World facing 4 Grey Swans: WPP CEO Sir Martin Sorrell

My colleague Nupur Anand co-authored this story appearing in DNA Money edition on Saturday, November 24, 2012.

Sir Martin Sorrell, CEO of WPP, the marketing communications giant, says global companies are sitting on as much as $2 trillion (Rs 11 lakh crore) cash instead of spending because of an overwhelming sense of caution.

As a result, their focus has shifted to the very short-term, quarter-on-quarter, instead of a year or more, he said at an event on ‘How the world views India — opportunities and challenges, 2013 and beyond’ organised by the Bombay Chamber of Commerce and Industry on Friday evening.

The ad maven predicted 2013 will be a difficult year with not many significant events scheduled. “2014 looks better with big events happening including in Russia and Brazil,” he said.

According to him, there are four potential Grey Swan events facing the globe: the euro zone crisis, the Middle East crisis, the repercussions of change of guard in China and America’s gargantuan debt burden.

The economic / financial crisis in euro zone has shifted attention to BRIC countries primarily India because it is witnessing better growth, increased levels of success and lots of smiling faces, though politically, it’s a minefield, while the Middle East has become totally unpredictable, he said.

In China, the new leadership’s strong message on corruption has instilled great confidence, he said. “Within two years, major changes are expected there,” he said. 

Lastly, with $16 trillion debt, Sorrell doesn’t know what is really happening in America. “The new administration will have to get its act together fast. And they can’t keep ignoring the Gorilla in the room. There has been significant erosion in confidence, and most companies have missed their topline forecasts earlier. The post-October period is looking better, though,” he said.

Meantime, Sorrell said India remains better placed than other nations because of easy accessibility, increased growth, success rate and smiling faces.

“India is a vital destination, more important than other countries because the access to companies here is significantly easier compared with many other nations. Populous, rapidly growing countries like India will contribute to global growth,” he said.

Sorrell said today India has a series of successful companies and a good number of big names globally are Indian – praising what Tata Motors did with Jaguar Land Rover or what Mahindras, Ambanis, Mittals have done.

“However, I find visits to India very disturbing. The abject poverty outside the pristine campuses in Bangalore is unnerving at a mental, psychological and emotional level. In fact, this is the reason why I like going to China more. It is not that there is no poverty in China but just that they have done a better job at concealing it with the investments in infrastructure,” he said.

Cipla to take reins of South Africa firm

This story first appeared in DNA Money edition on Thursday, Nov 22, 2012.

Cipla has offered to acquire a 51% stake in Johannesburg Stock Exchange-listed Cipla Medpro South Africa Ltd, which has been marketing its products in the region. The offer price of 8.55 rand per share, an 11% premium on Cipla Medpro’s closing share price on Tuesday, takes the overall deal value to $220 million.

Cipla Medpro, the third-largest pharmaceutical player in South Africa, sources almost 80% of its products from Cipla and has been a sort of captive front end for Cipla. It has a turnover of over $200 million, according to S Radhakrishnan, wholetime director of Cipla Ltd.

However, the Mumbai-based company does not own any stake in Cipla Medpro as of now. Radhakrishnan said discussions between the two companies have been on for a while. 

Analysts lauded the move as a strategic one, which would give Cipla long-term rather than short-term benefits.

"My understanding is that the acquisition may not necessarily be earnings per share (EPS) accretive. If one draws a parallel between revenues from Cipla’s Africa business and Cipla Medpro’s South Africa business and then compares it with the overall acquisition cost, its impact on Cipla’s EPS is just about 60 paise, which is not very huge. So what Cipla is primarily buying into is Cipla Medpro’s distribution strength in South Africa as part of a forward integration process. Besides, this acquisition will also help Cipla cut costs significantly,” said an analyst with a top domestic brokerage, requesting anonymity.

Cipla plans to fund the deal through internal accruals. 

The management is open to more such opportunities, said Radhakrishnan. “At the moment, there is nothing specific on the anvil. However, from a business prospective, we are open to doing what is required for the company’s growth.”

A Reuters report said the agreement was spearheaded by Cipla Medpro’s founder and former chief executive, Jerome Smith, who quit last month following charges of ‘gross misconduct’. There was speculation in the market that Smith’s departure could impact Cipla Medpro’s relationship with the Indian company.

Radhakrishnan, however, denied the events were connected.

StrawberryFrog brings its 'cultural movement' to India

This story first appeared in DNA Money edition on Wednesday, Nov 21, 2012.

New York-based StrawberryFrog, which prouds itself as the world's first ‘cultural movement’ creative agency, has set foot in to the Indian market. Founded in Amsterdam in 1999 by Swede Karin Drakenberg and Scott Goodson, the India operations of StrawberryFrog will be headed by Raj Kamble who joins the agency as managing partner.

Kamble was earlier associated with BBH India, the UK-based Bartle Bogle Hegarty (BBH) Network's Indian arm. He moved out of BBH India in January 2012.

Specialising in devising movement strategies and programmes for its clients, Scott Goodson, founder and chairman, StrawberryFrog, believes now is the perfect time to come to India and take that leap — akin to a frog that can leap 60 times its height.

Interestingly, StrawberryFrog is the rarest frog in the world and comes from South America. Being a poisonous frog, the agency’s briefs, Scott said, always look for the most effective poison.

