Is the tide turning for realtors?

This story first appeared in DNA Money edition on Thursday, October 04, 2012.

Two factors have revived the hopes of battered realty players: green signal for up to 49% FDI in multi-brand retail and high chance of interest rates falling.

While FDI is expected to stir demand for commercial space, any lower interest rates would reignite demand for homes. While actual creation of retail space may take 1-2 years, FDI news is a sentiment booster, said experts.

“FDI in retail will bring about a new approach to building retail spaces, just as the entry of firms such as IBM and Intel led to new architectural designs and world-class workplaces in India a few years back,” said Raja Kaushal, MD and India head of BNP Paribas Real Estate Advisory.

Better liquidity and lower mortgage rates are also creating sector tailwinds, said Puneet Jain and Aditya Soman, analysts at Goldman Sachs India, in a recent report. (mortgage rates have fallen 50 bps in the last six months.)

Sandipan Pal, analyst at Motilal Oswal Securities, said, “Favourable global liquidity, rising expectations of fiscal correction, 25 bps cut in CRR and likely interest rate downcycle are all positives.”

Given that several retail investors are struggling to service their home loans, interest rates are expected to fall, said Kaushal. His talks with banks and housing finance firms indicate that defaults among borrowers on equated monthly installments (EMIs) are up.
“From one in 2-3 years, defaults now happen within a year’s time. Job uncertainties and economic slowdown are worsening matters,” he said.

The current mortgage rates at 10.25-10.75% are at the higher end of the 7-11% range over the last ten years. Banks are keen to improve their loan books. A possible 150 bps drop in interest rates could result in EMIs for a Rs1 lakh loan drop from Rs1,032 a month to Rs932 a month for a 20-year loan, said experts.

Since up to 80% of home buyers take loans, and given the high loan-to-value ratios, banks have to go to the smaller towns and aggressively target home buyers in the Rs20- 40 lakh bracket, or reduce rates and improve their loan quality, said observers.

“Many people are yet to buy their first home. So interest rates will have to come down at least for them,” said Kaushal. Two-way pricing of loans where second and third home buyers pay a higher rate is also desirable, he said.

For, declining sales, liquidity concerns and mounting debts had led to shelved or delayed projects over the last three quarters, savaging realty firms.

The recent macro trends, however, will benefit companies such as DLF in terms of improving operating leverage and financial de-leveraging, analysts said.

Another reform area could be construction finance. “With demand slack, they sought financing. But lenders know such mega projects will take 10-12 years to complete whereas they want their money back in 3-5 years. So projects need to be phased,” said Kaushal.

Any fall in interest rates would revive buying and selling of residential apartments. This will help narrow the big gap of 5-7 years in real estate project financing. More and more lending will start to happen from mezzanine funds and state-owned banks,” said Kaushal.

Thus, any cut in lending rates would benefit property big boys such as DLF, HDIL, Godrej Properties and Unitech. Goldman Sachs analysts foresee a 50-100 bps cut in construction finance rates on account of better liquidity.

Siti leads metro switch to digital cable TV

This story first appeared in DNA Money edition on Saturday, October 06, 2012.

With the November 1 (extended) deadline for the first phase of the switchover from analogue to digital cable television (CTV) fast approaching, multi system operators (MSOs), led by Siti Cable Network (formerly Wire and Wireless), are going all out to ensure its effective implementation in the four metros.

Siti has executed digital addressable system (DAS) interconnect agreements with 55% of its local cable operators (LCOs), which will allow the latter to provide encrypted TV signals to subscribers, said Anil Malhotra, its COO. “We are engaging the LCOs for a smooth migration to the digital regime.”

MSOs aggregate channels of various broadcasters and supply them to LCOs for delivery to end-users (viewers/subscribers). Typically, a broadcaster offers a fee – carriage revenue – to MSOs for ‘carrying’ its content on their networks.

“Siti’s decision to offer 25% of its carriage revenue to LCOs has been very well received. LCOs are enthusiastic about implementing the digital switchover,” said an analyst with a leading domestic brokerage.

In June, the Telecom Regulatory Authority of India (Trai) had extended the deadline to November 1 at the request of the industry representatives. Yet, the short extension has not really led the C&S industry to expedite the process. Barring Siti, MSOs have been sluggish in executing interconnect agreement with LCOs, sources said.

