good quality hotels for both international as well as domestic tourists.
Major Companies
EIH Ltd.
EIH Ltd, the flagship company of Oberoi group is one of the largest chain of hotels in India. The company is in the business of luxury hotels, restaurant, management contracts and travel and tours. Their services include airline catering, management of restaurants and airport bars, travel and tour services, car rentals, project management and corporate air charters. They operate hotels under the brand name Oberoi and Trident. EIH Ltd formerly known as East India Hotels Ltd was incorporated in the year 1949. EIH will add nearly 750 hotel rooms to its existing inventory of over 1,800 rooms under the Trident brand in the next two years. These new rooms will be part of the upcoming properties in Hyderabad, Bangalore and Dehradun. EIH expects to increase its presence in Gurgaon, Bangalore and Hyderabad through management contracts. EIH will hold a 26% stake in Trident Bangalore.
Hotel Leela Ventures Ltd.
Hotel Leela Venture Ltd is one of the leading players in the Indian hospitality industry. The company operates in both, the leisure and business sectors. The Leela palaces and resorts include a chain of five star luxury hotels and resorts. The company properties include The Leela Kempinski in Mumbai, The Leela Palace in Goa, The Leela Palace Kempinski in Bangalore and The Leela Kovalam in Kerala. The company became a popular name in the hospitality industry in India due to their high quality of service to their customers. The companys proposed expansion in major cities like Delhi and Chennai would diversify its revenue mix while lowering its risk from concentrated operations in Mumbai and Bangalore. The company is currently focusing only on the New Delhi property which it intends to launch in July 2010 – ahead of the Commonwealth Games. Apart from this, Chennai is the only other location where a hotel launch is expected in F2011/2012..
Apart from these two , other prominent players include Asian Hotels , Sarovar Hotel, Royal Orchid Hotels. The following link shows expansion plans of several hotels majority of which are unlisted. Indian 2nd Tier Hotels.xls.htm
Long Term Pick : Indian Hotels Co. Ltd.(IHCL)
BSE Code 500850 52Week Range : 62-118 NSE Code INDHOTEL EPS : 2.12 P/E : 50.04 Div Yield :0.94 P/BV : 2.84 Book Value 37.23 Face Value 1.00 Market Cap. 7661.58 cr
The Indian Hotels Company Limited (IHCL) was founded in 1902 by the founder of Tata Group, Mr. Jamsedji N. Tata and opened its first property, The Taj Mahal Palace Hotel, Mumbai in 1903. IHCL and its subsidiaries are collectively known as Taj Hotel Resorts and Palaces. The company began its long-term geographical expansion plan with the launch of its IPO in the early 1970s and emerged as one of the leading hotel chains in India. The company took its first step in the in international market by opening a hotel in the Middle East. Today IHCL has over 60 hotels in 45 locations across India and 15 hotels internationally in United Kingdom, Malaysia, United State of America, Africa, Sri Lanka, Australia and the Middle East. With 104 properties and room inventory of 12500 rooms (and growing), Indian Hotels is set to emerge as one of the leading hotel chains in the world. It follows distributed risk model wherein hotel properties and related businesses are housed in a clutch of associate companies, subsidiaries and joint ventures. These include Taj GVK, Oriental Hotels, Benares Hotels and Roots Corporation, among others. The company also holds a significant stake in BJets, Asia’s largest corporate air travel provider. The company has holds significant interest in Oriental Express Hotels, a US based luxury hotels chain.
IHCL operate in the luxury, premium, mid-market and value segments of the market through the following : Taj (luxury full-service hotels, resorts and palaces) is the flagship brand of the company. Each Taj hotel reinterprets the tradition of hospitality in a refreshingly modern way to create unique experiences and lifelong memories.
Taj Exotica is a resort and spa brand found in the most exotic and relaxing locales of the world. Taj Safaris are wildlife lodges that allow travelers to experience the unparalleled beauty of the Indian jungle amidst luxurious surroundings. They offer India’s first and only wildlife luxury lodge circuit. Taj Safaris provide guests with the ultimate, interpretive, wild life experience based on a proven sustainable ecotourism model. Upper Upscale Hotels (full-service hotels and resorts) provide a new generation of travelers a contemporary and creative hospitality experience that matches their workhard play-hard lifestyles. Stylish interiors, innovative cuisine, hip bars, and a focus on technology set these properties apart. The Gateway Hotel (upscale/mid-market full service hotels and resorts) is a panIndia network of hotels and resorts that offers business and leisure travellers a hotel designed, keeping the modern nomad in mind. At the Gateway Hotel, we believe in keeping things simple. The hotels are divided into 7 simple zones- Stay, Hangout, Meet, Work, Workout, Unwind and Explore.