“StrawberryFrog has a culture of collaboration, fun and agility and jugad. India is a very important market for a host of international brands. Besides, a lot of Indian brands / companies are globalising and expanding across the world. I think this is just the perfect time to come to India and open up an alternative global marketing company,” said Goodson. Among the agency’s clientele include names like Mahindra & Mahindra, Google, Microsoft, P&G, Emirates, LG etc.

In addition to his role as global chairman of StrawberryFrog, Goodson recently published a new best-selling book ‘Uprising’. He has also been on the Cannes Titanium jury and writes for Harvard Business Review (HBR), Forbes, Huffington Post and Fast Company.

Elucidating on the agency’s cultural movement strategy, Scott said, the traditional advertising was primarily based on a model of providing marketing messages through television. “That’s changing. If you have a 16 year or 20 year old daughter or son, you realise there are other channels of communication that are equally important if not more important. In the United States there were soap operas, which were TV programmes created by advertisers of soap because women / mothers would watch it. All those shows disappeared about three years ago because mothers in the US (with an average age of around 24) no longer watched television,” said Goodson.

With new media especially digital and internet making a huge impact on the consumer behaviour / perception about a company or a product, Scott feels it is very important to tap each and every medium, build a movement through universal messages and create communities that will also connect with products and services being offered.

“No one wants to live in a smaller world today. Everyone wants to be in a connected world inspired with ideas, progressive dynamic thinking, they want to be alive. People are defocusing from the TV medium and a large part of the consuming population is online on Facebook etc. So how do you device a marketing strategy that’s coherent at a time when media is becoming so fragmented.

“A movement marketing strategy is all about finding an idea on a rising culture that is relevant to a wider audience across the span consuming your product. And once that’s done, you tie that idea back to the brand which then becomes central to that movement. Brands can identify, crystalise, curate, lead and sponsor a mass movement. Once you have a movement, you can do anything in a fragmented media environment,” said Goodson.

StrawberryFrog’s Indian arm is expected to get fully operational by the end of this month i.e. November 2012. While the company has already hired respective operational heads, Kamble refrained from sharing details saying, “We have some people on board but cannot disclose at this stage.” On the agency’s media strategy in terms of planning, buying etc Kamble said, “To be honest we haven’t figured that out yet.”

Talking about how has the agency dealt with this aspect of business in the past, Goodson said, “We generally work with partners and that’s what we are looking to do in India as well. Many clients have their own relationships so you can either plug into them or if they don’t then we can bring a partner and work with them.”

Indian Hotels going the asset-light way?

Business Editor Raj Nambisan is the lead writer of this story appearing in DNA Money edition on Wednesday, Nov 21, 2012.

Indian Hotels Company Ltd, which runs the Taj Group of Hotels, is altering its business model, according to people familiar with the development.

Till now, the country’s largest hospitality chain has been constructing hotel projects itself, which often leads to cost over-runs and clogged finances.

Under a new model, all hotel projects of the company will be executed by Tata Realty & Infrastructure Ltd (TRIL), while IHCL will manage them, one person said.

TRIL has already entered into an agreement with IHCL on this, another person said, adding the company has taken over -- or is in the process of doing so --three projects.

Officials of both Indian Hotels and TRIL refused to comment.

The Tata hospitality jewel has been financially stressed, posting net losses for the last four quarters. In July-September, the company reported a net loss of Rs67.82 crore on a net sales of Rs813.80 crore as against a net loss of Rs52.59 crore (on net sales of Rs743.86 crore) in the corresponding period last year.

The company owns and manages 115 hotels with 13,887 guestrooms under the Taj, Vivanta, Gateway and Ginger (through subsidiary Roots Corp Ltd) brands.

Traditionally, ownership and managing the operations (or management) are the obverse and reverse of the hotel business.

When management gets separated from ownership, it takes out all hotel assets from a company’s books but there is little clarity on whether IHCL will go the full tilt on this path – of spinning off the ownership of other properties that it already owns, especially marquee estates such as the Taj Mahal at Gateway of India.

An analyst with an audit firm, who did not want to be named since he’s not authorised to speak to the media, said a spinoff significantly enhances valuations and shareholder value. It also brings in efficiency with respect to taxation and better profitability.
IHCL has often talked about going asset-light.

"I am not at all surprised if the Tatas are thinking on those lines. While there aren’t too many examples to cite in the Indian hospitality market, that’s exactly how international players -- be it Marriott, Starwood or Hilton -- have restructured to become a pure-play hotel management companies," said a top hotelier also requesting anonymity.

In a similar exercise early this year, the Warburg Pincus-funded Lemon Tree Hotels separated ownership and management. The Patu Keswani-promoted entity then went on to also set up a third-party hotel management company and introduce new hospitality brands.

'Green buildings will be ubiquitous in a decade'

An edited version of this Q&A first appeared in DNA Money edition on Tuesday, November 20, 2012.

Phillip Bernstein

A green building is one which uses less water, optimises energy efficiency, conserves natural resources, generates less waste and provides healthier spaces for occupants, as compared to a conventional building. Phillip G Bernstein, vice president - Industry Strategy and Relations, Autodesk Architecture, Engineering & Construction (AEC) Solutions, delves into the concept of green buildings and its significance in creating a sustainable living environment. Edited excerpts...

Could you throw some light on the green building concept? How has is really evolved over the years?

