30% local sourcing curbs retailer play

My colleague Promit Mukherjee is the lead writer of this story which appeared in DNA Money edition on Wednesday, January 11, 2012.

After playing to the tunes of allies and coalition partners for almost a month, the government took the bold step of notifying 100% foreign direct investment (FDI) in single-brand retail in India.

This means global brands such as Gucci, Tommy Hilfiger, Zara, Adidas, Nike and others can set up fully owned businesses — till now, they had to have an Indian partner who held 49% stake.

But what skews this milestone development, retailing experts say, is the 30% rule — where foreign companies have to source nearly a third of their products from Indian ‘small / village and cottage industries, artisans and craftsmen’ if they want to go purely solo.

“I really do not understand the logic behind the 30% local sourcing pre-condition for foreign single-brand retailers looking to set up operations in India. It is like saying we are open to investments but you cannot really invest. It clearly shows the government doesn’t really understand the concept of single brand retailing,” said a top official from a leading retail consulting firm in India, who did not wish to be named.

The caveat defines small industries as those with a total investment in plant and machinery of around Rs5 crore. This valuation refers to the value at the time of installation, without providing for depreciation.

Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a ‘small industry’ for this purpose. The compliance of this condition will be ensured through self-certification by the company, to be subsequently checked, by statutory auditors, from the duly certified accounts, which the company will be required to maintain.

“This basically also means that the government doesn’t really want the small industries to grow their business and remain where they are forever,” added the official.

Arvind Singhal, chairman of Technopak Advisors, feels while the pre-condition may work for a handful of categories, it’s a hurdle for a whole lot of others where local sourcing is not really possible at least in the first few years of setting up front-end operations in the country.

“What the government could have done instead is make it mandatory for such retailers to export 30% - 40% of the value of their overall sales generated from the Indian market. This approach would work faster compared with what has been put together at present,” he said.

Anil Talreja, partner, Deloitte India, said companies which already source locally can be in a sweet spot but concurs others may have to relook at their expansion strategies.

“This may also lead to staggered buyouts or giving away the sourcing part to its Indian partner,” said Talreja.

Govind Shrikhande, managing director, Shoppers Stop, said retailers operating in categories such as bed linen which are already sourcing from India will be the key beneficiaries.

“However, luxury goods retailers will not be able to source from India because they have to maintain global standards for their brands and hence manufacture it from a single location. Such players will continue to operate the way they have been doing thus far,” he said.

Terming the government’s decision a move in the right direction, Kishore Biyani, founder and group CEO, Future Group, said, “Going forward, increased level of activity can be witnessed in categories such as home and apparels.”

Kumar Rajagopalan, CEO of Retailers Association of India (RAI), says larger fashion houses (without India sourcing) will have to start looking at ways to comply with the 30% condition if they want to set up beachheads.

The government first allowed 51% FDI in single-brand retail in 2006. In four years since, India drew close to $200 million in FDI.

Government figures show there are as many as 94 proposals for FDI with the government of which 57 have been approved so far.
“This is expected to rise exponentially now,” said Harish Bijoor, independent retail consultant. The 30% sourcing rule, according to him, will only expand the time between ideation and incubation of businesses.

According to Sageraj Bariya, managing partner, Equitorials, a Mumbai-based equity research firm, another plus point would be that foreign brands that are already in India will be able to take quicker business decisions and therefore make more investments since they will not have to wait for their partner’s ability to raise funds.

Disney to launch open offer for UTV Software Communications on Jan '16

Global entertainment giant Walt Disney Co said that it will launch am open offer on January 16, 2012 to acquire publicly held shares in BSE-listed UTV Software Communications Ltd (UTV). The open offer is for buying around 30% stake held by minority shareholders for up to Rs 1,000 a share. Once concluded successfully, the US company which currently holds 50.4% in UTV will take it private and delist the firm from the stock exchanges.

Following Walt Disney’s announcement, promoters of UTV Software have mooted another proposal to offer Disney a stake in its gaming subsidiary operating under the banner Indiagames Ltd.

When contacted, UTV officials were not available for a comment. An email sent to company spokesperson soliciting details viz. extent of stake to be offered, its valuation, shareholding post the offer, etc. remained unanswered at the time of going to print.

