TERM PAPER

AMITY INTERNATIONAL BUSINESS SCHOOL

HOSPITALITY INDUSTRY

INDEX

CERTIFICATE

UNDERTAKING

ACKNOWLEDGEMENT

HOSPITALITY INDUSTRY AN OVERVIEW

Hospitality is all about offering warmth to someone who looks for help at a strange or unfriendly place. It refers to the process of receiving and entertaining a guest with goodwill. Hospitality in the commercial context refers to the activity of hotels, restaurants, catering, resorts or clubs who make a vocation of treating tourists.

Helped With unique efforts by government and all other stakeholders, including hotel owners, resort managers, tour and travel operators and employees who work in the sector, Indian hospitality industry has gained a level of acceptance world over. It has yet to go miles for recognition as a world leader of hospitality. Many take Indian hospitality service not for its quality of service but India being a cheap destination for leisure tourism With unlimited tourism and untapped business prospects, in the coming years Indian hospitality is seeing green pastures of growth. Availability of qualified human resources and untapped geographical resources give great prospects to the hospitality industry. The number of tourists coming to India is growing year after year. Likewise, internal tourism is another area with great potentials. The hospitality industry is a 3.5 trillion dollar service sector within the global economy. It is an umbrella term for a broad variety of service industries including, but not limited to, hotels, food service, casinos, and tourism. The hospitality industry is very diverse and global. The industry is cyclical; dictated by the fluctuations that occur with an economy every year. Today hospitality sector is one of the fastest growing sectors in India. It is expected to grow at the rate of 8% between 2007 and 2016. Many international hotels including Sheraton, Hyatt, Radisson, Meridien, Four Seasons Regent, and Marriott International are already established in the Indian markets and are still expanding. Nowadays the travel and tourism industry is also included in hospitality sector. The boom in travel and tourism has led to the further development of hospitality industry.

INDIAN HOTEL INDUSTRY AT A GLANCE

In 2003-04 the hospitality industry contributed only 2% of the GDP. However, it is projected to grow at a rate of 8.8% between 2007-16, which would place India as the second-fastest growing tourism market in the world. The arrival of foreign tourists has shown a compounded annual growth of 6 per cent over the past 10 years. Besides, travel and tourism is the second highest foreign exchange earner for India. Moreover, it is also estimated that the tourism sector will account for nearly 5.3 per cent of GDP and 5.4 per cent of total employment.

GDP Employment Visitor Export Personal T&T Capital Investment Govt. Expenditure Outlook for 2006 7.80% 1.40% 10.90% 6.90 % 8.30% 7.70% Outlook for 2007-2016 6.60% 1.00% 7.80% 6.70% 7.80% 6.60%

The hotel industry in India had reported sales growth of 14.3 per cent during 2010-11, 20112012 and is expected to maintain this level in 2012-13. PAT is expected to grow at 36.2 per cent in 2011-12 and 26.4 per cent by 2012-13. The growth in tourist inflows in 2012-13 and 2013-14 is likely to be driven by tourists from regions other than North America and Western Europe. This includes Asian regions like South Asia, East Asia, and South East Asia. The shares of tourists from these countries have been rising in recent years, as per the data released by the Ministry of Tourism, and are expected to rise in the coming years as well.

Hotels and restaurants are an important component of the tourism sector. As on 31 December 2011, there were 2,895 classified hotels having a capacity of 1,29,606 rooms in the country. Availability of good quality and affordable hotel rooms plays an important role in boosting the growth of tourism in the country.

The share of the hotel and restaurant sector in overall economy increased from 1.46 per cent in 2004-5 to 1.53 per cent in 2008-9 and then decreased to 1.46 per cent in 2010-11. However, if the contribution of this sector only in the service sector is considered, its share decreased from 2.75 per cent in 2004-5 to 2.64 per cent in 2010-11 as other service sectors grew faster than this sector.

Parameters

9M FY11

9M FY12

y-o-y growth
11% 0% -113%

Total Income OPBDITA PAT OPBDITA % PAT % OPBDITA/interest & Finance charges

3,023.3 772.9 108.3 25.6% 3.6% 2.32

3,358.0 770.8 (14.4) 23.0% -0.4% 1.75

Its CAGR was 8.44 per cent during 2004-5 to 2009-10 and the growth rate in 2010-11 was 7.7 per cent. Health tourism, the new entrant in the sector, is a niche area where India has good potential to grow.