It’s a great question. I am an architect and I practiced for a long time before joining Autodesk. When I was a student in the late 70s or nearly 80s, we had just come out of big energy crisis. What was called green building back then used to be solar architecture. It was about trying to make buildings use energy more efficiently and that’s all anybody cared about. However, as soon as gas prices went down the whole idea disappeared.

I was talking to one of my professors about the question of solar architecture and I asked him if it was important. He said No, it’s just pluming and that doesn’t mean anything. That was 30 years ago.

Now we have this green building movement, which is about building real estate. While architecture is a cultural phenomenon the green building movement is all about growing awareness of the responsibility of the things that we make and how they affect the environment.

How is the concept different today and what will it be like a decade or so from now?

A lot of real estate developers would talk about green as a marketing idea or something they are being forced to do that cost them extra money. We are in this middle period, where we are trying to think, fighting among ourselves whether it’s important. I think in the third period, which is probably going to start 10 years from now and going forward it will not just be a discussion but a basic part of how buildings should be built.

For example, back in the 1920s in the United States, when building industry was evolving after the civil war the idea of making a building safe for its occupants was optional. It wasn’t required by the law, it wasn’t the part of the regular working or part of the process. Then there was a terrible fire in New York where hundreds of people were killed in a factory. And suddenly the idea of life safety became part of architects and engineers and builders.

We don’t talk about it, you don’t hear a developer ever say you know I am not going to put those sprinklers in that building because it’s going to cost too much or I am not going to build those fire stairs because they are too expensive or I am not going to put any emergency lighting because that costs me too much money. It’s just what we do now and green buildings are going to become what we would basically do to build these structures.

Has global warming necessitated the concept of green buildings?

I live in New York, my house is surrounded with trees and the city is flooded... It’s all global warming, climate change causes it, there’s too much energy in the atmosphere. That energy is caused by solar radiation being trapped in the energy by carbon. Buildings produce 40% of the carbon that we put into the atmosphere, it’s as simple as that. Buildings consume most of the electricity produced, most of the carbon and use most of the water that we use. It’s not optional.

My recent discussion at a green building summit in Hyderabad was if your obligation is to predict the things affecting the environment when making a building or a highway or waste water treatment plant or an airport the best way to do that prediction is to create a digital prototype and test it in digital format first. And that’s not what we do what we do as architects and engineers is make diagrams, then we speculate and we do very quick analysis and what we can do with computer is actually predict what is going to happen.

Are people really taking it up? Is it very specific to developed economies?

It's starting to happen. It’s much better understood concept in the markets where we see deeper penetration towards technology like US, UK, Australia, Singapore etc, so we are getting there. I’ll give you an example, in the UK when the government changed last year, the new prime minister said we are going to a net zero carbon economy. Meaning buildings are no longer going to contribute carbon to the environment and he assigned his bureaucracy the problem of figuring it out how to do this.

One of the things happening in Britain in the following years is the government is now requiring that all government buildings be designed using digital models instead of drawings. So we are going to get the building industry to net zero and use advance technology to do it. They are studying the technology, they are training, they are experimenting, they are writing standards and they are making the change.

So unless it made mandatory by government, it won't be take seriously?

Ultimately it has to be, as those government regulations are manifestations of social desire. In India, I was told at the recent green building conference in Hyderabad, over 60% of the buildings are going to be built in the next 30 years. What it means is that 60% of all the buildings that will exist in India 30 years from now, have not been started yet. These buildings will generate huge amount of carbon, consume huge amount of building materials and huge amount of water. Would you really go about building such kind of infrastructure, without thinking about the effect on the environment? Doesn’t make any sense right?

So the question is what’s the strategy? I watch my colleagues from the Indian green building community trying to figure it out what they need to focus on, they trying to decide and it’s because the opportunity is amiss. And it’s a question of picking the things which they think can be most effective. I do believe that no matter what they decide to do, modernising the methods of the construction industry which includes using advanced digital technology, which is not a new idea.

What are the elements that make for a green building?

The essence of a green building is one that has a minimum amount of impact on the environment and has responsible relation to the environment. Buildings are enormously complex and the process of building them is enormously wasteful. They use huge amount of energy and they produce huge amount of carbon and so a net zero carbon building is one that the design and construction strategy is such that the building does not consume any energy after everything is set and done.

Is doing a green building more costly?

No, not necessarily. What I am saying is, they’ll do what the model says they are being driven to do. They are not going to come here and do out of the goodness in their hearts.  So I build a building which makes a small incremental investment in the infrastructure of a green building. But you would reap the better fruits over the life of the building.

How effective is Indian Green Building Council (IGBC)?

They have done a good job. I think they are just on the cusp of really getting this thing going. They claim they have got 1.26 billion square feet of green building area which sounds impressive and at one level it is. But it’s only couple of 1,000 buildings. They still have to go a long way considering the numbers of building that will be built in the coming years.

'Home buyers can clearly discriminate between credible and non-credible supply'

Abhisheck Lodha

Abhisheck Lodha, managing director of Lodha Group, which is coming up with several premium realty projects in Mumbai, feels the fall in interest rates is set to give a fillip to the sector. He said the credible and non-credible supply of real estate developments need to be looked at separately. He spoke about the market scenario and his company's plans. Excerpts from the interview:

What is your view on the current demand scenario, particularly in the premium segment which constitutes majority of your realty development portfolio?