In contrast, Siti introduced ‘Own Your Subscriber Management System’ designed specially for LCOs, facilitating the latter to handle subscriber-related transactions on their own. Beneficiaries of the SMS system are looking forward to handling tasks like activation, deactivation, upgradation, downgradation, billing, payments, account statements, packaging and complaints, sources said.

The SMS system can be accessed by the cable operator on mobile phone, tablets, personal computer (desktop/ laptop). “Such systems empower the local cable operator. It will help him to provide better and prompt services to his subscribers on the digital platform,” said Siti’s Malhotra.

Siti has 56 analogue and 14 digital head-ends and a network of more than 12,000 km of optical fibre and coaxial cable. The company provides its cable services in India’s 60 key cities and the adjoining areas, reaching over ten million viewers.

Price control list may have 274 more drugs

An edited version of this story first appeared in DNA Money edition on Friday, September 28, 2012.

The Group of Ministers (GoM) formed to formulate the New Pharma Pricing Policy (NPPP) has finalised a proposal to set the price-ceiling on pharmaceutical drugs. The new proposal brings 348 essential drugs under price control of the government as against 74 earlier. This apart, the GoM has discarded the cost-based formula, and the ceiling price will now be determined by using the weighted average price (WAP) of brands with over 1% market share by volume.

The recommendations will be sent to the Cabinet within a week for approval to bring drugs in National List of Essential Medicines (NLEM), that have a total sales of around Rs 29,000 crore, which is about 60% of the domestic market, under control.

"We have finalised everything today. Now it will go to the Cabinet and the Cabinet will take the final view. We will send it in a week's time," Pawar told reporters here after the meeting. At present, the government through the National Pharmaceutical Pricing Authority (NPPA), controls prices of 74 bulk drugs and their formulations.

The decision however, has not gone well with the Indian pharmaceutical industry as it ultimately implies that the sector has lost one year's of growth.

According to D G Shah, secretary general, Indian Pharmaceutical Alliance (IPA), companies will suffer almost 15-17% revenue loss due the new policy. "It will hurt the pharma companies in the short-term, but hopefully the players will make it up by volume growth. It will ensure both availability and access of pharmaceutical products in the market," he said.

On the possibilities of the proposal getting clearance from the Cabinet, Shah said that with such high profile ministers on board including the health minister, commerce minister, and the GoM clearing the policy, it is very unlikely the Cabinet will disapprove of it.

Tapan J Ray, director general, Organisation of Pharmaceutical Producers of India (OPPI), is of the view that the new proposal will have adverse impact on the industry. "The span of price control will now cover around 30% of the Indian pharmaceutical market with further squeeze in the margin,” said Ray.

Though not a good sign for the large multinational companies (MNCs) in general, Bhavin Shah, pharma analyst, Dolat Capital, feels they will be impacted only with respect to the specific molecules being brought under the purview. "The impact will be on a case to case basis. Having said that, prices will undergo correction if the companies are selling drugs at higher prices. The new policy as such will not prove detrimental to domestic players to a significant extent though," he said.

Acknowledging the government's rights to make essential medicines available at affordable prices, Ranjit Shahani, president, OPPI, said, "A market-based policy is a balanced formula and will help improve the availability of essential medicines for patients."

A ministers panel, headed by Agriculture Minister Sharad Pawar, finalised the pharma pricing policy on Thursday evening wherein the GoM arrived at a consensus on the option which entails the use of weighted average prices for all the drugs which have a market-share of more than one per cent. "There were three-four options present in front the GoM but I think broad agreement has been made on the option of one per cent market share...," said Srikant Jena, fertilisers and chemicals minister. 

When asked if it would be mandatory for the doctors to prescribe generic drugs, Jena said, "The health ministry will look at it... more number of generic drug shops will be open in the country."

Apart from Pawar, Sharma and Jena, other members of the group include Health Minister Ghulam Nabi Azad, Minister for HRD, Communications and IT Kapil Sibal, Law Minister Salman Khurshid and Planning Commission Deputy Chairman Montek Singh Ahluwalia.

(With inputs from PTI)

Planet Retail sells Debenhams, Nautica and Next business in India to Arvind Lifestyle Brands

This story first appeared in DNA Money edition on Thursday, September 27, 2012.

Planet Retail has exited franchise agreements with three fashion brands – departmental store chain Debenhams and fashion brands Nautica and Next – as part of its business restructuring exercise.