ATITHI DEVO BHAVO (Guest is God) - We have all heard this phrase many times during our childhood from our parents and grand-parents. We can also find its presence in the earliest Vedas and religious epics. Hospitality is deep-rooted in our traditions and comes as an integral part of our heritage. In very simple terms, hospitality is the art of being warm to strangers and has been derived from the Latin word hospitalitem, which means friendliness to guests. The hospitality industry covers a diverse range of establishments in the form of accommodation, food and drinks. It includes hotels, motels, restaurants, bars, ships, airlines and railways. The concept of hospitality business started when people started traveling away on business and they needed a place away from home which could cater to all their needs. Today hospitality has evolved from the basic food and accommodation industry and taken a very important position in almost all businesses. In fact, it has become a huge industry and drives economies across the globe. The scope of hospitality/ service industry today is far more than one could have ever imagined a few years back. Earlier people who graduated from a Hotel School could get employed either in Hotels, Cruises or airlines. But service is the BUZZ word for all businesses today. Be it the Retail Sector, Banking Industry, BPO, Telecom world, Real Estate or any other sector having direct customer contact, a person with hospitality background has an edge above the rest, because of their sheer capability of understanding the needs of a customer better and handling difficult customers/ situations efficiently. Hotel industry depends largely upon the foreign tourist arrivals further classified into business travelers (around 65% of the total foreign tourists) and leisure travelers. The following figures show that business as well as the leisure travelers (both domestic and international) formed major clientle for hotels in 2004. Over the last two years, the hotel industry has seen higher growth rates due to greater number of tourist arrivals, higher occupancy rate (being around 75% in FY'06) and significant increase in average room rate (ARR). The major factors contributing to this growth include stable economic and political conditions, booming service industry, FDI inflow, infrastructure development, emphasis on tourism by the central as well as state governments and tax rationalization initiatives to bring down the tax rates in line with the international levels.

SWOT ANALYSIS OF HOSPITALITY INDUSTRY

STRENGTHS

1. Natural and cultural diversity: India has a rich cultural heritage. The "unity in diversity" tag attracts most tourists. The coastlines, sunny beaches, backwaters of Kerala, snow capped Himalayas and the quiescent lakes are incredible.

2. Demand-supply gap: Indian hotel industry is facing a mismatch between the demand and supply of rooms leading to higher room rates and occupancy levels. With the privilege of hosting Commonwealth Games 2010 there is more demand of rooms in five star hotels. This has led to the rapid expansion of the sector

3. Government support: The government has realized the importance of tourism and has proposed a budget of Rs. 540 crore for the development of the industry. The priority is being given to the development of the infrastructure and of new tourist destinations and circuits. The Department of Tourism (DOT) has already started the "Incredible India" campaign for the promotion of tourism in India.

4. Increase in the market share: India's share in international tourism and hospitality market is expected to increase over the long-term. New budget and star hotels are being established. Moreover, foreign hospitality players are heading towards Indian markets.

WEAKNESSES

1. Poor support infrastructure: Though the government is taking necessary steps, many more things need to be done to improve the infrastructure. In 2003, the total expenditure made in this regard was US $150 billion in China compared to US$ 21 billion in India.

2. Slow implementation: The lack of adequate recognition for the tourism industry has been hampering its growth prospects. Whatever steps are being taken by the government are implemented at a slower pace.

3. Susceptible to political events: The internal security scenario and social unrest also hamper the foreign tourist arrival rates.

OPPORTUNITIES

1. Rising income: Owing to the rise in income levels, Indians have more spare money to spend, which is expected to enhance leisure tourism.

2. Open sky benefits: With the open sky policy, the travel and tourism industry has seen an increase in business. Increased airline activity has stimulated demand and has helped improve the infrastructure. It has benefited both international and domestic travels.