Ginger (economy hotels) is IHCL’s revolutionary concept in hospitality for the value segment. Intelligently designed facilities, consistency and affordability are hallmarks of this brand targeted at travellers who value simplicity and self-service. The current international portfolio includes luxury resorts in the Indian Ocean, business and resort destinations in the Middle East and Africa, serviced apartments in the UK, the first hotel in Australia and three a top-end luxury hotels in the US.
Over the years, the Taj has won international acclaim for its quality hotels and its excellence in business facilities, services, cuisine and interiors.
SWOT Analysis for the Company
Strength
Market Leader , Brand and domestic dominance Wide global sales and marketing network Cutting edge distribution and reach Loyalty program, alliances/partnerships
Weakness
Fall in margin, ROCE and ROE over the last two years Still perceived as a High-end and costly hotel. Needs to publicize its budget segment Ginger Hotel.
Opportunities
Rapidly growing market in India, South Asia and key gateway cities in sourcemarket destinations Expansion in international destinations with top-of-the-line luxury and leisure properties Meeting growing demand in the budget and mid-market segments. Extending the product portfolio into related offerings viz. luxury residences, wildlife lodges and spas.
Threats
General downturn in global & domestic economies with consequent downturn in travel & tourism. Interest rates fluctuation due to which debt liability is uncertain Cheaper international airfares increasing the affordability of travel to international destinations, especially South East Asia, Europe and Australia. Growing presence of international hospitality chains competing in the luxury and business segments to meet excess demand situation.
FY 2011 Activities
With occupancy rates in the hospitality sector increasing by the day, Indian Hotels is bullish on growth in FY11. It expects to add capacity of over 1500 rooms in current fiscal. But it's not just organic growth anymore. It is also expecting grow through acquisition and joint ventures. The company is to open 13 hotels this year which translates to one hotel opening every three weeks Ginger Hotels will be listed in a couple of years as the chain plans to set up 80 hotels over the next three to four years from the current 21. The management emphasised the need to make US operations more profitable and its focus on improving margins. Rs 2.6 billion to be spent in FY11 on new projects across India which includes Falaknuma Palace in Hyderabad and a new hotel at Yeshwantpur in Bangalore which are on the advanced stages of completion. Work on our new Vivanta project in Guwahati is about to start and another hotel is coming up at Dwarka in Delhi.
Financial Performance: Last 5 Years and Future Price drivers
Particular FY 06 FY 07 FY 08 FY 09 FY 10 Revenue 1084 1544 1764 1619 1473 Op. Profit 320 569 708 489 380 PAT 184 322 377 234 153 PAT Mar.(%) 17.0% 20.9% 21.4% 14.5% 10.4% EPS 32.43 5.5 6.26 3.24 2.12 EPS Growth -83.0% 13.8% -48.2% -34.6%
(in Rs. Crores)
Before FY09, the company’s revenue grew at a CAGR of 32% during FY05FY08.
A better economic scenario and the consequent boost in consumer sentiment is leading to an improvement in occupancies across its leisure properties.
ARRs(Average Room Rates and occupancy levels are set to increase in coming quarters It is expected to grow EBITDA at a CAGR of 52% over FY10-12, compared to the 16% CAGR forecasted for its global peers.(India Infoline)
The company is in aggressive expansion mode with a. robust expansion strategy for the next 5 years. The company has planned to invest 959 crore over the next few years.
Special focus on mid and budget segment markets : Ginger Hotels - the budget segment hotel chain by the company plans to increase its location to 80 from 21 as of now. The work on about 40 properties is in various stages of construction.
The company has realized the importance of domestic market and with an established brand in place, it is well positioned to capture mid and budget segment hotel space.
As stressed by the management , steps are being taken to improve international profitability
1. With reopening of The Pierre, New York – full portfolio of US will be back in play. 2. 3. Retirement of $190m debt will result in significant interest savings and thereby will contribute to improve the bottom line Reaching out to new Customers / Segments to drive top line growth 4. Rationalization of Payroll cost These initiatives will improve the company’s bottom-line in the coming quarters.
Hotel Room tariffs are likely to go up by 15-20% towards the end of September. This will lead to improving Average room revenue in the long term.
Ratan Tata has said that Tata Sons is also looking at hiking its stake in IHCL from the current 29 per cent which shows the promoters’ increasing faith in the earning potential of the company.