The market is quite broad and demand is very strong for apartments / properties in the Rs 50 lakh to Rs 5 crore range. Unfortunately, majority of the discussions we get to hear these days is about piling up of supply and how inventory is not selling. What needs to be taken into consideration is that the home buyers can clearly discriminate between credible and non-credible supply. So lack of sales in the non-credible supply is clubbed with sales in the credible supply, but these are two different demands and markets.

Borrowing costs are still on the higher side for the home buyer though...

Some banks have announced interest rate cuts for mortgage financing in the recent past which is a good development for the industry. For the first time in the last two years, we are seeing single-digit interest rates and that's a very strong psychological effect. Overall, the rates are showing signs of coming down as there is a lack of credit uptake in the economy. Housing mortgaging is a long-term safe sector and no bank has ever lost money lending and non-performing assets are barely 0.1% to 0.3%. Banks will be more focused towards mortgage lending, which is good for the sector.

Do buyers in the Rs 3-5 crore range really find these 0.25% to 0.5% reduction exciting enough?

In absolute terms, a reduction of that kind may really not make much of a difference. But if you keep adding the percentage point reductions over a period of time, it is certainly exciting on a cumulative basis. Just two months ago, cheapest mortgage was available at 11% and the rate being talked about currently is 9.5% or so. Now a reduction of almost 1.5% in interest rates certainly makes a lot of sense.

How is the New Cuffe Parade development shaping up?

New Cuffe Parade is a neighbourhood and will develop over time with very unique offerings. We have already launched two developments there and a 63-storied third project was recently launched wherein we roped in UK-based Yoo Ltd to design, brand and market it. The development will have a mix of all the best that the world has to offer. We will keep striving to make sure that the new city centre has everything in terms of design, services and facilities that a project like that should offer. We have already sold more than 70% of the first two towers that were launched in the market.

What is the profile of buyers at your properties? Do you also get a lot of overseas buyers?

While there are people from outside India who have taken interest in this development, majority are domestic buyers. As a company we want to cater to the requirements of people of India, people with really good taste and desire for quality real estate developments. I strongly believe that our own people should be occupants of these apartments. Our developments are planned for the end-users residing in India.

The Indian rupee has depreciated against the US dollar and that appears to be presenting a huge opportunity for international buyers...

We always get such buyers for our developments, but that's just about 10-15% of the overall customer base. It's not very significant. Besides, it is very likely that the rupee could get stronger against the US dollar too, so it may not prove to be such an attractive opportunity then.

With the DLF land parcel acquisition completed, what are your plans for it?

It will be a separate residential project as all the related permissions are in place. I really cannot share details about it at this stage.

HDIL seen monetising 2 million sq ft TDRs

This story first appeared in DNA Money edition on Wednesday, Nov 14, 2012.

Housing Development & Infrastructure Ltd (HDIL) is likely to see a major contribution from TDR (transfer of development rights) business to its revenues in the second half of this fiscal.

Currently, the TDR market is sluggish due to a slow pick-up in construction activity and slower TDR generation, but analysts expect revival in both demand and generation in H2.

“Though construction and sales activities have remained sluggish in Mumbai even after the new development control rules norms, we expect a revival in TDR demand and generation in the next few quarters. We believe with HDIL’s Kurla project getting conversion approval from commercial to residential project, around 2 million sq ft of TDR will get generated and monetised in H2. Further, any revival of the Mumbai International Airport Ltd project would also be the key trigger for TDR generation,” said Shaleen Silori, research analyst, ICICI Securities in a recent note on the company.

The Mumbai-based realtor’s entire sales during the September quarter were from floor space index (FSI) sale of around 2.4 million square feet in Virar, a Mumbai suburb, which helped the company to post a 52% rise in net profit for the quarter at Rs 158.56 crore.

Sarang Wadhawan, vice chairman and managing director, HDIL, said the company’s focus continues to be on project execution and debt reduction. “We expect positive and robust growth in the future quarters as well,” said Wadhawan.

HDIL had launched two new projects of around 1.4 million sq ft in the second quarter and added 16 million sq ft project in Virar, which, analysts said, would enable further FSI sales in the coming quarters.

“The realtor’s strategy of deleveraging its balance sheet through FSI / asset sales augurs well. The company is targeting sales of around 1.5 million sq ft – 2 million sq ft per quarter going forward with realisation of over Rs 1,000 per sq ft,” said Silori.

The analyst said that HDIL’s project execution remains steady with four developments expected to achieve completion this fiscal, exerting a positive impact on the profit & loss account during the second half. “This would keep the earnings buoyant,” the analyst said.

HDIL’s gross debt currently stands at Rs4,030 crore, which is down Rs71 crore from the June quarter. The company is expected to repay around Rs600 crore of debt by the end of this fiscal.

DLF net profit plunges 63%

This story first appeared in DNA Money edition on Tuesday, Nov 13, 2012.

DLF Ltd, India’s largest realtor, disappointed Street by posting significant decline in consolidated profit after tax (PAT) for the second quarter. Net profit fell a whopping 63% to Rs138.51 crore compared with analyst expectations of Rs295.9 crore, which, in itself, was a decline of 20.9% on-year.

DLF’s consolidated net profit in the second quarter stood at Rs372.41 crore. On a standalone basis, the realtor registered a net loss of Rs19.54 crore in the quarter, compared with a net profit of Rs302.57 crore in the same period last year.