THREATS

1. Fluctuations in international tourist arrivals: The total dependency on foreign tourists can be risky, as there are wide fluctuations in international tourism. Domestic tourism needs to be given equal importance and measures should be taken to promote it. 2. Increasing competition: Several international majors like the Four Seasons, Shangri-La and Aman Resorts are entering the Indian markets. Two other groups - the Carlson Group and the Marriott chain - are also looking forward to join this race. This will increase the competition for
the existing Indian hotel majors

CHALLENGES FOR HOSPITALITY INDUSTRY

1. Shortage of skilled employees: One of the greatest challenges plaguing the hospitality industry is the unavailability of quality workforce in different skill levels. The hospitality has failed to retain good professionals.

2. Retaining quality workforce: Retention of the workforce through training and development in the hotel industry is a problem and attrition levels are too high. One of the reasons for this is unattractive wage packages. Though there is boom in the service sector, most of the hotel management graduates are joining other sectors like retail and aviation.

3. Shortage of rooms: The hotel industry is facing heavy shortage of rooms. It is estimated that the current requirement is of 1,50,000 rooms. Though the new investment plan would add 53,000 rooms by 2011, the shortage will still persist.

4. Intense competition and image of India: The industry is witnessing heightened competition with the arrival of new players, new products and new systems. The competition from neighboring countries and negative perceptions about Indian tourism product constrains the growth of tourism. The image of India as a country overrun by poverty, political instability, safety concerns and diseases also harms the tourism industry.

5. Customer expectations: As India is emerging as a destination on the global travel map, expectations of customers are rising. The companies have to focus on customer loyalty and repeat purchases.

6. Manual back-end: Though most reputed chains have IT enabled systems for property management, reservations, etc., almost all the data which actually make the company work are filled in manual log books or are simply not tracked.

7. Human resource development: Some of the services required in the tourism and hotel industries are highly personalized, and no amount of automation can substitute for personal service providers. India is focusing more on white collar jobs than blue collar jobs. The shortage of blue collar employees will pose various threats to the industry.

THE HOTEL INDUSTRY PROFILE

Hotel Industry in India has witnessed tremendous boom in recent years. Hotel Industry is inextricably linked to the tourism industry and the growth in the Indian tourism industry has fuelled the growth of Indian hotel industry. The thriving economy and increased business opportunities in India have acted as a boon for Indian hotel industry. The arrival of low cost airlines and the associated price wars have given domestic tourists a host of options. The 'Incredible India' destination campaign and the recently launched 'Atithi Devo Bhavah' (ADB) campaign have also helped in the growth of domestic and international tourism and consequently the hotel industry.

In recent years government has taken several steps to boost travel & tourism which have benefited hotel industry in India. These include the abolishment of the inland air travel tax of 15%; reduction in excise duty on aviation turbine fuel to 8%; and removal of a number of restrictions on outbound chartered flights, including those relating to frequency and size of aircraft. The government's recent decision to treat convention centres as part of core infrastructure, allowing the government to provide critical funding for the large capital investment that may be required has also fuelled the demand for hotel rooms.

The opening up of the aviation industry in India has exciting opportunities for hotel industry as it relies on airlines to transport 80% of international arrivals. The government's decision to substantially upgrade 28 regional airports in smaller towns and privatization & expansion of Delhi and Mumbai airport will improve the business prospects of hotel industry in India. Substantial investments in tourism infrastructure are essential for Indian hotel industry to achieve its potential. The upgrading of national highways connecting various parts of India has opened new avenues for the development of budget hotels in India. Taking advantage of this opportunity Tata group and another hotel chain called 'Homotel' have entered this business segment. According to a report, Hotel Industry in India currently has supply of 110,000 rooms and there is a shortage of 150,000 rooms fueling hotel room rates across India. According to estimates demand is going to exceed supply by at least 100% over the next 2 years. Five-star hotels in metro cities allot same room, more than once a day to different guests, receiving almost 24-hour rates from both guests against 6-8 hours usage. With demand-supply disparity, hotel rates in India are likely to rise by 25% annually and occupancy by 80%, over the next two years. This will affect the competitiveness of India as a cost- effective tourist destination. To overcome, this shortage Indian hotel industry is adding about 60,000 quality rooms, currently in different stages of planning and development, which should be ready by 2012. Hotel Industry in India is also set to get a fillip with Delhi hosting 2010 Commonwealth Games. Government has approved 300 hotel projects, nearly half of which are in the luxury range.