Conclusion
Hospitality sector is expected to be among the key emerging sectors in India in coming years. Increasing domestic demand on back of disposable incomes and increasing international tourists inflow than ever will be the major factors driving the growth of the sector. Indian Hotel Company Ltd. is a well established and popular brand in the country mainly via its Taj group of hotels. The company is well balanced to reap the benefits in the growing industry. The management backed by Mr Ratna Tata has been legendary in India. With focus on mid and budget segment hotels domestically and improvement of profit margins internationally, the company has already taken a lead over other listed players who suddenly seem to have lost the plot. EIH limited, the key competitor of the company is not even adding half of what IHCL plans to add and Hotel Leela is planning to add less than 10 hotels. In this scenario, to expect that they will be able to compete with IHCL seems highly implausible. There are some unlisted players like Fortune Hotel which will give stiff competition but in an industry poised to grow at 8% plus levels per annum for the coming 10 years and the market size set to triple in the same period , there is enough slice of cake which IHCL can garner for itself.
References 1. Indian Hospitality Industry Outlook by HVS 2. News and Articles from Internet
India – known the world over as the land of hospitality – is today in the defining stages of the business of hospitality. The Indian Hospitality Industry is one of the fastest growing sectors of the Indian economy. Riding on the economic growth and rising income levels that India has witnessed in recent years, the sector has emerged as one of the key sectors driving the country’s economy. The current market size is US$ 23 billion, accounting for 2.2% of India’s GDP. Rising disposable incomes and increase in double-income households have also played a part in this growth phenomenon. As per the Travel and Tourism Competitiveness Report 2009 by the World Economic Forum, India is ranked 11th in the Asia Pacific region and 62nd overall. It is ranked the 14th best tourist destination for its natural resources and 24th for its cultural resources. India also bagged 37th rank for its air transport network. The India travel and tourism industry ranked 5th in the long‐term (10‐year) growth and is expected to be the second largest employer in the world by 2019. The contribution of travel and tourism to gross domestic product (GDP) is expected to be at 6.0 per cent (US$ 67.3 billion) in 2009 rising to US$ 187.3 billion (Rs 8,500 billion) by 2019 which is nearly three times of current contribution. Real GDP growth for travel and tourism economy is expected to be 0.2 per cent in 2009 and to an average 7.7 per cent per annum over the coming 10 years. Export earnings from international visitors and tourism goods are expected to generate 6.0 per cent of total exports (almost US$ 16.9 billion) in 2009, growing (nominal terms) to US$ 51.4 billion in 2019. The Indian Hotel industry was hit hard during the past one year by the global economic slowdown which resulted in decline in foreign tourist inflows. The Mumbai terror attacks and the Swine Flu had effected severely to the industry. The Indian Hotel Industry has gone through all possible risks and concerns namely economic slowdown, terrorist acts and health scare in past one year. Today hospitality sector is one of the fastest growing sectors in India. It is expected to grow at the rate of over 8% till 2016. Many international hotels including Sheraton, Hyatt, Radisson, Meridien, Four Seasons Regent, and Marriott International are already established in the Indian markets and are still expanding. Nowadays the
travel and tourism industry is also included in hospitality sector. The boom in travel and tourism has led to the further development of hospitality industry. With successive Governments committed to reform, a strong manufacturing sector and a private sector that already has a critical mass that is needed to drive growth, it is unlikely that the strong growth in GDP is likely to be reversed. The rising middle class is also becoming increasingly affluent, mobile, Internet savvy and more sophisticated in terms of what is demanded in terms of tourism products and services, and more importantly the price they are willing to pay for it.
Economic growth in tier II and tier III cities have put these on the hospitality industry map. ARR are likely to harden in these cities in next 2-3 years due to shortage of room. Niche areas like health tourism and spiritual tourism are emerging as lucrative business opportunity for the industry. The overall buoyancy in the market is attracting increased interest from investors and higher inflow of capital in the industry is expected. The growth for hotels is also likely to come from proliferation of Special Economic Zones. Last year, the domestic market in India recorded 562.9 million travellers as compared to only 5.37 million international travellers. This highlights the potential of domestic tourism in the country, which is more than 100 times that of international arrivals. India is fortunate to have a domestic market that supports the growth of the tourism industry even when the world economy is experiencing a downturn. Domestic tourism has never been given its due. Even today, the statistics on foreign travellers that garner attention; however, the less represented domestic travellers form the major component of revenue generators for the Indian travel industry. Hotel industry is influenced by business cycle which includes demand‐supply mismatch, business confidence etc. The various leading economic indicators such as GDP, IIP etc are correlated to the performance of the hotel industry. The hotel industry along with the airline industry are amongst the first to be hit by an economic downturn and also are amongst the slowest to recover since the spending on travel is considered as discretionary for most leisure travellers and some businesses as well.
According to HVS – a global Hospitality consultancy firm, 114,000 rooms are being built across hotel categories in coming years. India requires investments worth 600 billion rupees over the next five years to cope with the severe shortage of about 150,000 rooms, according to FICCI- Evalueserve.