The brands have been taken over by textile and apparel major Arvind Ltd’s wholly owned subsidiary Arvind Lifestyle Brands Ltd.

Ramesh Tainwala, chairman, Planet Retail Holdings Pvt Ltd, said, “I have just concluded the deal and have transferred all the rights in favour of Arvind Lifestyle Brands.”

He, however, did not share financial details. Industry experts said that the transaction value would not be very large as Planet Retail was not the owner of these brands but a franchisee for India.

“It would be difficult to put a value to the size of a deal of that nature,” said a retail consultant.

As part of the deal, Arvind will absorb all the 300-400 employees associated with the Indian operations of the three brands, Tainwala said.

Arvind Lifestyle Brands, which runs value retail chain Megamart, owns 50% stake in Tommy Hilfiger’s India unit. Its existing portfolio of international fashion apparel brands includes Gant, Arrow, US Polo, Elle and Flying Machine. Tainwala said they were looking for a strategic buyer who had expertise in both manufacturing as well as retailing of fashion brands.

“Our business model was based on 100% imports, which was a key concern for viability of the operations. This hurdle gets mitigated now as Arvind has its own manufacturing base and they can do a better job of retailing,” he said.

Arvind Singhal, chairman, Technopak Advisors Pvt Ltd, said international brands need retailing expertise and financial investments to get traction in the Indian market.“The Debenhams departmental chain, Nautica and Next are very good brands and I think the new partners will do a great job based by leveraging on their expertise,” he said.

Earlier, Planet Retail had given up rights on US fashion brand Guess to Major Brands, which markets Mango and Aldo in India.

Experts said Planet Retail had failed to make a mark for the brands brought in to the Indian market in 2007-08 mainly due to positioning and slowdown.

Updates from Arvind Ltd:

Arvind targets Rs 5,000 crore in sales post acquisition of the new brands

Announcing the acquisition on Thursday at a press conference held in Mumbai, Sanjay Lalbhai, chairman and managing director, Arvind Ltd said, “This acquisition is a significant milestone as it signals our entry into the department store segment and also the globally fast growing apparel specialty retail segment. American sportswear lifestyle brand Nautica makes us the dominant player in the sportswear segment. With this move, we have taken a big step towards strengthening our position in the Indian fashion industry. These acquisitions will accelerate our growth and contribute to our vision of achieving sales of Rs 5,000 crore over the next 5 years.”

J Suresh, managing director and CEO, Arvind Lifestyle Brands Ltd, said the company has a strong menswear portfolio, which will get further strengthened with Nautica. Debenhams and Next. "They will substantially strengthen our position in womenswear and kidswear segment. We plan to achieve Rs 500 crore revenue over next five years from current Rs 70 crore by investing Rs 150 crore in to these three brands,” he said.

Acquisition of Debenhams signals the entry of Arvind into the bridge to luxury department store segment. Arvind plans to increase the current number of Debenhams stores in India from two to eight in the next three years. Arvind will enter into the fast growing segment of apparel specialty retail through Next and plans to increase number of Next stores from three to 12 in the next three years.

A Debenhams' spokesperson said that the company is excited by the new chapter to be written together with Arvind. "The new partners are are a very solid and experienced retail group with a fantastic reputation. I’m confident that within the next five years, we’ll have eight fabulous Debenhams stores in five of India’s biggest cities."

Commenting on the acquisition, spokesperson from Next said, “We are very positive about the new franchise partnership and are looking forward to Arvind Brands re-launching the Next brand in India."

The licensing arrangement with Nautica will strengthen Arvind’s already strong position in high potential sportswear segment of the market. The company plans to set up additional 30 Nautica stores taking the tally to 41 free standing Nautica stores and 71 shop in shops in the next three years.

“We are excited to be working with Arvind Lifestyle Brands on the further development of this market,” said Maria Vicari, president, Global Licensing - Nautica Apparel Inc. “As we continue to grow our brand footprint internationally with our licensed operators around the globe, we look to Arvind with their significant expertise in brand building in India, to grow Nautica’s presence in this important emerging market.”

ITC to expand hotels chain by two-thirds

This story first appeared in DNA Money edition on Wednesday, September 26, 2012.

ITC Hotels is aggressively pursuing an investment-led growth strategy to become the largest hotel operator in India.

A part of ITC Ltd, the chain is targeting 150 hotels across four accommodation categories in the years to come.

