Double Trouble
On the face of it, it does not augur well for the domestic hotel industry, since the domestic travellers account for 30 per cent of the hotel occupancy. However, a large part of this is accounted for, by the business community, that is, the corporates who enter into agreements at negotiated rates with the hotels. Depending on their bargaining power, the discounts vary, so what was 20 per cent earlier will now be higher. There will however be a difference in the period of agreement which would reduce understandably considering the dollar denomination.
The minimum impact would be an across the board increase of 20 per cent and hence, a demand for a higher discount. Whether this will be attainable by all is a debatable question. Moreover, with a general cost cutting scenario in the corporate sector and senior executives opting for economy grade tours, luxury hotels will feel the pinch. For lower grade hotels like three-star, four-star or those in up-country areas where the Indian clientele dominates the occupancy, it would make sense to make the tariff rupee denominated. But, this will also be affected by the depreciation in the rupee and pull down their earnings on income from foreigners.
The problems do not end there. This new development has occurred at a time when the countrys political uncertainty has intensified and the Asian economy has crashed. International tourists are opting for cheaper destinations in South East Asia and the foreign business traffic has come down. India is no longer a hot destination for business, at least in the short term. Indian hotel tariffs being 20-40 per cent higher than their international counterparts, are obviously not the first choice in spite of rates being dollar denominated.
Foreign travellers account for more than 80 per cent of the occupancy of five star and five start deluxe hotels and 60-70 per cent across the board for other listed companies. A drop in volumes of their major revenue earner coupled with the marginal decline in the domestic clientele will put pressure on the hospitality industry. The occupancy rate which was around 72 per cent in 1996 and around 67 per cent in 1997 has dropped to around 63.5 per cent this year. It is expected to touch 60 per cent with the average room rents (ARR) having gone up 6-7 per cent.
Low realisations have been accentuated by the tax rates which vary from state to state. First, is the luxury tax which is charged on the card rate, so even if discounts are offered to the domestic traveller, the mellowing effect of discount on the single dollar tariff will be nullified by higher taxes. Expenditure tax and sales tax are two other such avoidable levies. Sales tax on food ranges from 5 to 21 per cent, with Maharashtra topping the list. So, food in a five star hotel, which is normally 30 per cent of the total revenue becomes almost 25 per cent higher than the rest. Even the occupants of the hotel opt for cheaper outlets making the alternative revenue source of restaurants also redundant. To top it all, there is the five per cent service tax and the vehicle tax which again varies across states.
A reprieve for this very economy driven industry would be the depreciation in the rupee (see Financials). But, with an overall dip in the occupancy rates and the possible decrease in the ARRs in the near future owing to lack of demand, this effect maybe negated. However, in spite of a visibly bleak scenario, most of the hotels are going ahead with their expansion plans albeit down scaled. This is justified by the shortfall in the supply. Currently, the supply is around 63,000 rooms compared to an estimated demand of 90,000. The demand is expected to go up to 125,000 rooms by the year 2000 and the expansion plans so far include 43,000 rooms more. In spite of this, the capacity utilisation is low.
In addition, many international outfits like Radisson, Mariott etc have major expansion plans for the Indian market. In fact, the recent budget provision on tax concessions for hotel projects constructed in backward area, has given further impetus to expansion plans. So, there might be a state of overcapacity in the coming few years, particularly after 2000. If figures are the basis then it makes sense to expand when land prices are low. The immediate fall-out would be the rising interest burden, which in a poor liquidity condition will only dent the bottomlines further.
A company specific outlook will give a better picture as to where the industry is headed.
Asian Hotels
Asian Hotels, the hottest and the most profitable hotel scrip, follows the single tariff system and hence is safely insulated from the government directive. But now it seems to be facing the aftermath of large scale expansions. It has plans of starting five star deluxe hotels in Mumbai, Calcutta, Jaipur, Agra and Bangalore. As long as this is financed internally, there will not be many problems. But an expansion plan amounting to Rs 450 crore being financed through the debt route apart from a rights issue or a GDR, will definitely hit its bottomline. As of now, its interest coverage ratio is very comfortable. Currently, the Hyatt Regency in Delhi is reaping benefits of having a locational advantage. So far, the first half realisations have been down, but in the last quarter of 1997-98, due to elections, it is going to show better occupancy rates.