The future scenario of Indian hotel industry looks extremely rosy. It is expected that the budget and mid-market hotel segment will witness huge growth and expansion while the luxury segment will continue to perform extremely well over the next few years

A hotel is an establishment that provides paid lodging, usually on a short-term basis. Hotels often provide a number of additional guest services such as a restaurant, a swimming pool or childcare. Some hotels have conference services and meeting rooms and encourage groups to hold conventions and meetings at their location.

Some of the main features of the Indian hotel industry include the following: The industry is more dependent on metropolitan cities as they account for 75% to 80% of the revenues, with Delhi and Mumbai being on top. The average room rate (ARR) and occupancy rate (OC) are the two most critical factors that determine profitability. ARR depends on location, brand image, star rating, quality of facilities and services offered. The occupancy rate depends on other seasonal factors. India is an ideal destination for tourists. Approximately 4.4 million tourists visit India every year. Thus the growth prospects are very high. In the hotel sector, a number of multinationals have strengthened their presence. Players like Four Seasons are also likely to enter the Indian market in the near future. Moreover, Indian hotel chains are also expanding internationally. A combination of all these factors could result in a strong emergence of budget hotels, which could potentially lower the cost of travel and related costs.

Mumbai NCR Bangalore Pune Chennai Hyderabad Goa Kolkata

Current estimated supply ~10,400 ~14,000 ~4,900 ~3,700 ~3,100 ~3,800 ~4,000 ~1,700

Addition expected by 2015-16 ~4,000 Over ~5,000 ~3,700 ~1,000 ~3,300 ~2,500 ~500 ~3,000

Various reputed Domestic and International hotels

Brands present in India Existing Planned hotels hotels (Est.) Group Marriott Courtyard, International Renai ssance, JW Marriott, Marriott, Marriott Hotels and Convention Hilton Hilton Hotels Centre, & & Worldwide Marriott Hilton Resorts, resort Garden Inn, Double Spa, Marriott Tree by Hilton, executive apartments Hampton by Hilton 18 ~80-100 2015 By Some of the development Expansion partners Category for India development agreement with market Unique SAMHI Hotels Private Across Mercantile India Private segments Limited-a Limited hotel and investment company New brands being launched in India Fairfield, Ritz

~50-60

2016

Eros Resorts & Hotels

Luxury/ premium and mid market

Accor Group Ibis, Mercure and Novotel

13

~90-100

2015

Choice Quality, Comfort, Hotels Clarion International Best Western, Best Best Western Western Plus international ITC luxury Collections, Starwood Le Meridian, Westin, Hotels Four Points by Sheraton, Sheraton Hotels & Resorts, Aloft Country Carlson Radisson Blu, group Inn & Suites, Park Inn, Park Plaza

27 34 33

~100 ~66 ~50-60

Next 5-7 yrs 2017 2015

46

Hyatt Hotels Hyatt Regency, Grand Corporation Hyatt, Park Hyatt

100 hotels (20% of the group's contracted pipeline) ~50

2015

Exclusive agreement with Interglobe Enterprises Limited (with equity infusion) for Ibis properties. Formule 1Indian properties to be Royal Raj owned by Accor. Non International exclusive (RIRIC) agreements Corporation with Shree Naman developers and Brigade Non-Exclusive Master group Agreement with D.I.H (Cyprus) Limited (an affiliate of Duet India Hotels Ltd.) and JHM Interstate Hotels Country India Pvt. Ltd, Jaguar Developmen Buildcon Privateand Limited t Management Services (CDMS), a joint venture between Carlson and Chanakya Hotels; Real estate firm Pioneer Urban Land and Infrastructure

Luxury, mid scale and budget

Hiltons full-service brands-Hilton and Double Tree, as well as its mid-market, focuse d-service Hilton Garden Inn and Hampton. The company1, also plans to Formule Sofitel and introduce its luxury Pullman Conrad and Waldorf Astoria brands

Mid market 3/ 4 and 5 star Across segments

Sleep Inn, Cambria Suites, Econo Lodge Best Premier St. Regis, W

Mid market and premium Premium

Regent

Hyatt Place, (extended stay)

Hyatt

House

Analysis on some Prominent and Prestigious Hotels

HOTEL LEELAVENTURES LIMITED

Revenue Growth Leela reported a healthy 27% growth in revenues during Q3, 2011-12 driven largely by inventory additions. The company added 260 rooms to its inventory in Q1, 2011-12 with the launch of its Chanakyapuri, New Delhi property. The RevPAR growth for the company across business as well as leisure destinations remained subdued.