DLF officials were not available for a comment, nor did the company website detail the accounts at the time of going to press.
Overall income from operations (sales and other receipts) declined a little over 19% to Rs2,039.54 crore against Rs2,532.41 crore on-year previously.

Realty sector analysts said while decline in home sales appears to be the key reason behind the lower profitability, margin pressure could also another key reason. “Their margins have come down to 36% compared with 40-45% earlier. This could also be due to increase in costs,” said an analyst requesting not to be quoted because he hadn’t dissected the numbers till late Monday evening.

Reforms, rupee set Deal Street on fire

This story first appeared in DNA Money edition on Monday, Nov 12, 2012.

The Deal Street has suddenly come alive.

Twenty-seven merger and acquisitions (M&A) were struck in the first nine days of November as compared to about 50 for the entire October. What has changed for the deal makers to shake off the somnolence of the last two years?

Experts said though overall business environment hasn’t changed much, a slew ofreforms by the government since September is leading the companies to bet on a rosy future. 
Vikram Hosangdy, partner — M&A, KPMG India, said, “Sentiment had deteriorated significantly in the September quarter and now most people believe we are at the bottom of the slowdown with a sharp lowering of interest rates seen from January 2013.”

A range of reforms around foreign direct investment as well as the Shome Committee’s stance on tax regulations have improved deal making sentiments, especially on inbound transactions, Raja Lahiri, partner - transaction advisory services, Grant Thornton India LLP, said.

With the western economies in shambles, assets are available there at cheap valuations and a sudden surge in rupee has dramatically reduced costs for overseas acquisitions.
“Outbound transactions like Rain Commodities buying Ruetgers, Infosys snapping up Lodestone and the Sun Pharma’s Dusa deal will continue as long as there is a strategic fit and valuations are reasonable,” said Lahiri.

Though it is rising, the rupee is still comparatively weak against the dollar, which makes Indian assets also cheaper for foreign buyers, said Rajeev Kakkad, associate director, Protiviti Consulting.

Most of the deals are happening in the $25-100 million range mostly in pharma, manufacturing, services, industrials and consumer sectors. However, deals are still taking a longer 6-8 months for getting finalised compared with 3-4 months seen in the peak times.

Experts see the trend continuing and valuations staying high as there are more buyers than sellers. A lot of Indian companies are sitting on huge cash reserves and are actively pursing opportunistic acquisitions in international markets, they said.

Diversifying their businesses for forward or backward integration and expanding presence outside India appear to be major drivers. 
“Many large India groups believe this is a very good time to buy in Europe and US,” said Hosangdy.

And Indian financial services firms, too, are at the forefront of the deal making activity. JM Financial has advised on four large transactions including the $2.1 billion acquisition of a majority stake in United Spirits by Diageo. It was also the sole financial advisor to Wipro for demerger of its diversified businesses.

Indian Hotels may sweeten offer for Orient-Express

This story first appeared in DNA Money edition on Saturday, Nov 10, 2012.

Indian Hotels Co Ltd is expected to sweeten its offer to take over Orient-Express Hotels at a 40% premium after the New York Stock Exchange-listed global luxury hotels operator turned it down on Thursday.

The Tata group hospitality flagship and its partner Montezemolo & Partners, which is backed by Ferrari chairman, are mulling their next move after OEH thwarted the bid saying it undervalued the company.

Will it be a new offer with more premium, a hostile takeover or will IHCL drop the bid altogether, move on and focus on optimising its revenues which are under pressure?

Experts feel the Indian company would opt for the first.

Kaushik Vardharajan, managing director, HVS Global Hospitality Services - India, a hospitality consultant, sees OEH as a larger strategic fit and the easiest way for IHCL to expand in the global hospitality market. “If you look at the previous offer, it was significantly higher than the current share price as market conditions were different then. IHCL certainly can hike the offer,” he said.

This is the second time OEH board has rebuffed IHCL’s proposal and an increased offer will give out a message to the shareholders that the Indian company is very serious about its intent, he said.

“OEH is still at a very attractive valuation,” said Siddhartha Khemka, equity research analyst at Centrum Broking.

It is, however, not clear how much more can IHCL offer.

“They still have some room to increase the offer and can hike it by another 20%,” said a top hotelier.

Experts feel IHCL should hike the offer and see how the OEH board reacts.

“I don’t understand on what basis OEH called it an undervalued offer because IHCL offered a significantly higher price than OEH’s market value,” said a top hospitality consultant. “Their stock price has fallen so much from the peak and any increase of late is purely because of IHCL’s offer. IHCL made a great offer especially when the overall economic environment is not very conducive for OEH’s business. It will take OEH at least a couple of years if not more to stabilise.”

In case IHCL hikes the offer, experts said, the OEH board will have tough time explaining shareholders why it should not be lapped up.

“The US and Europe markets are still reeling under pressure and turning around business in a short span will be a tough task. IHCL will get support from OEH shareholders given its intention to reward the shareholders in such stressed market conditions,” said a top hospitality consultant.

Also, more suitors may pop up and jack up the bidding price.

“It is quite possible that private equity players like Blackstone or some other entity sitting on huge investable cash could make a counter offer. If that happens, acquiring OEH will become a very expensive affair for IHCL,” said a top official from an investment advisory.

Indian Hotels delivers a minor loss

This story first appeared in DNA Money edition on Wednesday, Nov 7, 2012.