It currently has around 90 hotels in over 70 destinations across India.

As many as 40 hotels are at various stages of development, according to Nakul Anand, executive director, ITC Ltd.

“These hotels are either owned or managed by us under one of the four brands. The intention is to double capacity in the next few years in terms of rooms, across the brands,” said Anand, adding that the company has an outlay of Rs9,000 crore for the hotels business.

He said the company is committed to competitive growth and deploying its full portfolio across the four segments. “That is what we believe is required to successfully deliver on our ambition and goal to attain competitive growth. All the funding will be done through internal sources,” he said.

In line with its ‘responsible luxury’ ethos, the company recently opened a brand new, 600-room integrated super premium luxury hotel, ITC Grand Chola, in Chennai. Built at an overall cost of Rs1,200 crore, this is the world’s largest LEED Platinum Green Hotel in the new construction category.

LEED, or Leadership in Energy and Environmental Design, is a rating given by India Green Building Council (IGBC) under licence from the US Green Building Council.

This new hotel is an addition to seven existing hotels in Chennai, Ooty and Madurai.

Other additions include a 500-room hotel adjacent to the ITC Sonar in Kolkata and an ITC resort property in Manesar. The development pipeline currently encompasses 3-4 hotels under construction (the premium segment) and another 6-7 hotels on the drawing board.

“In the course of the next few years, we’ll consolidate our position in main metros and Tier II cities with critical inventory across our multiple brand portfolio. While pursuing this, we are constantly evaluating potential opportunities in leisure destinations as well like Goa and Kerala to name a few,” said Anand.

Focusing on niche areas and providing differentiated value propositions, ITC Hotels has been leveraging on the country’s unique advantages in terms of diversity and heritage. The company caters to the emerging needs of travellers through ITC Hotels (luxury), WelcomHotel (five-star), Fortune (mid-market, upscale) and WelcomHeritage (heritage leisure).

Adding another dimension to the Fortune brand, the company has introduced a new product under the My Fortune brand. The new offering is mainly targeted at upscale business travellers. This apart, the company has undertaken a re-branding exercise for hotels under the WelcomHeritage brand with the introduction of Legend Hotels, Heritage Hotels and Nature Resorts.

ITC Hotels has been considered a game changer since its inception a little over three decades ago. The company pioneered the concept of providing luxury accommodation in cities like Ahmedabad, Bhubaneswar and Amritsar, which were hitherto not considered as sought after markets in this category. The company also has to its credit of being the youngest among Indian chains and is recognised as the fastest growing chain in the country in the very first decade of inception.

“Our business philosophy is to continue to make a meaningful contribution to the overall economic development of the country in multiple ways while enriching the tourism landscape of the country. We believe that business can and must play a role. Therefore we have consciously moved from a single dimension of financial value creation to a triple bottomline philosophy of creating value that encompasses the economic, environmental and social dimension,” said Anand.

ASK Property to invest Rs 500 crore in realty projects by Sept 2013

ASK Property, the real-estate private equity arm of ASK Group, will invest Rs 500 crore in real estate projects over the next 12 months. The investments will be made from their Rs 1,000 crore, second domestic real estate fund ASK Real Estate Special Opportunities Fund raised in 2012, said a top company official.

Sunil Rohokale, CEO and MD, ASK Investment Holdings, said, "We will be investing in 4-5 within a year from now. The ideal size of the transactions will be between Rs 100-150 crore each depending on the project."

The real estate investment firm has, in the last four years since inception, raised two domestic real estate funds with an overall corpus of Rs 1,326 crore (Rs 326 crore + Rs 1,000 crore). The company has already place 50% of the overall corpus in eight investments across cities like Delhi, Mumbai, Pune and Chennai.

Entering the Bangalore real estate market, with their ninth investment, it has picked up undisclosed stake in a residential project developed by Sushil Mantri promoted Mantri Developers. While ASK Property has committed Rs 100 crore for the project, it has already deployed Rs 77 crore in the special purpose vehicle (SPV) developing the project. The overall cost of this affordable luxury residential project located in the heart of Bangalore is pegged at around Rs 450 crore.

Amit Bhagat, CEO and MD, ASK Property Investment Advisors (ASKPIA), said, investment in Mantri's residential development is their first in the Bangalore real estate market. "Another deal is in the advanced stages of finalisation and we should be closing the transaction within a fortnight or so," Bhagat said adding that the investment firm typically picks up 26%-65% stake for its equity in the real estate projects.