However, in a notification to the Bombay Stock Exchange (BSE), UTV said, “It is proposed that, in the event the delisting offer by The Walt Disney Company (Southeast Asia) Pte Ltd is successful, the company may assign to Disney or its affiliates its rights to acquire such shares of Indiagames.”

UTV also said that the proposal is subject to execution of necessary documents and compliance with applicable law. As far as Disney’s reaction to this initiative is concerned, UTV said that, “As on the date of this letter, no definitive decision has been taken by the company or Disney in this regard."

Earlier in October 2011, the UTV management had informed the stock exchange about its intentions to acquire 30.02% in Indiagames for Rs 94.56 crore from founder-promoter Vishal Gondal and other employee-shareholders. While the deal has not been concluded as yet, the transaction (once completed) will increase UTV’s holding to 86.02% from the existing 56% in Indiagames Ltd.

While the Indiagames deal with promoter and employee shareholders continues, UTV is simultaneously working on acquiring stakes from other shareholders in the gaming company. According to a report in VCCircle.com, UTV management has struck a deal to buy out Adobe Systems Incorporated’s 6.29% stake in the country’s largest digital gaming company – Indiagames Ltd.

While deal value was not disclosed, the report said that ‘the agreement for sale has already been inked’. It also estimated taking the recent deal as a benchmark that UTV will pay around Rs 20 crore to Adobe to raise its holding to 92.31%. UTV is also understood to be in talks to acquire 7.69% held by Cisco Systems thereby which will make the gaming company its wholly owned arm.

Earlier in October 2011, Disney entered into an agreement to buy out around 20% stake in UTV Software held by the original promoter group that includes Rohinton (Ronny) Screwvala, Unilazer Exports and Management Consultants, Unilazer (Hong Kong) and Zarina Mehta. While these promoters are not expected to participate in the delisting offer, they are likely to exit the firm if the delisting offer is successful.

According to a Reuters report, assuming an exit price of Rs 1,000 per share (Disney has mentioned this as the maximum it is willing to pay), Disney will have to spend over Rs 1,400 crore to buy 29-30 per cent stake held by public shareholders, including convertible securities. With the buyout of the remaining promoters, the overall deal size might be around Rs 2,150 crore at the same share price.

Mahindra Holidays acquires The Retreat by Zuri Goa for Rs 112 crore

Mahindra Holidays & Resorts I Ltd (MHRIL) has acquired a 106 room hotel in Pedda, Salcette, Goa. The hotel was acquired from Bangalore-based The Zuri Group which currently operates four hotels in India - excluding the Pedda property which was earlier operated under the banner The Retreat by Zuri, Goa.

Rajiv Sawhney, managing director, Mahindra Holidays & Resorts I Ltd (MHRIL), said, “While discovering new destinations and placing them on the holidayer’s map has been a strong tradition at Mahindra Holidays, we always aim to ensure that our members can holiday where they want. This launch will significantly augment our capacity in Goa which is one of our most preferred destinations.”

While MHRIL did not disclose the deal value, industry sources confirmed the transaction was closed at a little over Rs 1 crore per key giving The Zuri Group Rs 112 crore from the sale of this asset.

Confirming the sale of the hotel, Bobby Kamani, managing director, Zuri Group Global, said, divesting the property was a planned and strategic decision by the hotel company primarily because the company was over exposed in the leisure destination with two properties. “It was quite an interesting deal that Mahindra made us for The Retreat and it works in our benefit. The money that this deal will bring in will primarily be used for the revamp of our other property - The Zuri Whitesands, Goa Resort and Casino built on a 37 acre beach front land parcel," said Kamani.

this move, Zuri top management said, is in line with the group’s intention of pursuing an aggressive growth for the immediate future. "The decision taken will help reduce debt and completely refurbish the five-star luxury Goa and Kumarakom resorts. More investments will be pumped in to further expand the hospitality basket under Zuri Group Global," said Priti Chand, vice president - corporate communications and public relations for Zuri Group Global.

Post acquisition, MHRIL has re-branded the property as Club Mahindra Emerald Palms resort taking its tally to 336 rooms in South Goa. The Club Mahindra management also said that the Goa hotel was the first of a series of launches in the next six months, whereby several new destinations will be added along with a significant increase in its room count.