The industry can be classified into four segments: 5 Star and 5 Star Deluxe. These are mainly situated in the business districts of metro cities and cater to business travellers and foreign tourists. These are considered to be very expensive. These account for about 30% of the industry. Heritage Hotels: These are characterized by less capital expenditure and greater affordability and include running hotels in palaces, castles, forts, hunting lodges, etc. Budget Hotels: Budget hotels cater mainly to domestic travellers who favour reasonably priced accommodations with limited luxury. These are characterized by special seasonal offers and good services. Unclassified: These are low-priced motels spread throughout the country. A low-pricing policy is their only selling point. This segment accounts for about 19 % of the industry.
Typical Development Cost:
Hotel Type Luxury Upper Upscale Upscale Mid Market Budget Economy
Typical Development Cost per Key (INR) 12,500,000 and above 8,500,000 to 12,500,000 6,000,000 to 8,500,000 3,500,000 to 5,500,000 2,500,000 to 3,500,000 2,500,000 and below
SWOT Analysis for Hotel Industry
STRENGTHS: 1. Natural and cultural diversity: India has a rich cultural heritage. The "unity in diversity" tag attracts most tourists. The coastlines, sunny beaches, backwaters of Kerala, snow capped Himalayas and the quiescent lakes are incredible. 2. Mostly internal demand: Out of 560 million travellers last year, less than 1% were international travellers. There has been a very strong demand from rising Middleclass for various family functions like marriages, birthday celebrations etc. 3. Government support: The government has realized the importance of tourism and has proposed a budget of Rs. 540 crore for the development of the industry. The priority is being given to the development of the infrastructure and of new tourist destinations and circuits. Additionally, massive money is being spent on SEZs, regional airports, highways etc. The Department of Tourism has long back started the "Incredible India" campaign for the promotion of tourism in India. 4. Increase in the market share: India's share in international tourism and hospitality market is expected to increase over the long-term. New budget and star hotels are being established. Moreover, foreign hospitality players are heading towards Indian markets.
WEAKNESSES 1. Poor support infrastructure: Though the government is taking necessary steps, many more things need to be done to improve the infrastructure. The total expenditure made in this regard does not equal even one tenth of that done by China. 2. Slow implementation: The lack of adequate recognition for the tourism industry has been hampering its growth prospects. Whatever steps are being taken by the government are implemented at a slower pace. 3. Susceptible to political events: The internal security scenario and social unrest also hamper the foreign tourist arrival rates.
OPPORTUNITIES 1. Rising income: Owing to the rise in income levels, the middle class is now having more income at their disposal. This has resulted in increasing expenditure on tours, travels and dining outs. 2. Demand-supply gap: Indian hotel industry is facing a mismatch between the demand and supply of rooms leading to higher room rates and occupancy levels. With the privilege of hosting Commonwealth Games 2010 there is more demand of rooms in five star hotels. This has led to the rapid expansion of the sector. More than 150,000 rooms are needed across all the categories in next 3-5 years. 3. New Avenues of Growth: MICE (Meetings, Incentives, Conventions and Events) is a new concept which many hospitality companies including travel trade are adapting to. The inbound MICE segment is growing at 15% to 20% annually. Countries like Singapore and Malaysia have grown exponentially in the MICE segment. India gets close to 0.96% share of the world’s meetings which though miniscule, has ample room for growth.
THREATS 1. Fluctuations in international tourist arrivals: The total dependency on foreign tourists can be risky, as there are wide fluctuations in international tourism. This has become important in wake of recent 26/11 attacks. Hence, domestic tourism needs to be given equal importance and measures should be taken to promote it. 2. Cost of Land: Land prices in India constitute almost 25% of the cost of the property, whereas it accounts for only 15% to 20% of project cost overseas. This cost has only been on the upward side. The rising land cost and low Floor Space Index (FSI), adds to the industry’s financial dilemma
3. Increasing competition: Several international majors like the Four Seasons, Shangri-La and Aman Resorts are entering the Indian markets. Two other groups the Carlson Group and the Marriott chain - are also looking forward to join this race. This will increase the competition for the existing Indian hotel majors. 4. Skilled Manpower Shortage: The hotel sector is labour-intensive with an average employee-to-room ratio of 1.8: 1 in India, compared to 1.5: 1 globally. However, there exists a huge gap in manpower availability, especially in the budget hotel segment. Other reasons contributing to the manpower worries include: Bright and educated younger generation has never considered hotel industry as a progressive employment option There is more demand overseas for trained hospitality workers
The Maturing of Indian Hotel Markets About a decade ago, there were really only a handful of major hotel markets in India, namely the four metros and possibly a Bangalore or a Goa, a result of businesses primarily being based in and needing hotel rooms in these cities. Thus, while visitors to these major cities had a choice of several luxury and upscale hotels, affiliated with both domestic and international brands, the availability and quality of hotels declined significantly when venturing to the smaller cities. In the last decade, as the major cities developed rapidly, real estate prices soared, and the cost of setting up and sustaining business operations in these cities became prohibitive. Companies, therefore, started looking at other cities in the country where costs were lower which resulted in the ascent of cities such as Hyderabad, Pune, Jaipur and Ahmedabad. As a result of these dynamics, there are currently about 10 to 12 main hotel markets in the country, all of which offer a variety of branded product offerings across different positionings. The emergence of these secondary and tertiary cities led to an aggressive increase in hotel development activity and provided avenues for expansion of hotel brands, which were previously dependent on new opportunities in just the five main cities. Another trend that has now emerged in the various major markets is the growth of micro-markets, especially in the primary cities. As commutes in larger cities are increasingly measured in amount of travel time rather than distance, people are choosing to stay at hotels that are located closer to their place of work, thereby saving crucial travel time that might otherwise have been wasted in traffic. Thus, while it might have been feasible previously to build only one Holiday Inn or one Marriott in the market, the presence of independent micro-markets now allows the existence of multiple hotels with the same brand affiliation without fears of cannibalization of demand. Key Game Changers: Emergence of secondary and tertiary cities Emergence of micro-markets Continued marketing of Brand India Continued improvement of infrastructure in Indian cities and towns Ease of attaining Indian visas Development of India’s image as a safe, secure and friendly destination Development and marketing of niche tourism like medical tourism, religious circuits, adventure tourism etc.