Indian Hotels Company Limited (IHCL), the Tata group hospitality flagship, will expand its room capacity by almost 11% next fiscal with the addition of 13 hotels. Over 1,500 guest rooms are to swell its global portfolio of 13,887 rooms in 115 hotels.

The additions will be made through a mix of management contracts and new developments (to be built by IHCL, its associated companies or its subsidiary, the Roots Corporation).

Raymond Bickson, IHCL’s MD, said, “Almost 70% investment has already been made in our upcoming hotel in Dwarka which is likely to open sometime in 2013-14. The Vivanta in Guwahati will be funded over the next two years. Roots will open six Ginger hotels, Taj GVK will open a Taj hotel at Terminal 1C in Mumbai and Benaras Hotels will open a Gateway hotel at Gondia.”

IHCL officials said its latest quarterly and half-yearly profits were impacted by factors like lean season, higher costs of power and fuel, significant increase in the new inventory.

All this led to IHCL’s net loss of `6 crore is the second quarter (Q2; July-September), a contrast to the entire group’s net loss of `2 crore in the first half (H1; April-September). But its Q2 turnover of `379 crore is higher than `358 crore in Q2 of last fiscal, while H1 turnover rose 7% to `775 crore.

“The 23% growth in new hotel rooms was higher than the demand that grew only by 20%, which has led to decline in average room rates (ARR) and revenue per available room (RevPAR) for the overall industry in general,” said Deepa Harris, senior vice-president of sales and marketing at IHCL.

IHCL is, however, very optimistic about demand growth in H2. “The second half is the main business season for the entire hospitality industry, and IHCL has seen good business. We are expecting increased occupancy levels around 75%, up from around 65% in the first half, and a marginal increase of 5-8% in room rates in the coming two quarters,” said Anil P Goel, executive director of finance, IHCL.

The company has invested significantly in greenfield developments in the last couple of years, so will pause now to stabilise the hotels, IHCL officials said. Business outside India will take more time to stabilise; the US market alone will take another 18-24 months, they said.

On the controversial move on Orient-Express Hotels, the IHCL managers said since both are listed entities, they would not like to comment until they hear from the OEH board.

Erstwhile promoter of Share Khan, Shripal Morakhia forays into sports-based entertainment business

Shripal Morakhia, the erstwhile promoter of SSKI & Share Khan, has entered the sports-based entertainment centre business with the launch of first facility in Mumbai. Morakhia has partnered with Star India, one of India's leading television entertainment networks, for this unique entertainment centre concept. Cricket icon Sachin Tendulkar is also associated with this unique venture.

Christened ‘Smaaash - Inspired by Star’ the centre is spread over 24,000 square feet and is located at Kamla Mills Compound, Lower Parel in Mumbai. Through this venture, Star India has taken the brand "STAR" beyond television. Smaaash is a sports-based entertainment centre with cricket at its core and stands for active entertainment. 

According to Star India, it is a fully immersive and an addictive experience, which will provide the audiences an opportunity to play cricket LIVE.

Uday Shankar, CEO, STAR India, said, "Star has always stood for thought leadership and with 'Smaaash - Inspired by Star' we take brand Star beyond television to create an immersive entertainment experience for audiences."

Smaaash is positioned as the largest aspirational, immersive, recreational destination in India and is in line with Star’s promise of inspiring and entertaining audiences and will help bring this promise alive.

The centre has 8 cricket lanes, an F&B arena and other arcade games including a F1 simulator, FPS simulator etc. The cricket lanes enable LIVE cricket play using the Hawk-Eye and Bola technology. Sachin Tendulkar’s involvement has been very active in this concept during the initial testing as well as in designing the overall experience.

Star, whose acquisition of ESS' sports broadcast businesses is now virtually imminent, will provide international quality cricket experience to sport buffs through the centre. Smaaash will bring an international quality cricket experience, where the players can face off against top cricketers like Sachin Tendulkar, Brett Lee, Anil Kumble and many others in a simulated environment.

Mahindra Holidays acquires 49% in Thailand's Infinity Hospitalities Group

Mahindra Holidays, India’s largest vacation ownership company, has added a new property in Thailand by acquiring 49% equity share capital of Infinity Hospitalities Group Co Ltd. Financial details related to this deal were not disclosed.

This deal brings to the company's existing hotels network, a 77-room resort in Bangkok operating as Mac Boutique Suites. While continuing to cater to other travelers, the resort will be available to members of Club Mahindra through a special arrangement and a nominal access fee.

According to Rajiv Sawhney, managing director and CEO, Mahindra Holidays & Resorts India Limited (MHRIL), this is the first step towards what MHRIL believes will be the next big movement in family holidays. "Building presence where Indians love to go - outside of India - was been considered for a while especially in locations like Dubai, Sri Lanka, Malaysia including Bangkok. With this addition, our strategy has begun to take shape,” said Sawhney.

Mac Boutique Suites is a full-service resort in Sukhumvit, Bangkok’s bustling business district. Located only a few steps away from BTS (Nana Station), a few minutes away from the  MRT (subway Asoke Station) and  only five minutes to the expressway, it offers easy access to a wide array of shopping, entertainment, museums and international cuisines.

Among the top 10 vacation ownership companies globally with over 150,000 members, MHRIL's international presence includes resort properties in Thailand, Malaysia and Austria. The last 10-odd months have seen the company add 781 rooms across the resort network and its resort count currently stands at 43.