To launch $200 million maiden offshore real estate fund in October '12

In another development, ASKPIA is launching its first offshore fund with a corpus of $200 million. An entity in Singapore has already been established for this purpose and the investment firm will hit the road for fund raise starting October 2012.

Rohokale said that an offshore fund vehicle has been set-up and approval from Monetary Authority of Singapore (MAS) has been obtained. "We are expecting to start the fund raise next month. The target is to achieve the first close before March 2013 and do a final close within the same calendar year," he said.

Christened ASK Capital Management Pte Ltd, Singapore, the offshore fund will have a 6 year tenure to be extended by two terms of one year each. The investment strategy will focus on project level mid-segment residential developments in the top 5 Indian cities. The money will be raised from family office, ultra high networth individuals (HNIs), institutions, sovereign funds and endowments. "The gross return (internal rate of returns - IRR) expectations from this fund is over 20%," Bhagat said.

Despite unfavourable fund rasing environment, ASKPIA is confident about their plans to raise $200 million on the back of strong performance of their investee companies from the domestic fund portfolio.

"Our investments are in marquee developments by realtors like Godrej Properties, Omkar Realtors, Rajesh Builders and Mantri Developers to name a few. One of the major factors that works to our advantage is that we have already returned 40% of our first fund to our investors at a significantly high IRRs. So we have a strong track record to demonstrate to our offshore investors," said Rohokale.

74% FDI in broadcast a game-changer

This story first appeared in DNA Money edition on Saturday, September 15, 2012.

The government on Friday has raised foreign direct investment (FDI) limit from 49% to 74% in various services of the broadcast sector, except television news channels and FM radio where the existing 26% limit will continue.

The 74% FDI limit will apply to broadcast carriage services providers, including direct-to-home (DTH), head-end in the sky (HITS), multi-service operators (MSOs) and cable TV to bring about uniformity.

Commerce minister Anand Sharma said 49% FDI will continue to be approved through the automatic route. But any FDI beyond 49% up to 74% will be allowed through the government route, thereby requiring a clearance from the Foreign Investment Promotion Board (FIPB).

The higher limit for FDI in broadcast is a welcome step, in the right direction, and much anticipated, said Smita Jha, leader-entertainment and media, PwC India.

“This will help step up the process of digitisation where investments by the cable industry are required. This timely announcement will likely enable the TV distribution industry meet the October 31 deadline for mandatory digitisation in the four metros. Also, uniformity in the 74% FDI limit across sub-sectors like DTH, cable and HITS is acommendable step, given that we are now in the era of convergence,” said Jha.

Till now, 49% FDI was allowed in the cable TV and DTH segments while it was 74% in HITS,a satellite multiplex service that provides TV channels for cable operations. Among other segments, 74% FDI was allowed in mobile TV, which is an area of future growth.

Devendra Parulekar, partner, Ernst & Young, said the 74% FDI decision will introduce parity among the three platforms of HITS, DTH and cable TV.

“All these platforms are capital-intensive and only people with deep pockets and a long-term interest are capable of investing. Besides, given the fact that digital addressable system (DAS) is round the corner, a lot of investment needs to go to digitising the existing network, seeding the set-top boxes (STBs) and getting back-end systems and processes up and ready. A lot of action is expected in the coming few months as foreign players have been waiting for long for this policy regime,” said Parulekar.

India is estimated to have about 106 million households with cable and satellite TV. Some 26 million use DTH and 80 million receive feed from cable networks. Industry experts said that digitising these homes would require an overall investment of over $20 billion, a major portion of which can now be raised from foreign investors.

Tough times ahead for premium hotels in India

An edited version of this story first appeared in DNA Money edition on Tuesday, September 11, 2012.

India's premium hotel operators (five-star, five-star deluxe and above) are in for challenging times in the next couple of years. As per Crisil Research, profitability of premium hotels is likely to plunge to levels that will be the lowest in the last decade. The analysis is based on business performance assessment of the premium hotel segment across 12 Indian cities that collectively account for 80% of India's premium hotel rooms.