Growth Drivers
Demand Supply Imbalance India currently has approximately 114,000 hotel rooms spread across the various hotel categories and is facing a shortfall of 156,000 rooms. This is especially the case with mid-segment and budget hotel categories that face a large gap in supply.
Rising GDP The Indian economy has been growing at a rate of 9.6% and 9% in 2006-07 and 2007-08 respectively. Despite the slowdown, the GDP growth for 2008-09 is at 7.1% and 7.5 % for 2009-10. The hospitality sector is expected to contribute up to 2.2% to the GDP.
Foreign Direct Investment (FDI) Inflow Of the total FDI inflow between 2000 and 2008, the hospitality sector attracted 1.56%, amounting to US$ 1.07 billion. The hospitality sector still requires over US$ 10 billion in the next two to three years for which the Government is relying partly on FDI.
Changing Consumer Dynamics & Ease of Finance India is the second fastest growing financial cards market in the Asia-Pacific region. The credit card base in 2009 is estimated at 25 million and is expected to grow at 20% to 25% per annum. Driving this growth is the increased use of credit cards for the purpose of purchasing, due to attractive and consumer friendly schemes being offered by various banks. Travel, hotel and dining category accounts for 35% of credit card usage
Increasing Domestic & International Tourist Arrivals There has been an increase in tourist flow, both domestic as well as international. From 310 million domestic visits in 2003, the number rose to 529 million in 2007, a CAGR of 14%. The Ministry of Tourism’s vision is to achieve
a level of 760 million domestic visits by the year 2011, with an annual average growth of 12%. Foreign Tourist Arrivals (FTAs) were up by 5.7% during 2008 and clocked 5.37 million compared to 5.08 million during 2007. Foreign exchange earnings increased by 8%, to US$ 11.5 billion in 2008 from US$ 10.7 billion in 2007. The Ministry of Tourism aims to achieve a figure of 11 million foreign tourist arrivals by 2011.
Both these figures went down as expected in 2009 owing to adverse economic conditions and 26/11 terror attacks ; but the worst seems to be behind now.
Policy & Tax Incentives
The Department of Tourism, Government of India has initiated a number of steps as listed below: Foreign Direct Investment (FDI) allowed in all construction development projects including construction of hotels and resorts, recreational facilities, and city and regional level infrastructure Reduction of expenditure tax for upscale hotels Introduction of a new category of visa - ‘Medical Visa’ (‘M’-Visa) for Medical Tourism Tie-up with the United Nations Development Program (UNDP) to promote rural tourism. The Ministry has also sanctioned 102 rural tourism infrastructure projects to spread tourism and socio economic benefits to identified rural sites with tourism potential Issuance of visa-on-arrival by 2009 for persons arriving from specific countries under the pilot project
Trends and Future Outlook
Rapidly Changing Operating Models Unlike in the west, the franchise model has not been a success in India. What accounted for its success in the west is a consistency in the product offering along with strict regulations by the Government on hygiene and health standards, which helped the franchise model to flourish. Recent trends strongly suggest that the franchise model of business has taken a backseat and the focus is shifting to the management model. Factors driving this operating model are: Hotel operation is a critical area where efficiency has to be spot on and this is where the management model stands out There are a number of properties developing with a fewer number of operators
Emergence of Mixed Land Usage Mixed-use developments incorporating residential, retail, entertainment, hospitality and corporate offices are fast emerging in metros tier-II and tier-III cities. Some examples are as below: Kshitij introducing ‘Market Cities’, retail-led mixed-use development projects in Mumbai, Chennai and Bengaluru. Brigade group is focusing on the ‘hotel-cum-mall’ options with Brigade Metropolis, a business hotel being developed at Chennai The Leela Kempinski, Gurgaon is located in a mixed-use complex of luxury residences, retail spaces, entertainment and wellness facilities
Diminishing Brand Loyalty Guests today are becoming increasingly unpredictable and quickly switch their patronage for better deals across hotel segments, thereby reducing efficacy of many loyalty programs which hotels target towards their customers.