Profitability

Leelas operating margins dropped during Q3,2011-12 to 18.9% in the absence of any meaningful traction in operating metrics while costs increased sharply on account of the newly launched Delhi property. The New Delhi property is in the initial stages of operations with less than one full year of operations. High interest costs on borrowings for the New Delhi hotel have led to heavy losses for the company during the the last three quarters.

Q3 FY11 Total Income Net Sales Growth (%) - YoY OPBDIT Less: Depreciation Less: Interest Charges Other Income Exceptional Gain/(Loss) PBT PAT OPBDIT/OI (%) PAT/OI (%) 142.3 -19% 55.6 12.2 20.1 5.3 28.6 22.0 39.1% 15.5%

Q3 FY12 178.4 27% 33.7 25.1 111.6 3.4 (99.7) (99.7) 18.9% -55.9%

Q2 FY12 127.9 23% 12.4 21.4 57.4 1.5 (64.9) (64.9) 9.7% -50.7%

Capex Leelas capex over the next year would be primarily towards the 326 room project at Chennai which is expected to be launched in 2013. The company has further plans to open new properties at Agra and Ashtamudi, Kerala. To support its severely strained balance sheet, the company sold its Kovalum property for Rs. 500 crore in August 2011. It would however continue to manage the hotel under a long

SWOT Analysis
Strengths Customer satisfaction strategies Technological prowess Well established brand Global presence Weakness Only serving the upscale market Threats Economic downturn competitors Opportunities Unexplored territories Globalization

Key Success Factors (KSFS)

Total customer satisfaction

Industry leading technology Brand value Global presence at convenient locations

Outlook Leelas growth going forward is expected to be derived from a mix of its business and leisure destinations. The new property in New Delhi provides the company with a presence in the national-capital- region. The current cash losses and stretched capital structure remains a concern. The board and its lenders have recently approved the restructuring of companys debt under the CDR mechanism. Under these circumstances the funding for the new projects could become challenging, however, steps such as the sale of the Kovalam hotel to raise funds is a positive. Furthermore the company also expects income from the sale of residential property in Bangalore. The company entered into a joint development agreement with Bangalore based Prestige Estate Projects Limited in July 2011 for the development of owned land adjacent to its luxuty property in Bangalore.

BUSINESS PROFILE

Hotel Leelaventure Limited, founded by Capt. C. P. Krishnan Nair and headquarters in Mumbai, owns the hotel chain The Leela Palaces, Hotels and Resorts which manages seven hotels in India with a total inventory of 1,869 keys including business hotels in Bangalore, Gurgaon, Mumbai, New Delhi and leisure properties in Goa, Kovalam and Udaipur. While the properties at Bangalore, Mumbai, New Delhi, Goa and Udaipur are owned by the company, Gurgaon is a management contract. The resort at Kovalam was also earlier owned by the company however it has been sold off in August 2011 while still remaining under a long term managmeent contract with Leela. Properties under development include Chennai followed by Agra, Jaipur and Ashtamudi, Kerala. The company is listed on the BSE and NSE with 56.6% shares still by promoter group.

The group has marketing alliances with US-based Preferred Hotels & Resorts and is a member of Global Hotel Alliance based in Switzerland. In February-12, Leela exited its 25 year alliance with Germany based Kempinski, intending to undertake its own distribution. Kempinski will still continue to mar ket Leela hotels till the earlier agreement of 2015-16. During 2010-11 the company reported a 17% growth in operating income to Rs. 525.8 crore with net profit of Rs. 37.8 crore.

Taj Groups Hotel

Revenue Growth TAJGVK reported a weak Q3, 2011-12 performance with revenues de-growing by 6% on account of falling occupancies and flat ARRs. The properties in Hyderabad were particularly impacted by the Telengana issue and intensified competition due to the supply overhang. Further competition for the company intensified in the hereto monopolistic Chandigarh market with the launch of the JW Marriott, effectively capping Taj Chandigarhs RevPARs.