As global economic slowdown affects both business and leisure travel, according to Binaifer Jehani, director, Crisil Research, annual demand growth for premium hotel rooms is likely to stay subdued at 7% in 2012-13 and 2013-14. "The slowing demand growth will coincide with large additions of rooms. We expect 14,500 new rooms to be added by 2013-14 to the existing 46,200 rooms as a result occupancy levels of premium hotels will fall from 64% in 2011-12 to 56% in 2013-14," said Jehani.

Fighting a host of challenges including slowing demand growth, rising costs, large-scale room additions leading to decline in occupancy levels and average room rates, the premium hotels segment will see operating margins drop to just over 16% in financial year 2013-14. This, according to Crisil, will be the lowest in 10 years as a similar drop was witnessed back in 2002-03 and 2003-2004 post 9/11 terror attack and the SARS (Severe acute respiratory syndrome) outbreak.

“The margins had dropped to 16-17% during that period, as travel advisories were issued by various countries thus sparking a drastic fall in demand. However, that fall was temporary and margins recovered to their earlier levels of 30-35%. This time around though, the recovery will be slower. A continued oversupply, at least till 2015-16, will maintain the pressure on profitability of premium hotels,” Jehani said adding that operating margins will, dip from around 24% in 2011-12 to slightly over 16% in 2013-14.

However, Dilip Puri, managing director - India and regional vice president - South Asia, Starwood Asia Pacific Hotels & Resorts Pte Ltd, feels it is incorrect to generalise trends across the whole country. "While there is pressure on margins, I do not believe they will plunge to levels as indicated in the report. At Starwood, we have institutionalised many learnings from the recession of 2008/9 and now have more efficient cost structures in place to withstand the temporary dip in business we are seeing presently. The markets that will see considerable pressure are those where there is likely to be a significant increase in supply, specifically Chennai and Delhi (with DIAL hotels).”

Officials from other domestic and international premium hotel chains like Taj, Oberoi, Leela, ITC, Marriott, Hilton, Accor, etc were not available for a comment.

However, P R S Oberoi, chairman, East India Hotels (owners and operators of The Oberoi and Trident hotel brands), in his address to shareholders last month had said that while occupancy levels were maintained, room rates have shown a downward trend. "Due to the expanding presence of new international brands, supply has exceeded demand in the luxury segment in several cities," Oberoi had said.

Increased room inventory across various markets has already intensified competition and aggravated the demand-supply imbalance prevailing in the segment. As a result, average room rates (ARR) for premium hotels, which are already under pressure, are set to further dip by about 10% in 2011-12 and 2013-14. The fall in occupancy rates and room rates is likely to precipitate a sharp decline in revenue per available room (RevPAR), the revenue from rooms occupied divided by the number of rooms available. "The average RevPAR for premium hotels will plummet from Rs 5,000 per day in 2011-12 to Rs 3,900 per day in 2013-14," said Crisil Research.

Of the 12 cities being analysed, it is expected that 10 of them will see decline in RevPAR. While cities like Ahmedabad and Chennai are set to be impacted the most with an annual decline of over 20%, premium hotels in Bengaluru, Hyderabad, National capital Region (NCR), Jaipur and Kochi will register a fall of 15% annually. Markets like Agra will see stable RevPAR due to limited room additions while it will marginally increase in Goa.

The research house further added that decline in RevPAR will erode the profitability of premium hotels, as room revenues make up almost two third of their total revenues. Rising costs will add to the pressure on profitability. A shortage of personnel will increase employee costs, whereas energy costs are also expected to rise significantly.

ITC dares Mukesh Ambani, picks up more in EIH

This story first appeared in DNA Money edition on Tuesday, September 11, 2012.

It was in January 2009 that ITC last picked up a stake in EIH – which was 0.5%.

Since then, the PRS Oberoi-promoted hotels chain has had a few looking-over-the-shoulder moments. Was ITC chairman Yogesh Chander Deveshwar the proverbial predator at the gate?

The build-up of anxiety was enough for hospitality’s doyen to bring in a white knight – the Mukesh Ambani-led Reliance Industries, in August 2010.

The company now holds 18.53% stake, and Mukesh’s wife Nita and confidante Manoj Modi are members of the EIH board.

Yet that hasn’t stopped Deveshwar and ITC, through its investment arm Russel Credit, from increasing its stake by 1% or 57.38 lakh shares on Monday, to 15.98%.

The Rs41.89 crore purchase was made through HSBC Bank (Mauritius) Ltd in a bulk deal on Monday wherein Russel Credit paid Rs73 per share.