DB Hospitality in talks with Sahara to sell Grand Hyatt Hotel in Goa

This story first appeared in DNA Money edition on Thursday, December 22, 2011.

DB Hospitality, a sister company of DB Realty whose promoters have been mired in the 2G scam, is in talks with the Sahara Group to sell its newly launched five-star hotel Grand Hyatt Goa, according to industry sources.

“The deal is currently at the due diligence stage,” said an industry source familiar with the development.

An email sent a week ago, seeking comments, to a Sahara Group spokesperson remained unanswered and when contacted a DB Hospitality spokesperson said, “This is not true.”

But industry sources said the asset owners were demanding a huge premium for the hotel, which opened for guests in August 2011, and as a result the mandate has travelled from one firm to another. It is not clear which firm is finally advising on the deal.

In terms of valuation, sources said DB Hospitality is seeking Rs1,000 crore, which they felt is quite high, especially for a project in Goa.

“Assuming overall development cost of around Rs1.25 crore a key in an ideal situation, the promoters would have invested (including debt) around Rs390 crore for 314-room hotel, excluding the land cost. However, one will also have to factor in the almost a year-long delay, which would have increased the project cost by 15%-20% on a conservative note,” said a top official of one of the big four international property consultants.

“The general market practice with most hotel owners in Mumbai is to value the asset at Rs2 to 2.5 crore per key. However, the per-key figure will certainly be lower in Goa. Based on these assumptions, Rs1,000 crore for a 314-room hotel appears quite steep, that too in such a stressed market environment,” said the official.

Grand Hyatt Goa is not the only asset that DB Group’s hospitality vertical is understood to have put on the block. The group’s Mumbai hotel, managed by Hilton Worldwide, is also up for grabs, sources said.

The promoters are looking to raise Rs450 crore from the sale of this 171-room boutique hotel, which was launched back in 2000 under the Le Royal Meridien brand.

The deal has been doing the rounds in the market for a while now with no potential suitor willing to pay the valuation sought. DB promoters are targeting to raise a total of Rs1,500 crore by divesting the two hotels, sources said.

Nestled in a 28 acre beach front land parcel, the hotel is part of a 140 acre high-end mixed-use development called Aldeia De-Goa and located in Dona Paula in North Goa.

DB Hospitality has four operational hotels and several in pipeline.

Hotel buyers sniff a chance to rake it in

This story first appeared in DNA Money edition on Tuesday, December 20, 2011.

The fairly quick rebound following the economic downturn in 2008-09 had upset all calculations for hospitality asset buyers, who now have a reason to rejoice. A looming double-dip recession means 2012-13 is likely to open another window of opportunity for them to make a killing.

Real estate consultants - both domestic and international - and individual brokers these days are working overtime on mandates involving buying and selling of hotel projects. While the phenomenon, experts said, is quite evident in key metros, the level of activity is quite similar in non-metros as well. And as the sector has already witnessed a handful of deals being concluded in the recent past, there is a feeling that the momentum will pick up in the coming year.

“There is some degree of stress in the market for sure, especially with land parcels and incomplete structures. As for sale of operational hotels is concerned, it is largely in the case of companies with heavily leveraged balance sheets,” said an industry expert.

Companies with high debt on books and those struggling to access capital to start or complete work on their respective projects are taking to divestment seriously. Besides, the not-so-exciting economic environment, which is likely to impact hospitality, travel and tourism sectors in the coming year, has only added to the urgency in sales.

Among hotel assets already in the market for sale are those from leading realty firms like DLF Hotel Holdings, a subsidiary of DLF Ltd, and DB Hospitality, a part of DB Realty. According to sources, there are assets also from companies like Bangalore-based Royal Orchid Hotels (ROHL) and Indore-based mixed-used developer Entertainment World Developers Pvt (EWDPL) which are understood to be seeking buyers for some of their projects.

Similarly, another BSE-listed hotel company Kamat Hotels India (KHIL) is in the process of divesting four of its hotel land parcels - ranging from 2 acres to 40 acres -in cities like Coimbatore, Amravati, Raipur and Nagpur. The assets were earlier in the development pipeline.