New Avenues of Growth Service apartments, time sharing, fractional ownership, and company hotels or guest houses, have immense potential to grow. Their growth is likely to be due to increased demand of the IT, ITES, BPO, KPO, biotechnology and medical tourism sectors. Heightened awareness of consumers towards their environment has brought into prominence the concept of ‘eco tourism’ and ‘agri-tourism’.There is an increased flow of people, especially those from the west, to India for medical services. This has also brought into limelight the concept of ‘medical tourism’. The current market for ‘medical tourism’ in India is US$ 533 million, and is expected to grow to US$ 3.29 billion by 2018. Diversification holds the key to survival in the long run. The hotel industry isn’t behind. Spas are appearing at hotel properties at a remarkable rate and are becoming independent profit centres. Cafes, lounges and bars which have high profit margins, are increasing their presence in several hotels.
Growth of Budget Hotels Heightened demand and the healthy occupancy rates have resulted in an increase in the number of budget hotels. Some of the new players entering into this category of hotels include Hometel, Kamfotel, Courtyard by Marriott, Country Inns & Suites, Ibis and Fairfield Inn. Leading groups present in this segment are Ginger Hotels, Lemon Tree, Sarovar Hotels, Fortune Hotels, Ibis and Choice Hotels. Currently, 3 & 4 star category hotels together account for 22% of the total room supply in India, which clearly indicates a huge growth potential for budget hotels. Due to the vast demand-supply gap of mid-segment
hotel rooms, an investment of US$ 835 million (Exhibit 15) is proposed for this hotel category over the next three years. Furthermore, for the Commonwealth Games in 2010, the Government is expected to provide 10,000 budget rooms while the requirement would be for 40,000 to 50,000 rooms in this category.
No longer classified as ‘commercial real estate’ The Reserve Bank of India has recently removed hotels from the commercial real estate classification. This will make larger credit available to the capital‐intensive and credit starved hospitality industry at lower rates of interest, thus bringing down the high cost of the hotel projects.
Commonwealth Games 2010 to aid recovery of the hotel industry The Commonwealth Games are scheduled to be held from October 3 to October 14, 2010. According to Assocham, India’s foreign exchange earnings from the tourism sector is likely to grow by 20% to $16.91 billion dollars in the next two years, primarily due to huge tourist inflow expected during the Commonwealth Games. Around two million foreign tourists and 3.5 million tourists from different parts of India are likely to arrive in Delhi for Common Wealth Games 2010. The event will have a bigger impact on the countrys tourism industry. There will be a high rise in the number of international passengers from 25 million last year to 45 million by 2010 and the number of foreign tourists is also expected to rise from 4.43% to 10%. As per industry estimates, currently, there is a requirement of around 30,000 rooms in Delhi and the NCR for the 2010 Commonwealth Games. IHCL, being the largest player in this segment, would be a key beneficiary of the same. Overall, this will have a positive effect on the tourism and hotel industry over the longer term.
Demand supply mismatch likely to continue During the period before the economic downturn (FY07), many hotel companies had announced expansion plans. During this period, Crisil had estimated an addition of 14,890 rooms between FY10‐FY11. The after effects of economic downturn namely lack of credit availability, delay in construction, high realty prices have resulted in many companies pushing their planned expansion by 1‐2
years. Crisil now estimates an addition of 6,214 room addition between FY10‐ FY11 which have more than halved than their earlier estimates. The industry is highly capital intensive in nature and has a long gestation period. India is reportedly facing a shortage of good quality hotels for both international as well as domestic tourists.
Major Companies
EIH Ltd.
EIH Ltd, the flagship company of Oberoi group is one of the largest chain of hotels in India. The company is in the business of luxury hotels, restaurant, management contracts and travel and tours. Their services include airline catering, management of restaurants and airport bars, travel and tour services, car rentals, project management and corporate air charters. They operate hotels under the brand name Oberoi and Trident. EIH Ltd formerly known as East India Hotels Ltd was incorporated in the year 1949. EIH will add nearly 750 hotel rooms to its existing inventory of over 1,800 rooms under the Trident brand in the next two years. These new rooms will be part of the upcoming properties in Hyderabad, Bangalore and Dehradun. EIH expects to increase its presence in Gurgaon, Bangalore and Hyderabad through management contracts. EIH will hold a 26% stake in Trident Bangalore.
