The much-awaited bidding of the capital’s iconic Taj Mansingh hotel is set to be delayed further.
The New Delhi Municipal Council (NDMC), given a nod by the Supreme Court last year to auction the luxury hotel, had plans to complete the process by January 30. But, as things stand, it is likely to be delayed by at least a month.
Prospective bidders in the run-up to the auction have raised several questions, to which the NDMC didn’t come up with satisfactory responses and explanations.
One of the issues raised before the NDMC is regarding a condition that restricts the winner from making any structural change or damage to the property. This clause, it is learnt, may make securing various fire and safety approvals tricky for a new operator. These approvals are outside the purview of the NDMC.
Interested players have also raised the issue of restrictive nature of the bid criteria which insist that the bidder must have a five-star hotel brand as well as at least five hundred rooms across three properties. That has been restricting some of the leading global hotel brands present in the country and asset firms from bidding in the Taj auction.
The NDMC, according to sources, has informed prospective bidders that the civic body will take time to come back with answers, and indicated postponing the bidding. No fresh dates have been specified. “The NDMC has a meeting later this month where grievances of bidders will be addressed. The Council will try to conclude the bid in February,” said a person familiar with the developments.
Also, as per the bidding criteria, two bidders cannot have a cross-holding beyond five per cent between them. ITC Hotels owns 14.98 per cent stake in Oberoi Hotels and as a result only one of the two could be eligible to bid. Both these companies were keen to bid for the 294-room hotel in Lutyens’ Delhi. Samhi, a hotel asset company backed by Goldman Sachs, was also keen to bid, but it cannot due to non-ownership of a luxury hotel brand.
Due to all these restrictions, the numbers of bidders may be limited to a low single digit and in turn dampen revenue maximisation — the idea behind any auction, said an industry executive.
“We are disappointed about the restrictive nature of bidding. In hotel business, ownership is mostly with investors (both individual and institutional) and brands are distinct, but the NDMC requires that only a brand can bid. Even if, the eligibility criteria are met, our assessment indicates that the deal will be difficult to stack up on financial returns. We wish the NDMC very best and hope the hotel continues to maintain its iconic status,” said Ashish Jakhanwala, managing director and chief executive officer at Samhi, which owns 25 operational hotels.
Taj Mansingh is learnt to have clocked revenue of approximately Rs 2 billion and a profit before tax of Rs 450 million in FY17The NDMC is leasing the property for a 33-year period. In 1976, Indian Hotels company Ltd (IHCL) had signed a lease agreement with the NDMC for Taj Mansingh, and two years later the hotel was inaugurated. In 2011, however, the 33-year-old lease ended and a court battle started. Four years ago, the NDMC decided to auction the property, while Tata Group’s IHCL challenged the decision in the Delhi High Court. After much back and forth and several lease extensions, the Supreme Court in April gave a go-ahead for auctioning the hotel.
The next operator of this property will have to assure a minimum revenue share of 17.25 per cent and a minimum guarantee fee of Rs 29.6 million per month, with a clause for escalation. There is also an upfront non-refundable fee of Rs 530 million.
Taj Mansingh is learnt to have clocked revenue of approximately Rs 2 billion and a profit before tax of Rs 450 million in FY17. So, after paying the minimum monthly fee that translates into about Rs 350 million and a revenue share, not much may be left for the operator. This is not all. The hotel is unlikely to bring any revenue for the first one-and-a-half to two years that may go into renovating the property.
The new operator will also need to invest Rs 3-4 billion on the renovation. If this money is borrowed, add an annual interest cost of about Rs 300-400 million. So, there is hardly money to be made. But IHCL, which has earned a profit from the property all these years, could be more aggressive in the bidding than others.