Strong movie content driving occupancy levels in multiplexes

Film exhibition firm PVR witnessed a good second quarter with consolidated revenues growing 37% driven primarily by box office performance and food and beverage (F&B) revenue growth. Strong movie content is driving occupancy levels across multiplexes thereby leading to double digit growth in same store sales, said a top company official.

According to Nitin Sood, chief financial officer, PVR Ltd, there is upward trending in the consumption pattern evident from over 40% occupancy levels across its multiplexes over the last few quarters. "Content certainly has been of great help and as content improves, it definitely reflects in overall better occupancy across cinemas," he said.

Footfalls for the second quarter fiscal 2013 (Q2FY'13) increased 28-29%. Occupancy levels also increased disproportionately over the last couple of quarters thus leading to scaling up of return on capital scaling. This growth, industry experts said, is largely driven by occupancy than pricing.

Commenting on the observation, Sood said the company took a conscious call last year to cut down on pricing and re-look at the customer base. "We sustained this for 12 months. And starting last quarter, we have increased pricing so this quarter reflects a double digit growth of 10-11% in pricing as well. We need to try and sustain the pricing growth over the balance part of the year," he said.

Industry experts are of the opinion that the trending in consumption has been happening for slightly longer than a year now. The change in consumption patterns are mainly because of maturing markets and opening of new multiplexes. While there certainly is some kind of a shift, there really is no scientific answer to it.

"New cinemas driven by good content are attracting more and more consumers to the multiplexes. As the economy moves up and new malls open people will go out, try to consume and see these products. Cinema is an activity one can probably do every week unlike shopping and some of the other activities," said an analyst with a domestic brokerage.

"In fact, if you look at our numbers for the last six quarters and plot it consecutively, you will see double digit same store growth," said Sood adding that the company is seeing an increase even in some of their cinemas that have been operational for seven to eight years now.

As the film exhibition business is largely driven by content, there are concerns in the market that occupancy levels of over 40% across screens may not be sustainable. Industry experts said this business also has cycles like other businesses and that while things may look good in the short-term, same cannot be said in the long term.

"Will the occupancy levels be 40% forever, it will be very difficult to say as the nature of the business is such that it will have content cycles with hit years where business may not be so great and vice-versa. There would be properties that may not open to expectation on day one and take time mature," said an analyst with a leading domestic firm.

Echoing the sentiments, Sood said, "While the outlook for the next 12-18 months looks very encouraging with a good content pipeline even for the next year. To say this is how the industry will always remain will be slightly incorrect. In terms of the period ahead for the balance part of the year, I think we have a very decent third quarter with a lineup of some big films releasing during Diwali followed by end of December. Overall the content pipeline is looking very exciting for the next three to four months and we hope to maintain and sustain these occupancies and footfalls."

On the expansion front, PVR management had indicated Rs 150 crore - excluding deposits that's an additional 5-10% - has been earmarked as capital expenditure for opening about 82 screens in the beginning of the year. During the first six months the company has opened about 31 screens. On Friday (November 2, 2012) it opened an eight screen multiplex at Market City, Kurla in addition to their first IMAX in Koramangala, Bangalore. "With 40-odd screens added, roughly about 50% of the portfolio is open in terms of what was indicated earlier and are sticking to our guidance," said Sood.

As for its food and beverage (F&B) operations is concerned, the company currently operates two food courts in Delhi and there are no immediate plans to expand that format as it's been operated mainly through sub-leasing than building their own brands.

According to Sood, the management is looking at the F&B piece and believe it needs to be repositioned the way food and beverage is currently sold in the cinema. "Consumers are getting stressed for time and clearly the variety of F&B being offered in the cinema has to change. In the earlier days, one of the key concerns was the huge pricing difference between what was available in the cinema and outside. This gap has been narrowed to some extent," said Sood.

Industry experts also feel if the consumers are given quality F&B items for consumption in the cinema they will be more than willing to increase their food intake inside the cinema as compared to having a separate meal experience outside. "These are the two factors we are working on and if you look at our F&B spend-per-head growth has been in double digits. We believe, this is one area that needs repositioning and work more on given the kind of opportunity that exists in this space," said Sood.

On the sub-segmentation of the screens with Director's Cut, Gold Class, Premiere and mainstream, Sood said that an exclusive luxury cinema is positioned as Director's Cut and if the facility is part of a larger cinema then it is positioned as Gold Class. "Pricing is very catchment specific. For instance in Delhi, if the property is in South Delhi area the pricing differential could be three times and can go as high as Rs 1,000 on a weekend. But if the multiplex is in some other catchment, it would be a function of what the relative pricing for a normal ticket in that market is," he said.

PVR took 15 years since inception to open 160-odd screens in the country. In terms of roll-out, the company is adding 150-odd screens between FY'13 and '14 with the hope that as these screens come on board they do well and change the company's overall growth trajectory in the coming years.

Property prices will hold or increase from here, very unlikely to go down

Pirojsha Godrej

This Q&A first appeared in DNA Money edition on Friday, November 2, 2012.

Pirojsha Godrej, managing director and chief executive officer of Godrej Properties Ltd, cannot hide his glee. The company posted a whopping 67.5% on-year growth in net profit for the second quarter of the financial year 2012-13 on Thursday, and appears intent on sustaining the momentum. In an interview soon after announcing the results, Godrej took stock of the current property market, consumer sentiment and the road ahead for his company.