Leading international property consultants (IPCs) like Cushman & Wakefield (CW), Ernst & Young (E&Y) and Jones Lang LaSalle Hotels (JLLH), among others, too confirmed the rising flow of mandates for buying and selling of hotel assets across the country. But putting a figure to the number of hotel assets on the block is difficult because each one works on a slew of exclusive mandates and there are non-disclosure agreements in place to protect the identity of the buyer or the seller.

Akshay Kulkarni, executive director - residential services, Cushman & Wakefield, said: “The current activity level is certainly high and I’m confident that the sector will see a good number of transactions getting concluded in 2012-13. In fact, we are working on a few hotel transaction mandates and are likely to close some deals by the first quarter of the next fiscal.”

Deals currently being pursued by the IPCs are a mixed bag of operational hotels, incomplete structures and land parcels earmarked for hotel projects. While cities like Mumbai, Delhi, Bangalore and Chennai are certainly on the radar, others like Pune, Hyderabad, Kerala and Goa are joining the brigade, too. Interestingly, ‘sell’ mandates seem to be on the higher side vis-a-vis ‘buy’, thus making it very challenging for the broking community to find potential buyers.

Talking about the profile of prospective buyers, Chintan Patel, director, real estate and hospitality services, E&Y India, said strategic and financial investors are best suited for land parcels and incomplete structures. “The current market scenario, however, is more opportunistic for high net worth individuals (HNIs) in the case of already operational hotels. In fact, the timing is much better also because of a depreciating rupee,” Patel said. Reasons to sell hotel assets vary for different companies. While DLF is keen to shift focus from non-core assets, for DB Hospitality, the priority is to raise funds to mitigate debt pressure on the books. And as for ROHL and KHIL, ramping up hospitality presence in key metros to access capital is a big driver.

But are valuations realistic for faster closure of deals? A senior consultant with one of the domestic hospitality consultant companies said, “Deals generally take longer to conclude mainly because of valuation issues between the buyer and the seller.”

So, is distress one of the reasons for companies to sell hotel assets? The IPCs feel otherwise. “There is some stress in the market for sure but it certainly has not reached the distress situation. While buyers are not giving high premium, sellers have also become realistic with their expectations. This is why the market has seen a few deals getting concluded in the recent past.

This momentum will only increase next year,” said Patel. Some of the deals that are expected to get concluded include projects from BSE-listed Viceroy Hotels, which is expected to complete the sale transaction of its Chennai hotel and residential projects with Mahal Hotel Pvt and Esteem Housing Developers Pvt, respectively. The deal size reportedly is in the region of Rs500 crore.

Similarly, DLF Hotel Holdings — which recently acquired Hilton’s 26% stake in the JV for Rs120 crore — is rumoured to have sold its four land parcels to Kolkata-based Square Four Housing & Infrastructure Pvt for Rs550 crore.

Rajesh Exports to expand jewellery stores six-fold

This story first appeared in DNA Money edition on Tuesday, December 20, 2011.

Rajesh Exports has embarked on an ambitious expansion of its retail chain ‘Shubh Jewellers’ with a goal to become the largest jewellery retailer in the country.

The BSE-listed jewellery exporter which operates 73 stores in Karnataka is planning to increase it to 550 across the south Indian states in the next three years.

It plans to invest about Rs6,600 crore for the expansion and expects revenues of Rs25,000 crore by 2014.

Siddharth Mehta, chief strategist, Rajesh Exports, said that the company aimed to have 125 stores in Karnataka by April 2012.

“Another 50 stores will be added in Karnataka after which we will expand into Tamil Nadu, Andhra Pradesh, Goa and Kerala. All stores follow a unique franchisee model, wherein established jewellers are brought into the network,” Mehta said. These stores are refurbished according to the Shubh format and require an investment of Rs15-20 lakh from the franchisee, he said, adding that day-to-day management and other operating costs would be taken care of by the franchisee and Rajesh Exports would invest in the inventory at these stores.

“The franchisee’s share in the overall revenues generated from the store is 2.3% of the profit,” he said. The average size of a Shubh store is 500-600 square feet, though the company also has stores that are as small as 300 sq ft going up to 3,000 sq ft.
With a rollout of these 125 stores by April 2012, the company expects to become the largest retail jeweller in the country.

Through the network of 550 stores, the company is eyeing 8% of the domestic retail gold jewellery trade.

