 "Taj Mahal Palace")
Indian Hotels Company, a Tata Group company, has been under intense scrutiny for the past three years. It has not added even a single upmarket hotel to its inventory since 2010, has recorded no profits since 2012-13 and has had to face shareholder's ire for unfruitful overseas investments. But, Rakesh Sarna, the man who took over the reins from Raymond Bickson six months ago, says he is committed to turning things around in two years.
As an old hand in the hospitality industry, Sarna's induction as managing director and chief executive has left shareholders confident about the projected turnaround. Before joining the 113-year-old hotel chain, Sarna worked for US-based Hyatt Hotels Corporation, which is seven times the size of Indian Hotels in revenue terms. He spent 35 years at Hyatt and managed 10 of its brands across 146 hotels.
Makeover man
Under Sarna, Indian Hotels has undergone its first mega restructuring exercise in a decade. Sarna, who is the second-highest-paid CEO in the Tata Group, broke down Indian Hotels' brand-led set-up to one that's based on geographical distribution of its properties. From having three chief operating officers (one each for the upmarket Taj, Vivanta by Taj and Gateway brands) reporting to the executive director of operations, Indian Hotels now has three senior vice-presidents (operations) who are based in Delhi, Mumbai and Bengaluru, with each managing a portfolio of 20-30 hotels. Indian Hotels currently manages 130 properties, including 26 that it owns, across four brands, which includes the low-cost Ginger chain.
In addition, Chinmay Sharma is set to join Indian Hotels from Paris-based Starwood Capital as the chief revenue officer and will be responsible for streamlining the new structure, while accelerating the company's online presence and enhancing its consumer database.
"The company has embarked on an internal restructuring exercise that makes individual hotel's general managers the key drivers of overall strategy, much like in US hotels," observes a JPMorgan report. "Individual hotels and regions henceforth will have their own P&Ls and flexibility around pricing and promotions. This is a significant departure from the way the company operated earlier and, in our view, should help improve market response for individual hotels and thus potentially drive up currently low occupancy levels (below 65 per cent)."
But Sarna has set his sight on more, including its debt. Indian Hotels' muted financial performance may be attributed in a large measure to its consolidated debt of Rs 4,300 crore. To reduce this burden, the company had even approached its promoters last year for a convertible debenture issue. In the nine months till December 31, 2014, Indian Hotels reported consolidated profit from operations (before other income, finance cost and exceptional items) of Rs 112.88 crore. Finance cost paid in that period stood at Rs 134.5 crore. The loss for the nine months was Rs 70.67 crore.
"From the EBITDA standpoint, we have been profitable for the last few years. But PBT-PAT is an entirely different matter," Sarna pointed out at a recent coversation with the media. "We are at least two years away from being profitable because we need to make sure that we have taken account of all our liabilities, defined and undefined. When the 2014-15 results are published, we will show progress."
This outlook is why Sarna is not averse to unlocking the value of Indian Hotels' assets like Hotel Leelaventure did in selling off its Kovalam hotel for Rs 500 crore and taking the property on a management contract. Last year, Samsara Properties, an Indian Hotels subsidiary, sold The Blue Hotel in Sydney, the chain's only hotel in Australia, for Rs 180 crore. The intention was to be better focused on markets core to the group's operations and to create liquidity to fund the company's expansion into such markets. Indian Hotels' eyes are now on Bangkok, Singapore, Hong Kong, Shanghai, Bahrain, Muscat and Abu Dhabi.
Eyes on the target
At the media interaction, Sarna had said, "If your eventual goal is to grow the company, the general philosophy is you buy an asset, take it up to its ramp-up stage and then you flip the asset, but you maintain brand presence." He said he wasn't averse to leveraging the capability of its properties in Boston and San Francisco in the US to free up cash but maintain brand presence.
In addition, Indian Hotels has decided to liquidate its 6.9 per cent holding in Belmond (formerly Orient-Express Hotels) to "anyone offering a good value". The company holds 7.13 million shares in Belmond valued at around Rs 580 crore based on the average closing price on the New York Stock Exchange of $12.9. The Bermuda-based Belmond had announced a share repurchase programme in March for class-A common stock with a total outlay of $75 million. Indian Hotels may look at participating in this offer provided it meets the company's internal targets. Indian Hotels has said it is open to selling the shares to investors other than the promoters.
The troubled Sea Rock project in Bandra, Mumbai, needs Sarna's attention too. Nothing has happened since Indian Hotels bought the 440-room property six years ago for Rs 680 crore and razed the defunct seaside hotel to build a complex of convention centres, meeting halls and retail outlets. Sarana said that the company was fighting a public-interest litigation on the property: "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 this financial year."
The road to profits
The Indian Hotels chief executive also has to strike a balance between profitability and expansion. Of the 357 new properties that India will add in 2015-2017, just 17 hotels belong to Indian Hotels. Though the country offers ample headroom for expansion with just 103,000 branded rooms currently, Sarna is worried that the prime areas could be out of Taj's reach. "The development opportunities are perishable. The number of opportunities will reduce overtime and the prime locations will be gone," said Sarna at the media meet. "The Taj needs many more hotels in the metros. In 20 years' time, Mumbai will have more hotel rooms than Manhattan."
Looking at Sarna's plans, including bringing all international properties (excluding joint ventures) under one company, Homi Aibara, senior partner, Mahajan and Aibara, says, "He is making all the right moves. There was a requirement to streamline the operations at Indian Hotels. For returning to profitability, a lot of that will depend on how the market behaves."
JPMorgan believes the five-year bear market in the hotel sector is coming to an end. That should spell good news for India's biggest hotel company with over 15,000 rooms.