Profitability With revenues shrinking and operating costs rising, a drop in operating margins was inevitable. The operating profits were further impacted by the pre-operative expenses for the 181 room Vivanta at Begumpet which was launched in Q3,2011-12. The operating profits of the company fell by 32% while operating margins contracted sharply to 28.6% from a healthy 39.6% in the corresponding period in the previous year. The companys current debt burden remains moderate leading to low interest expense. The drop in PAT was in tandem with the lower operating profits.
Q3 FY11 Total Income Net Sales Growth (%) - YoY OPBDIT Less: Depreciation Less: Interest Charges Other Income Exceptional Gain/(Loss) PBT PAT OPBDIT/OI (%) PAT/OI (%) 70.2 -31% 27.8 5.3 3.0 19.6 12.9 39.6% 18.4% Q3 FY12 66.3 -6% 18.9 5.6 4.0 9.3 6.1 28.6% 9.2% Q2 FY12 59.2 -2% 19.5 5.0 3.2 11.3 4.3 33.0% 7.3%

Capex The companys capex plans are focussed on ensuring both geographic as well as segmental diversification. New projects in the pipeline include a 275 room 5-StarD luxury property strategically located at the Mumbai domestic airport, expected to be launched by mid 2014. The company also proposes to enter the Bangalore market with a premium 150 room Vivanta at Yelahanka, Bangalore. It also intends to invest in consolidating its business in Hyderabad with the construction of banqueting and additional parking space at Taj Krishna. Further, in collaboration with its parent IHCL, the company is proposing to enter the budget segment through its maiden Ginger hotel near the International Airport in Shamshabad, Hyderabad. Expected to be launched in 2014, the 250 room Ginger hotel would widen TAJGVKs price point diversification in Hyderabad. TAJGVK enjoys the first right of refusal for owningGinger hotels in Andhra Pradesh and over the long term intends to own a majority of the Ginger properties in the state.

Taj Hotel established on December16, 1903 Taj Hotels resorts & places comprise 57 hotels in 40 locations across India. 18 International Hotels in the Malaysia,Australia.UK,USA,Sri lanka, Africa. Taj is recognised as the premier Hospitality provider. Innovator in dining:- Taj was the first to introduce thai,Italian ,Mexican into the country.

Marketing strategy A higher emphasis was placed on the business segment as the profits are higher (this market being less price-sensitive) as compared to the luxury segment. There was a proliferation of the Taj Presidency hotels not only in new cities, but also smaller towns. The action plan is more opportunities, adding to and complementing the brand.

Services Health & Fitness facility to its Guests. Latest cardio vascular machines, strength-training equipment. Spa also includes steam rooms & sauna, specialized treatment rooms. Swimming pool, Gardens, Waterfall The beauty salon of the Taj hotel offer a wide range of beauty and hair treatment for men &women.

SWOT Analysis
Strengths Brand loyalty

- urban Threats Fluctuations in international tourist arrivals

Opportunities

KSFs

Technology related:Used of advance technology in hotel premises.

Manufacturing- related: High utilization of fixed assets. Quality control know-how. Serving customer according to their specification.

Distribution-related:Presence of hotel chain at various places. A strong network.

Marketing related: Breadth of product line and product selection. Personalized customer services. A well-known and well-respected brand name.

Outlook While the company has a strong position in the Hyderabad premium market with four properties in the Banjara Hills area, it has over the years reduced its dependence on the market-diversifing to Chennai and Chandigarh. Going forward, the company intends to diversify into the Bangalore and Mumbai markets while strengthening its Hyderabad foothold. Growth going forward would hence be driven both by accretion to inventory and improving operating metrics.

BUSINESS PROFILE Incorporated in 2000, TAJGVK Hotels & Resorts Limited (TAJGVK) is a joint venture between Indian Hotels Company Limited (IHCL) and the Hyderabad based GVK Group. IHCL holds 25.5% stake in TAJGVK while the GVK group holds 49.5% stake; the balance is held by the public. TAJGVK currently has six 5-star/D properties with a cumulative inventory of 1,083 rooms. Of these four 5-star hotel properties are located in Hyderabad - an inventory of 717 rooms, viz. Taj Krishna, Taj Deccan, Taj Banjara and Vivanta by Taj Begumpet. The company also owns a 150 room hotel in Chandigarh (Taj Chandigarh) and a 220 room property in Chennai (Taj Club House) which opened in December 2008. The most recent addition to the inventory is the 181 key Vivanta at Begumpet launched in Q3,2011-12. During 2011-12 the company reported a 14% growth in operating income to Rs. 260.7 crore with net profits of Rs. 43.3 crore.