For the first half, the company generated Rs650-700 crore sales through 48 stores. “Around 25 stores were added during the Diwali period and hence revenues from those stores haven’t been included in the figure.The net profit from 48 operational stores was in the range of Rs42-45 crore,“ said Mehta.

The expansion would be funded through a mix of internal accruals, external commercial borrowings and credit from suppliers. The company has Rs2,000 crore of internal accruals and is at an advanced stage of negotiations for debt with foreign financial institutions at a rate of Libor + 4.5%. It expects to close the ECB by May-June 2012.

Yummy! Ready-to-eat foods eye centre of thali

My colleague Shailaja Sharma is the lead writer of this story which first appeared in DNA Money edition on Wednesday, December 21, 2011.

Ready-to-eat (RTE) foods are no longer a no-no. Packaged French fries, cheese nuggets, parathas, samosas, aloo tikkis... all are tickling the Indian tastebuds.

The RTE segment is growing at 25-30% annually, say analysts. “It was crawling a few years ago. Now, it has started to walk. The segment will run in a few years,” says Sushil Sawant, vice-president, Godrej Tyson Foods.

Analysts think urbanisation, rise in the number of working women, higher disposable incomes and evolving consumer habits are all making processed foods popular, promising rapid growth for the segment.

Vadilal was among the early movers. In 2000, it began export of ready-to-eat curries, parathas and snacks to 20 countries. Rajesh Gandhi, managing director, says organised retail has expanded with the entry of new players in the last two years. “Indian consumers are ready to try these products.”

Vadilal now sells frozen products like plain and stuffed parathas, samosas, kachoris and springrolls in India under its brand Quick Treat. Given brisk sales, it expects to notch up Rs15 crore from new launches alone this year.

Other players are optimistic, too. Come February 2012, Signature International Foods will launch a range of Indian naans, kulchas and parathas as well as international items like tortilla wraps and pizza bases. Its massive Nashik unit boasts a daily capacity of 1 million chapatis and 5 lakh naans.

Given the Indian consumer’s penchant for good deals, Signature will offer a pack of four naans weighing 80 grams for Rs65, says Gaurang Bhasin, head, sales and marketing.

McCain Foods swears by similar strategy. The Toronto-based firm recently introduced smaller trial packs of its frozen French fries, Super Wedges and Smiles, priced Rs25, after winning customers for its Aloo Tikki, Crunchy Potato Bites, Tandoori Vege Nuggets and Vege Burger.

Other players such as Venky’s India, Temptation Foods and Al Kabeer are keen to garner market-share. Godrej believes frozen foods sales will touch $700 million in four years. “Snacking has always been an integral part of our culture. The snacks industry is getting organised. The opportunity is huge,” says Sawant.

Yet, frozen foods have not reached the centre of the thali (platter) at Indian households. But firms like Godrej and Vadilal, with their strong distribution networks, are seeking to make convenience foods part of Indian lifestyle.

They are confident the task won’t prove daunting , given that over 40% of the household spend is on food. The share of packaged foods may be small, but with a 30% growth, anything is possible.
Industry estimates suggest consumer spend on food in India will grow from $330 billion now to $900 billion by 2020. Processed foods account for $40 billion already, with packaged food market estimated at $10 billion (and likely to reach $20 billion by 2014).

Such heady facts and figures are encouraging processed food firms to bet big on India. For instance, West Coast Fine Foods, a distributor of frozen foods in India and owner of frozen seafood brand Cambay Tiger, is launching Malaysian frozen paratha brand Kawan in India this month.

Rahul Kulkarni, director, marketing, says the time-starved working Indian consumer “is spending less time in the kitchen and is adopting the branded ready-to-heat-and-eat option to suit her lifestyle”.

What does all this signify? “The sign is unmistakable: the urban Indian household is undergoing a quiet revolution. The trend is accelerating because of both socio-economic factors and lifestyle reasons,” says Kulkarni.

India Hospitality ends deal with Entertainment World

This story first appeared in DNA Money edition on Friday, December 9, 2011.

Blank-cheque firm India Hospitality Corp (IHC) has called off a Rs100 crore deal with real estate company Entertainment World Developers Pvt Ltd.

Under the deal, London Stock Exchange’s Alternative Investment Market listed firm was to lease and operate the realtor’s 10 under-development hotels and 14 food and beverage outlets in non-metros.