Will there ever be a correction in real-estate prices? Prices seem to be heading only north.
Pricing and price correction... very tricky question that, something we get asked very often. Six months ago, there was talk about a possible price correction; but the answer is, most probably, it won't happen, though prices always can come down. One needs to appreciate that there are factors on all sides. The developers are also facing constraints — whether in the form of much higher input costs, labour cost, and cost of funds, which hurts both the developer as well as the customer looking to buy an apartment. The substantial increase in costs over the last couple of years makes meaningful price cuts quite unlikely.

Anybody who claims to know what will happen to prices in a complex market like real estate is probably fooling himself. There are more signs that point to prices holding steady or going up than there are of them coming down. We didn't think prices would come down even when the economic conditions and consumer sentiment were [at their] worst. Predicting price trends in the very near term is very difficult. I don't think there is a compelling case for prices trending lower in the next 6-12 months.

What is your sense of the overall business environment in the Indian real-estate sector?
The sector clearly has gone through a bit of a difficult period over the past 12 months. Interest rates have been high, gross domestic product (GDP) growth has obviously been under pressure. Our sense is that particularly in the residential space, there is good demand for good quality projects in the right locations at reasonable price points. And we have seen evidence of that from the market response to some of our recent launches in Bangalore and Gurgaon. Across cities, we have been able to maintain fairly good traction. That said, we certainly think there are some things on the horizon that are likely to improve the momentum in the sector, including, hopefully, interest rates starting to come down. It is very positive to see the momentum the government has gained now on reforms and, hopefully, that can be taken to a logical conclusion.

But consumer sentiment doesn't appear to be improving. One look at the flat registration numbers of recent times explains it all. Where is the traction?
That may be true for the sector as a whole, which clearly has not seen good traction; but we have not really witnessed a decline in sales and the consumer sentiment. We had launched the second phase of our Vikhroli, Mumbai, project last year and the price per square foot for the recent third phase launch is 35% higher than what it was in the same period last year. We have received great response from the market even at the increased price point. So, fundamentally, the demand exists and we have already witnessed it.

What do you think needs to be done to improve consumer sentiment? Are the necessary steps being taken in that direction?
In my view, consumer sentiment would be better if the economy and people's perception of it get back on track. On that front, while we have had a very disappointing 12-18 months, the last 30-45 days have been very encouraging. If that kind of momentum can be sustained by the government on the policy side, it will be very good news. I think over time we are hopeful that the RBI [Reserve Bank of India] will also be supportive of this kind of growth through interest rate reduction which most people expect to unfold in the coming months. What is also very encouraging to see is that the momentum/thinking is correct and now it is all about making sure they are able to get the results as expected. I think the finance minister has done a fabulous job of coming in and very quickly announcing a set of measures that I think would go a long way in increasing business confidence as well as the consumer sentiment.

The second quarter has been quite exciting for the company. Could you share the key business highlights?
It certainly has been a good one on most operating metrics. We have seen strong growth in total revenue to the extent of 64% over the corresponding period last year. Booking growth, which is new sales and indicative of the likely growth that will come in revenue in the future, has been more strong with growth in value terms of about 327% for the second quarter this fiscal. A lot of booking growth has actually come from the launch of Godrej Summit in Gurgaon. We were able to sell the entire first phase of the project constituting about 1 million square feet in one day. Our ebitda [earnings before interest, tax, depreciation and amortisation] increased by more than 100% from Rs34.6 crore to Rs72.3 crore while net profit grew from Rs19.5 crore to Rs32.6 crore, representing an increase of 67.5% on a year-on-year basis. So, all in all, it has been a very satisfying second quarter.

Could you share some details about new launches in the coming months?
We have several project launches coming in. In October, we launched two projects in Bangalore — Godrej Gold County and Godrej Electronic City. Over the next couple of months, we will be launching the second phase of Godrej Summit, Gurgaon. We launched on Dussehra the third phase of our Vikhroli project in Mumbai and will have additional phases of project launches in Pune, Nagpur, Kolkata and Ahmedabad. Mumbai will see several new projects getting launched. One of them is a redevelopment project called Godrej Central in Chembur and another is our commercial project in the Bandra Kurla Complex (BKC) which is a joint venture with Jet Airways.

Are you looking at financial partners for the Chembur and BKC projects?
We have already done a private equity (PE) partnership with Sun-Apollo for the Chembur project which would be a 6-7 lakh square foot development. For the BKC project, we are open to a PE partnership though nothing has been finalised. We don't have any particular amount in mind, it will depend on the structure of the deal. The total project size of the BKC development is a little bit larger than we had anticipated, which is positive news. We expect it now to be about 1.25 million square feet. Of that, a little over 2 lakh sq ft will be used by Jet Airways for their corporate space, so we will have slightly over a million square feet available for sale and/or lease. The exact ratio between sale and lease is something that will be decided as the project unfolds.

What is your outlook for the coming quarters?
I would imagine the second half of the fiscal will be a busy period with a host of launches starting from the festive season. The third quarter has also started on a good note. We have had a few good launches in Bangalore and many more are slated over the next couple of months and the upcoming financial year. And we hope to maintain the strong sales momentum in these developments. We maintain that even if things don't improve, we feel pretty good [that] given the kind of projects we have added and the launches we have in the pipeline we would be able to deliver strong growth picture. Clearly that ability would be further enhanced if the economic climate in general improves in the coming quarters.