Oberoi hotels

Revenue Growth EIH, at the standalone level, reported a subdued 5% y-o-y growth in revenues for Q3, 201112 in the absence of any room additions, a marginal improvement in RevPARs across its key hotels. The muted revenue growth remains largely in line with the industry trends with several hoteliers indicating an inability to increase rates owing to the uncertain economic environment in general and oversupply situation in a few markets

Profitability Sluggish revenue growth overlaid with inflated operating costs eroded margins. With operating expenses growing in the range of 6-13% and revenues by 5%, operating profits declined by 3% while margins declined by 230 bps to 32.4%, again largely in line with the industry trend. However, with the company having retired a large chunk of its debt utilizing funds raised from a rights issue in March 2011, a sharp fall in interest expense has boosted PAT margins which improved to 13.5%.

(Standalone) Total Income Net Sales Growth (%) - YoY OPBDIT Less: Depreciation Less: Interest Charges Other Income Exceptional Gain/(Loss) PBT PAT OPBDIT/OI (%) PAT/OI (%)

Q3 FY11 301.1 27% 104.6 22.2 40.3 0.9 43.0 28.4 34.7% 9.4%

Q3 FY12 313.8 5% 101.6 23.6 11.6 0.7 67.2 42.3 32.4% 13.5%

Q2 FY12 237.2 9% 29.4 23.7 11.9 9.7 11.2 14.7 16.6 12.4% 7.0%

Capex Over the next 2-3 years the company expects majority of the new hotel additions to take place through the management contracts route. The company proposes to invest in owned properties on land parcels it owns in Goa and Bangalore. At Goa, EIH owns a 55 acre beach front site on which the company proposes to set up a luxury hotel while at Bangalore it is planning a 250 room luxury propery with 65 luxury branded residences.

SWOT Analysis Strengths

Cost advantage Effective communication Innovation Loyal customers Market share leadership Strong management team

Weaknesses
Diseconomies to scale Not diversified Poor supply chain Weak real estate

Opportunities
Acquisitions Emerging markets and expansion abroad Product and services expansion Takeovers

Threats
Competition Exchange rate fluctuations Price wars

Outlook EIHs revenues growth over the medium term would remain restricted in the absence of any major owned inventory additon, howev er inventory would be added under margin accretive management contracts. Further, the current improvement in capital structure is expected to enable the company to comfortably fund its upcoming Bangalore and Goa projects.

BUSINESS PROFILE EIH Limited, founded in 1949 by Mr. P.R.S Oberoi, is the third largest hospitality company in India after Indian Hotels Company Limited and the ITC Welcome Group. It is the flagship company of the 1934 founded Oberoi Group which owns/manages luxury hotels across five countries under The Oberoi brand in the 5-star Deluxe category and the Trident brand in the 5-star category. EIH has a portfolio of 24 luxury hotels with an inventory of 3,721 rooms (March-11), three luxury cruises, Oberoi printing press and Oberoi Flight Services (a division that provides commercial in-flight catering and operates airport lounges and restaurants in India, Mauritius, Egypt and Indonesia). EIHs associated businesses include Mercury Car Rentals for car rental operations, Corporate Air Charters and Mercury Travels for travel agency operations. The promoter group holds 34.9% stake in the company. EIH Limited is listed on the BSE and NSE in India. During 2010-11 the company reported a 24% growth in operating income to Rs. 1,288.0 at the consolidated level with net loss (after minority interest) of Rs. 5.2 crore. The same at the standalone level stood at Rs. 1,044.6 crore and a profit of Rs. 64.5 crore.