IHC was to also acquire Treasure Food & Beverage Pvt Ltd, the franchisee for Pizza Hut in central India, from Entertainment World.

IHC was doing the deal through its Indian subsidiary, Gordon House Estate Pvt Ltd, in which Entertainment World was to pick up a 15% stake.

The alliance announced in September 2009 was to be completed in three years. However, there was a buzz in the market sometime back that IHC was reviewing the partnership and now sources have confirmed that the deal has been called off.

"There has been no progress on the deal between IHC and Entertainment World. It has been terminated finally, with both parties free to go their own ways,” said an industry source.

Financial constraint faced by IHC was the key reason for the partnership to be called off, the source added.

Officials from IHC and Phoenix Mills, which owns 42% in Entertainment World Developers, were not available to comment.

The hotels and F&B outlets to be leased and managed by IHC were part of Entertainment World’s 24 million square feet development pipeline across India including 11 shopping malls, 10 hotels and 11 townships.

Entertainment World was developing a total of 900 hotel rooms across 10 locations. The first phase comprised 352 rooms across Nanded, Ujjain, Jabalpur, Bhilai and Raipur, and second phase 548 rooms across Chandigarh, Udaipur, Amravati, Indore and Thiruvanathapuram.

Faced with own set of financial challenges, Entertainment World is understood to be going slow on further developments, including those that were under the deal with IHC, and is currently believed to be undergoing a restructuring exercise to turn around its existing operations.

It was planning raise Rs500-600 crore last year through an initial public offering by selling 25-30% stake mid-2010, but could not because of unfavourable market conditions.

Delays turning hotel breakevens elusive

This story first appeared in DNA Money edition on Tuesday, December 06, 2011.

Delays and cost escalations are set to double the breakeven time for several upcoming upscale hotels in the country, including those of Leelaventure and French Group Accor, which are 2-3 years behind schedule and face a cost overrun of several hundreds of crores.

Several projects that were announced during the boom period in 2006-07, were affected by the economic slowdown of 2008-09 as funding dried and demand fell.

Experts said of every 100 guestrooms being built around 36 are behind schedule, which means only 48,000 guestrooms from the current total pipeline of 75,000 are at various stages of completion and the balance 27,000 are delayed.

Among the notable examples, Shangri-La hotel coming up at High Street Phoenix, Lower Parel, Mumbai and Sofitel at Bandra-Kurla Complex that were scheduled to open in 2009 have been delayed by almost three years and are only expected to receive guests next year. Work on both the hotels had started in 2006.

In case of Sofitel, the delay was because the French hotel group Accor decided to reposition it as a luxury hotel.

“The brand specs were redefined which led to change in the entire development plan. It not only delayed the development but also increased the cost per key from Rs80 lakh to Rs1.2 crore. The overall cost is now pegged at over Rs800 crore,” said an industry source. The total cost of the 302-key hotel was pegged at Rs473 crore. “Taking the cost escalation and the current stressed market scenario into account, the hotel’s breakeven will get extended by another 3-4 years at least,” said the source.

The asset owners could recover their investment in the hotel after 11 years from the time it gets operational as against 5-7 years earlier. Accor is also an investor in the hotel with Shree Naman Group, the asset owner. Michael Issenberg, chairman and chief operating officer, Accor Asia Pacific, recently told DNA that Accor continued to hold 40% stake in the development, which means it has to make further investment to maintain stake.

The over 400-room Shangri-La got delayed mainly because of issues with contractors. However, work resumed post hiring of new contractors late last year by the asset owner, Pallazzio Hotel and Leisure Ltd, a subsidiary of Phoenix Mills, and the property is now expected to be soft launched by April and a full-fledged opening by September.

The overall cost of the project as per 2010 timeline was estimated to be around Rs700 crore. A recent report by brokerage Edelweiss Securities has now pegged it at Rs835 crore. “The breakeven situation with Shangri-La is more or less similar to the Sofitel at BKC. I certainly don’t see it breaking even in the normal 5-7 years,” said top industry official.

Among the other hotels that have got delayed include the 250-room Ritz Carlton in Bangalore, being built by Nitesh Estates. The initial cost projection in 2007 was Rs450 crore, which has now risen to `700 crore. Industry experts feel the delay and cost escalation has been so severe that it may not be a viable project for the asset owner anymore.