In Mumbai, their project site is close to the international airport, but this strategy is being followed by most players. There will be an overcrowding in north Bombay with three other such projects coming up. In such a case, the current level of 82 per cent occupancy rates cannot be sustained. The Calcutta project is timely and will definitely bring results due to its proximity to the airport. As of now, these two projects are on, while the rest have yet to materialise. A lot depends on whether it continues with its strategy of expanding too much too soon.
Hotel LeelaVenture
Hotel LeelaVenture is the second company which has not been affected by the change in tariff system. It currently boasts an occupancy rate of 75 per cent and has expansion plans for five star deluxe hotels in Bangalore, Delhi, Mumbai, Udaipur and Goa. These will be marketed and operated by the US hotel company Four Seasons. The total cost will run into Rs 495 crore, of which Rs 166 crore will be raised in the last quarter of 1998 through a GDR. The debt component has gone up and is the main cause of concern for the future apart from the viability of the projects. So far, it has had a comfortable debt servicing position and in Mumbai, it has enjoyed a locational advantage. But, with various other hotels coming up near the international airport in Mumbai, competition will increase. Had the Bandra-Kurla project worked out for Leela, then the company would have required huge funds. This is not a concern anymore.
Around 87 per cent of its clientele comprises foreign travellers, of which 2-3 per cent are the leisure travellers. The rest are domestic business travellers. With the general economy slowing down, the business traffic is expected to reduce and the results for the first half have dipped. Controversies, bad shape of the industry and expansion plans have played havoc on the scrip. The reprieve lies in its single tariff system, one can only wait and watch.
EIH
A hot favourite of the FIIs till recently, the scrip has seen massive hammering on the bourses. EIH which owns the Oberoi chain of hotels has so far had a slow and steady growth. Over seventy per cent of its revenue accrues from its Delhi and Mumbai properties. Moreover, these hotels have been set up at much lower cost than the newer hotels giving them a cost advantage. For example, a new hotel would need to charge Rs 10,000-Rs 13,000 per room to break even, EIH could charge 30 per cent less.
Though occupancy has fallen to about 70 per cent, two strategic shifts make EIH attractive: an India focus and a shift towards budget hotels to be set up under the Trident brand. It has planned 17 hotels over the next three years. Fourteen are marked for India of which six would be the Trident hotels to be set up in Delhi, Chennai, Pune, Udaipur, Coimbatore and Kochi. Due to presence of larger international chains overseas and a strong brand equity within India, return on investment for the group is higher in India than overseas.
Future growth is expected mainly from budget hotels especially, in the second rung cities. With a mix of luxury and budget hotels, the company would be well positioned to take advantage of the next boom. Since future expansions are being funded by internal accruals and debt, there would be no further equity dilution. A change-over to a single tariff system would certainly impact the bottomline. A scrip to watch for the long term.
Indian Hotels
This is another case of a blue chip losing its favoured status. The half yearly results have been poor coupled with a none too rosy outlook for 1997-98. This Tata group company which runs the Taj and the lesser known Residency (five star but not deluxe) and the Gateway (budget) chain of hotels had till recently led almost a charmed existence, with many success stories attached to it. With management now passing on to RK Krishna Kumar, things are expected to be calm.
As with any other hotel scrip, the outlook for the immediate future is a further fall in occupancy from the present level of about 64 per cent and some dent in the ARR. Once the single tariff system is implemented, the companys profitability would probably take a minor hit. However, even in Indian Hotels case, the high-yielding Mumbai and Delhi properties are old and can lower rates and still be comfortable.
For the longer term, the new management is said to be taking a hard look at its earlier expansion plans and it is expected that the thrust areas for the future would be the Residency and the Gateway hotels. This sensible growth strategy coupled with its overall cost advantage would give it an edge over newer entrants.
Chhavi Wadhwani and Shalini Gupta