Hotel Leela Ventures Ltd.
Hotel Leela Venture Ltd is one of the leading players in the Indian hospitality industry. The company operates in both, the leisure and business sectors. The Leela palaces and resorts include a chain of five star luxury hotels and resorts. The company properties include The Leela Kempinski in Mumbai, The Leela Palace in Goa, The Leela Palace Kempinski in Bangalore and The Leela Kovalam in Kerala. The company became a popular name in the hospitality industry in India due to their high quality of service to their customers. The companys proposed expansion in major cities like Delhi and Chennai would diversify its revenue mix while lowering its risk from concentrated operations in Mumbai and Bangalore. The company is currently focusing only on the New Delhi property which it intends to launch in July 2010 – ahead of the Commonwealth Games. Apart from this, Chennai is the only other location where a hotel launch is expected in F2011/2012..
Apart from these two , other prominent players include Asian Hotels , Sarovar Hotel, Royal Orchid Hotels. The following link shows expansion plans of several hotels majority of which are unlisted. Indian 2nd Tier Hotels.xls.htm
Long Term Pick : Indian Hotels Co. Ltd.(IHCL)
BSE Code 500850 52Week Range : 62-118 NSE Code INDHOTEL EPS : 2.12 P/E : 50.04 Div Yield :0.94 P/BV : 2.84 Book Value 37.23 Face Value 1.00 Market Cap. 7661.58 cr
The Indian Hotels Company Limited (IHCL) was founded in 1902 by the founder of Tata Group, Mr. Jamsedji N. Tata and opened its first property, The Taj Mahal Palace Hotel, Mumbai in 1903. IHCL and its subsidiaries are collectively known as Taj Hotel Resorts and Palaces. The company began its long-term geographical expansion plan with the launch of its IPO in the early 1970s and emerged as one of the leading hotel chains in India. The company took its first step in the in international market by opening a hotel in the Middle East. Today IHCL has over 60 hotels in 45 locations across India and 15 hotels internationally in United Kingdom, Malaysia, United State of America, Africa, Sri Lanka, Australia and the Middle East. With 104 properties and room inventory of 12500 rooms (and growing), Indian Hotels is set to emerge as one of the leading hotel chains in the world. It follows distributed risk model wherein hotel properties and related businesses are housed in a clutch of associate companies, subsidiaries and joint ventures. These include Taj GVK, Oriental Hotels, Benares Hotels and Roots Corporation, among others. The company also holds a significant stake in BJets, Asia’s largest corporate air travel provider. The company has holds significant interest in Oriental Express Hotels, a US based luxury hotels chain.
IHCL operate in the luxury, premium, mid-market and value segments of the market through the following : Taj (luxury full-service hotels, resorts and palaces) is the flagship brand of the company. Each Taj hotel reinterprets the tradition of hospitality in a refreshingly modern way to create unique experiences and lifelong memories.
Taj Exotica is a resort and spa brand found in the most exotic and relaxing locales of the world. Taj Safaris are wildlife lodges that allow travelers to experience the unparalleled beauty of the Indian jungle amidst luxurious surroundings. They offer India’s first and only wildlife luxury lodge circuit. Taj Safaris provide guests with the ultimate, interpretive, wild life experience based on a proven sustainable ecotourism model. Upper Upscale Hotels (full-service hotels and resorts) provide a new generation of travelers a contemporary and creative hospitality experience that matches their workhard play-hard lifestyles. Stylish interiors, innovative cuisine, hip bars, and a focus on technology set these properties apart. The Gateway Hotel (upscale/mid-market full service hotels and resorts) is a panIndia network of hotels and resorts that offers business and leisure travellers a hotel designed, keeping the modern nomad in mind. At the Gateway Hotel, we believe in keeping things simple. The hotels are divided into 7 simple zones- Stay, Hangout, Meet, Work, Workout, Unwind and Explore.
Ginger (economy hotels) is IHCL’s revolutionary concept in hospitality for the value segment. Intelligently designed facilities, consistency and affordability are hallmarks of this brand targeted at travellers who value simplicity and self-service. The current international portfolio includes luxury resorts in the Indian Ocean, business and resort destinations in the Middle East and Africa, serviced apartments in the UK, the first hotel in Australia and three a top-end luxury hotels in the US.
Over the years, the Taj has won international acclaim for its quality hotels and its excellence in business facilities, services, cuisine and interiors.