Facts And Figures

The current scenario Existing hotel rooms in India: 202,963, source FHRAI Revenue of the Indian hotel industry FY 2007-08: INR 38,558 crore 30% of this revenue i.e. INR 11,567.4 crore went back into the market in FY 2008-09 as operating expenses

Number of hotels and restaurants in India: Hotel category No. of Hotels No. of Rooms 5 star deluxe/5 star 165 43, 965 4 Star 134 20, 770 3 Star 505 30,100 2 Star 495 22,950 1 Star 260 10,900 Heritage 70 4,200 Uncategorised 7,078 Total 8,707 1,32,885 Restaurants 12,750

Emerging trends in Indian hospitality industry

The Indian Hospitality sector is expected to show a healthy growth in the medium term. Strong economic growth, increased FDI, greater emphasis on tourism development, favorable Government policies, impending 2010 Commonwealth games, 2011 Cricket World Cup and other international events, will be the major drivers for the growth. There exists a lot of scope for growth in tourism sector. According to the Ministry of Tourism, the contribution of tourism to Indias GDP is only 5.9 per cent as compared to the worldwide average of 11 per cent. By 2020, the Government of India expects travel and tourism to contribute Rs 8,500 billion to GDP, almost four times the value in 2005. With successive Governments committed to reform, a strong manufacturing sector and a private sector that already has a critical mass that is needed to drive growth, it is unlikely that the strong growth in GDP is likely to be reversed. The rising middle class is also becoming increasingly affluent, mobile, Internet savvy and more sophisticated in terms of what is demanded in terms of tourism products and services, and more importantly the price they are willing to pay for it.

Entry of international brands through joint ventures and tie-ups is likely to enhance the service levels and will narrow demand-supply gap of rooms. But ICRA expects the shortage in rooms to remain for next five years leading to higher occupancy levels and increase in Average Room Rates (ARR). Currently, according to industry estimates, there are only 1,05,000 hotel rooms in India while in China the figure is much higher at 7,65,000 rooms. The annual growth rate of hotel rooms in India is only 6 per cent, compared to 22 per cent in China, 18 per cent in Thailand and 15 per cent in Malaysia.

Economic growth in tier II and tier III cities have put these on the hospitality industry map. ARR are likely to harden in these cities in next 2-3 years due to shortage of room. Niche areas like health tourism and spiritual tourism are emerging as lucrative business opportunity for the industry. The overall buoyancy in the market is attracting increased interest from investors and higher inflow of capital in the industry is expected. The growth for hotels is also likely to come from proliferation of Special Economic Zones.

Major impediments to the growth are sensitivity to business cycles and adverse political and social events (including terrorist attacks), high rate of tax, high land price, bureaucracy, and poor infrastructure. For instance, the effective rate of taxation on tourism in India is 21 per cent as compared to 7 per cent in Thailand, 4 per cent in Malaysia and 1 per cent in Hong Kong. Furthermore, owing to high land prices, there are more five star hotels than budget hotels, making India a high cost deluxe destination. Additionally, India still does not have facility of modernised evisa. The existing visa process is cumbersome and comparatively more expensive than other destinations. Yields are expected to be low in coming years on account of continuing price-cutting and discounts.

The Government is planning to grant infrastructure status to all budget hotels and convention centres set up in Delhi and National Capital Region till 2010 Commonwealth Games. This will enable them to enjoy a 10 year tax holiday as in case of other infrastructure projects such as roads, ports and power.

Emerging hotel concept in India Projected investments years 2009-015 Rooms being built across hotel categories: 114,000, source HVS Investment in rupees: INR 40,463.10

Conclusion and Recommendations

The outlook for the hospitality market in India is optimistic and will continue to remain so, in our opinion. The economys buoyancy, initiatives to improve infrastructure, growth in the aviation and real estate sectors and easing of restrictions on foreign investment will fuel demand for hotels across star categories in the majority of markets. Indias hotel industry is increasingly being viewed as investment-worthy, both within the country and outside, and several international chains are keen to establish or enhance their presence here. We anticipate that, over the next three to five years, India will emerge as one of the worlds fastest growing tourism markets and will be hard to ignore.

Recommendations
Tie -up / arrangement for their required human resources with one or two hospitality institutes in the country.

in the organization. When they have a tie up with the institutes, the institutes will offer in house training to different category of employees from time to time to update their skills.

institute for their betterment. If possible the sponsor a chair for continuous funding and research for that institute.

further development and understand the present situation. The industry should involve in the researchers by providing timely information and data which is ultimately useful for them only.