ITC bucks trend, builds own hotels

Diversified conglomerate ITC is building hotels when most of the organised players in the domestic hospitality space are going asset-light.

Ten owned hotels are in various stages of construction in the luxury and five-star segment, while 30 owned/managed hotels are on the drawing board in the mid-market to upscale segment. At least half of the room inventory in the 30 hotels would be owned by ITC and the timeframe for completion is five to seven years.

“Hardly any large organised player is creating hotel assets now; they are opting to go asset-light through management contracts or token equity. Asset creation in the hotel industry currently is primarily being done by single-hotel companies or builder,” said Pavethra Ponniah, analyst, ICRA.

According to ITC, it is building assets to catch the upturn. “It would not be prudent to wait for the Indian market to mature and then look at investing, because we need to build capacity to cater to the forecast demand. We remain committed to a long-term approach,” said a company spokesperson.

ITC did not want to reveal the investment in the sector, but in 2010, chairman Y C Deveshwar had said there was scope to invest Rs 9,000 crore in hotels.

Most of the growth in the hotels segment for ITC happened during Deveshwar’s time.

The hospitality business, which was operating 12 hotels in 1996 when Deveshwar took charge as chairman, has grown to 100-odd properties, comprising brands, ITC Hotels, WelcomHotels, Fortune and WelcomHeritage.

“Our investments are a testimony of our confidence in the Indian economy, of which tourism is a derived demand. India as a destination is poised for growth with exponential potential for business travel,” the company spokesperson explained.

Of a room inventory size of 9,000 currently, the ratio of owned to managed is 50:50. That ratio would remain the same even with the ones in the pipeline.

ITC, which has generally favoured organic expansion, is also building a hotel in Colombo, its first overseas venture in the hotels space, through WelcomHotels Lanka, a wholly owned subsidiary.

ITC’s move to build hotels is contrary to industry trend. Both EIH and Indian Hotels Company have been moving toward the managed-property model for a while now.

EIH owns 55 per cent of its room inventory in India. A number of managed properties for EIH are at various stages of construction and the management had recently indicated that on completion of the properties, managed rooms would account for 85-90 per cent of total inventory size.

According to Icra’s latest credit perspective report on Indian Hotels Company, which happens to be one of the largest hospitality companies in Asia, it has an inventory of 16,459 rooms and 136 hotels as on December 31, 2015.

“IHCL’s hybrid business model comprises owned properties (27 per cent of the total inventory, or 27 properties), properties in subsidiaries and associates, properties under joint ventures and hotels run by IHCL under management contracts,” the report said.

The de-risked model of the hotels business has been decoded by IHCL in its annual report.

“The hotel business comprises two distinct elements of either ownership of hotels, which carries a high reward and risks linked to business cycles or the management of hotels in which the risks and rewards are limited through stripping away the business risks,” the report noted.

ITC investors may also want the company to de-risk its business model. “Slowdown in macro-economic environment is a major threat to hotels business. The hotels business is highly cyclical with long gestation periods,” an analyst said.

However, he conceded the asset creation could be a fall-back option for ITC.