Hotel Leelaventure’s hotel in Delhi also faced minor delays but it has its own challenges related to cost escalation. The Delhi market has seen a fairly good supply of hotels as a result the average room rate there is severely under pressure. The market scenario is expected to remain more or less the same for a while now and impact the breakeven of the hotel, a source said. The group’s Chennai hotel has been delayed by almost two years and is likely to open mid-next year.

Work on Emaar MGF’s JW Marriott hotel in Delhi, too, has been stalled for a while now with no updates on its resumption.

Experts say while a delay of few months is manageable, projects that deviate two years or more from their schedules affect profitability drastically and even make the project unviable.

Siddharth Thaker, managing partner, Prognosis Global Consulting, a hospitality advisory firm, said. “Breakeven is a function of how much leverage you have on the project. A delayed project inflates the interest component on the debt. The entire pressure is met through the operating cash flows of the hotel.”

The other factor is that the hotel misses the business cycle as the entire market dynamics changes, particularly the supply-demand situation, Thaker said.

Concept Hospitality to add over 650 guestrooms in 2012-13

Focusing on the five-star accommodation segment, Lighthouse Fund-backed Concept Hospitality Pvt Ltd (CHPL) will add over 650 guest rooms in the financial year 2012-13. A pure play hotel management firm, Concept has lined up a slew of launches across cities like Mumbai, Chennai, Chandigarh and Tejpur (Assam). CHPL’s current development pipeline includes 15 hotels across metros, tier II and III cities in the country of which the management expects 8 hotels to be operational by March 2013.

Param Kannampilly, chairman and managing director, CHPL, said, the company added a little over 500 guest rooms in the last 12-odd months taking the total number managed guestrooms to 1,207 across 20 hotels. “The next 12-16 months will see 8 new hotels getting operational adding approximately 660 guestrooms. All the new hotels will be five-star carrying The Fern flag. Among the new launches, five properties will be launched in the city of Chennai and will also mark our foray there,” he said.

The company – on a collective basis – is targeting a turnover of Rs 200 crore for the current fiscal of which Rs 65 crore has been achieved in the first half already. “We are currently in the business season and will enter the peak season in a few weeks from now. We are very much on track to achieve the Rs 200 crore turnover target in this fiscal as against Rs 120 crore in the previous financial year,” he said. On an entity level, CHPL (as a management company receiving management fees and other revenues) will register a turnover in excess of Rs 12 crore.

Managing hotels under The Fern, The Fern Residency and Beacon brands, CHPL will opened four 'ecotel' hotels in the five-star segment adding over 300 guest rooms under its flagship 'The Fern' brand across key metros and mini-metros in the country.

In Mumbai, the hotel management company opened Hiranandani Group’s second ecotel project the 141-rooms, Meluha - The Fern at Powai in March 2011. The first one – Rodas - an Ecotel hotel – also in Powai is managed by Concept as well. The company also manages a 35-room boutique hotel at Bandra called Grand Residency. Another 75-room hotel is currently in the final stages of completion and will come up in Chembur early next year and will be branded as The Fern Residency. The company’s fifth hotel in Mumbai is currently under development in Goregaon and is likely to start receiving guests sometime in 2014. “Going by the letter of intends (LoI) we have signed already Mumbai and Chennai will be two cities with five hotels each,” he said.

Elaborating on the funding for new developments, Kannampilly said, investment for all the hotels will be done by the respective asset owning companies with Concept coming in as a branding, operating and management partner. On an average, the cost per key for The Fern hotels ranges between Rs 55 to Rs 65 lakh excluding land and financing costs. In the three- and four-star categories, CHPL manages hotels under 'The Fern Residency' brand. The average cost per room for this category of hotels is Rs 25 lakh excluding land and financing costs.

The company is actively pursuing management contracts in the international markets and is currently in discussion with hotel asset developers in countries like Bangladesh, Tanzania and South Africa. While in Tanzania CHPL is mulling an eco village cum city-based resort project, it will be a management contract initially in Bangladesh followed by a joint venture with the same developer to manege eco-friendly hotels there. As for South Africa, the company is doing a management contract for a four-star hotel in the outskirts of Johannesburg.