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‘Markets are quite receptive to hotel firms’

‘Markets are quite receptive to hotel firms’
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First Published: Mon, May 07 2007. 11 53 PM IST
Updated: Mon, May 07 2007. 11 53 PM IST
Mumbai: Anil Madhok left the Oberoi Hotels chain after a quarter of a century in 1991 to set up Sarovar Hotels & Resorts. Today, the firm that concentrates on the mid-market segment of the Indian hotel industry has emerged the fourth-largest chain in India, managing 28 hotels.
Sarovar Hotels Pvt. Ltd sold a 28% stake to US-based venture capital firm Bessemer Venture Partners Trust and US based private-equity fund New Vernon Private Equity in December, 2005 and now plans to more than double its network over the next five years. The company, which has hitherto focused on management contracts, also plans to venture into ownership of some hotel properties.
Sarovar is also exiting the business of standalone restaurants and banquet halls and will not open any more of its Geoffrey’s (pubs) and Oriental Blossom (Chinese restaurants) outlets. The company said these restaurants were taking up too much management bandwidth.
Anil Madhok, managing directo, Sarovar Hotels Pvt. Ltd spoke to Mint about how the company is positioning itself in a market that’s attracting hospitality firms from all over the world. Excerpts:
The hotel industry in India is seeing the entry of several global majors. How will this impact smaller companies such as Sarovar that have traditionally focused on managing rather than owning the hotels?
The hotel industry is India is currently booming, with a shortage of rooms across the country. Just like some of these international brands have been investing in some hotels jointly with the owners, we too have decided on a mix of owned and managed properties in our bouquet of hotels.
We plan to set up 50 Hometels (budget-segment hotels) across India over the next five years. In the next two years alone, we plan to set up a mix of 20 hotels under our Sarovar Premiere (upscale full-service four-five star), Sarovar Portico (three-star), Hometel, Park Plaza and Park Inn brands. Of these, a 98-room Sarovar Portico at Indore, Madhya Pradesh, and four Hometels in Chennai, Hyderabad and Chandigarh will be owned by us.
We will finish all these hotels by the end of 2008-09 as the land has already been acquired by us and the development plans submitted to the relevant authorities. We have a stable stream of management contracts from the Carlson brand hotels that we have franchised in India. We own the franchisee rights to the Park Plaza and Park Inn brands in India for 50 years ending in 2045.
The important thing to remember is that almost 80-90% of business gets generated within India even if it’s overseas business.
Charter operators, for instance, will negotiate directly with hotel chains here or have their handling agents do this for them.
Most multinational companies have offices here and the corporate rates and bookings get done out of the local offices. You don’t have the overseas offices booking directly in large numbers so the difference that the global chains bring is the balance 8-10%, which are their focused clients who will come, again only if it’s a really top-end brand.
How will the expansion be funded?
We had raised Rs38 crore from the fund investors for part-funding this expansion. That said, we will have a fund constraint in six to 12 months’ time. But we will look at options, as the capital markets are quite receptive to hotel companies. Of the Rs200 crore funds requirement, we anticipate raising around Rs130 crore through debt. Even the Tourism Finance Corp. of India has shown keenness to fund us.
Insofar as equity is concerned, we could go in for a listing on London’s Alternative Investment Market or the domestic exchanges or get more investments from private equity investors. Whether the existing private-equity investors would like to participate in the second round of funding remains to be seen, as the company’s valuation has risen fivefold in the last one year alone. Ideally, we would like to go for an IPO three years from now.
Land costs have been escalating hugely even for hoteliers. How far will the new projects be viable when a downturn happens?
The cost of construction has gone up by 30% in the last two to three years, as has the cost of land. The cost of labour, cement and steel have all gone up. The cost of cables required for everything, from electricals to electronics and broadband access, has gone up by 200-300%.
Pricing of hotel rooms, on the other hand, is more demand-led.
In the last two years, the average room rate has increased by 100%. In the long term, high rates can’t be sustained. The project economics mean that a hotel room that could have been sold at Rs1,600 per day has now to be sold at Rs2,500 per day to break even. We believe that at the current average room rates, we can service debt even at 50-55% occupancy levels.
At $100 per room night on an average, you not only make money but a very big margin as well. However, if you let costs go haywire, when the market cracks, you will be in trouble.
How is the rise in room rates across categories and locations impacting the nature of tourists coming to India, considering that the average five-star room in Southeast Asia is now significantly cheaper than in India?
It’s getting quite difficult for the tourists. Tourists usually come on a budget, so the tour operators reduce the amount of time spent in Delhi, Mumbai or Chennai to work out a tour cost that’s viable. As a result, many of them are spending more time in smaller towns and less in bigger metros like Delhi, for instance. Business-traveller demand in the big metros is so high that they are effectively taking all the available hotel rooms.
What has also changed is the emergence of the new free individual traveller coming on a leisure trip to India. We are talking about millionaires here who don’t want to be on a tour bus. They want a guide to wait for them in the car, rather than be ordered to be up and ready at 6am.
What’s clear is that tour operators who bring in charters etc aren’t buying hotel rooms at $750 per night. But instead, we have high-end groups here on incentive packages.
Flight crews, which used to be big business for hotels a while back, now find they can’t get rooms in their regular places as very few of the top hotels are actually interested in that business.
This is because crews spend very little on anything in the rooms, whereas a business traveller will normally have meetings and meals where he/she will invite others to join in, too.
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First Published: Mon, May 07 2007. 11 53 PM IST
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