SWOT Analysis for the Company
Strength
Market Leader , Brand and domestic dominance Wide global sales and marketing network Cutting edge distribution and reach Loyalty program, alliances/partnerships
Weakness
Fall in margin, ROCE and ROE over the last two years Still perceived as a High-end and costly hotel. Needs to publicize its budget segment Ginger Hotel.
Opportunities
Rapidly growing market in India, South Asia and key gateway cities in sourcemarket destinations Expansion in international destinations with top-of-the-line luxury and leisure properties Meeting growing demand in the budget and mid-market segments. Extending the product portfolio into related offerings viz. luxury residences, wildlife lodges and spas.
Threats
General downturn in global & domestic economies with consequent downturn in travel & tourism. Interest rates fluctuation due to which debt liability is uncertain Cheaper international airfares increasing the affordability of travel to international destinations, especially South East Asia, Europe and Australia. Growing presence of international hospitality chains competing in the luxury and business segments to meet excess demand situation.
FY 2011 Activities
With occupancy rates in the hospitality sector increasing by the day, Indian Hotels is bullish on growth in FY11. It expects to add capacity of over 1500 rooms in current fiscal. But it's not just organic growth anymore. It is also expecting grow through acquisition and joint ventures. The company is to open 13 hotels this year which translates to one hotel opening every three weeks Ginger Hotels will be listed in a couple of years as the chain plans to set up 80 hotels over the next three to four years from the current 21. The management emphasised the need to make US operations more profitable and its focus on improving margins. Rs 2.6 billion to be spent in FY11 on new projects across India which includes Falaknuma Palace in Hyderabad and a new hotel at Yeshwantpur in Bangalore which are on the advanced stages of completion. Work on our new Vivanta project in Guwahati is about to start and another hotel is coming up at Dwarka in Delhi.
Financial Performance: Last 5 Years and Future Price drivers
Particular FY 06 FY 07 FY 08 FY 09 FY 10 Revenue 1084 1544 1764 1619 1473 Op. Profit 320 569 708 489 380 PAT 184 322 377 234 153 PAT Mar.(%) 17.0% 20.9% 21.4% 14.5% 10.4% EPS 32.43 5.5 6.26 3.24 2.12 EPS Growth -83.0% 13.8% -48.2% -34.6%
(in Rs. Crores)
Before FY09, the company’s revenue grew at a CAGR of 32% during FY05FY08.
A better economic scenario and the consequent boost in consumer sentiment is leading to an improvement in occupancies across its leisure properties.
ARRs(Average Room Rates and occupancy levels are set to increase in coming quarters It is expected to grow EBITDA at a CAGR of 52% over FY10-12, compared to the 16% CAGR forecasted for its global peers.(India Infoline)
The company is in aggressive expansion mode with a. robust expansion strategy for the next 5 years. The company has planned to invest 959 crore over the next few years.
Special focus on mid and budget segment markets : Ginger Hotels - the budget segment hotel chain by the company plans to increase its location to 80 from 21 as of now. The work on about 40 properties is in various stages of construction.
The company has realized the importance of domestic market and with an established brand in place, it is well positioned to capture mid and budget segment hotel space.
As stressed by the management , steps are being taken to improve international profitability
1. With reopening of The Pierre, New York – full portfolio of US will be back in play. 2. 3. Retirement of $190m debt will result in significant interest savings and thereby will contribute to improve the bottom line Reaching out to new Customers / Segments to drive top line growth 4. Rationalization of Payroll cost These initiatives will improve the company’s bottom-line in the coming quarters.
Hotel Room tariffs are likely to go up by 15-20% towards the end of September. This will lead to improving Average room revenue in the long term.
Ratan Tata has said that Tata Sons is also looking at hiking its stake in IHCL from the current 29 per cent which shows the promoters’ increasing faith in the earning potential of the company.
Conclusion
Hospitality sector is expected to be among the key emerging sectors in India in coming years. Increasing domestic demand on back of disposable incomes and increasing international tourists inflow than ever will be the major factors driving the growth of the sector. Indian Hotel Company Ltd. is a well established and popular brand in the country mainly via its Taj group of hotels. The company is well balanced to reap the benefits in the growing industry. The management backed by Mr Ratna Tata has been legendary in India. With focus on mid and budget segment hotels domestically and improvement of profit margins internationally, the company has already taken a lead over other listed players who suddenly seem to have lost the plot. EIH limited, the key competitor of the company is not even adding half of what IHCL plans to add and Hotel Leela is planning to add less than 10 hotels. In this scenario, to expect that they will be able to compete with IHCL seems highly implausible. There are some unlisted players like Fortune Hotel which will give stiff competition but in an industry poised to grow at 8% plus levels per annum for the coming 10 years and the market size set to triple in the same period , there is enough slice of cake which IHCL can garner for itself.
References 1. Indian Hospitality Industry Outlook by HVS 2. News and Articles from Internet