EIH shares closed at Rs79.35 after reaching an intra-day high of Rs81.45.

In the January-March quarter of 2009, ITC’s holding in EIH increased from 14.96% (from April-June 2008) to 14.98%.

ITC’s stake then was a whisker under the open offer trigger of 15% set by the Securities and Exchange Board of India (Sebi) until August 2011 post which threshold was increased to 25%.

Deveshwar’s renewed interest in the hospitality business is evident from the fact that Russel Credit has been accumulating shares in Hotel Leelaventure Ltd during the April - June quarter of 2012, increasing ITC’s holding by 1.1% to 13.98% as of August 2012.

Industry experts ruled out ITC’s increased shareholding in EIH Ltd as an attempt to gradually pursue hostile takeover considering RIL is already on board as a white knight. “ITC can never take on RIL’s financial muscle. It’s just not possible. Can’t say the same about Hotel Leelaventure though considering Capt. Nair is reeling under the financial pressure with mounting debt on the company’s books,” said a leading hospitality consultant requesting not to be identified.

ITC spokesperson did not comment on the development. The management has however, maintained in the past that buying into hotel company stocks is part of its treasury operations and has nothing to do with hostile takeover.

Commenting on ITC’s hotel stock buying spree, Homi S Aibara, partner, Mahajan & Aibara Management Consultants (a hospitality, travel and tourism industry focused consultancy firm), said, “Majority of the hotel sector stocks are hugely undervalued currently and are nowhere close to the company’s underlying value of assets owned by them. I would have bought hotel stocks too, if I had such a huge treasury operation.”

Earlier in March 2012, Mukesh Ambani-led Reliance Industries had bought out Max Group chairman Analjit Singh’s 3.73% stake in EIH Ltd. Singh’s investment firms Gaylord Impex and Pivet Finances had sold all the 21,315,000 EIH shares in a bulk deal to RIL subsidiary Reliance Industries Investment and Holding Pvt Ltd at Rs90 a piece valuing the deal to Rs191.83 crore. RIL current holding has now increased to 18.53% from 14.8% before.

People buy Samsonite to experience the brand promise

Ramesh Tainwala

This Q&A first appeared in DNA Money edition on Wednesday, September 12, 2012.

Ramesh Tainwala's association with the luggage industry goes much beyond the 15 years he has spent with Samsonite. His first brush with the industry was as one of the suppliers for Indian luggage major VIP Industries, eventually paving his way to take reins of the US luggage major's operations as president of Asia Pacific and Middle East region. He shares views on the Indian luggage market, market perception of the brand, recent acquisitions and expansion plans. Edited excerpts...

Samsonite is perceived to be very expensive brand. Are you doing anything to possibly change that perception in the market?

We are quite happy with that perception and do not want to dilute that brand image in the consumer's mind. Samsonite is our top-end offering and is supposed to be a prestigious and innovative brand. Any new technology that we develop is first launched under the Samsonite brand and gets launched with other brands after a gap of a over a couple of years.

There is certain level of expectation in a customer's mind and many a times we have noticed that they know the product will be expensive when they walk into the store. People are buying the brand to ultimately experience the brand promise. In fact, there are times when consumers are pleasantly surprised to know that we have an entire range of bags (depending on their definition of affordability) starting from Rs 5,000 going up to Rs 35,000 and beyond. Using a Samsonite branded bag also communicates the individual's social status and we want them to flaunt it.

The urban middle and upper middle class buyer is being targeted through the American Tourister bags starting from Rs 1,000 going up to Rs 6,000. The product delivers the same quality and functionality as Samsonite. And we have now launched a new brand called AT, which is the rural cousin of American Tourister and is sold at 30-40% premium over unbranded luggage. The AT products are priced from the Rs 800 to Rs 2,500 and is aimed at migrating people from buying unbranded luggage.

So there are different brands catering to target audience and that is precisely how we think it should be.

Is VIP Industries a strong competitor considering it is almost addressing the same set of consumers?

VIP remains a formidable competitor as they have certain inherent strengths. Their market share is almost same as Samsonite in terms of value. The only differentiation is they concentrate more at the lower-end of the target audience while our focus is premium. We reach out to 85-odd towns and cities with 2,500 doors while they are anywhere and everywhere with over 13,000 doors. It will take us 3-5 years to reach as many doors as VIP has but we are not in a hurry. We do not want to compete at the lower-end but help people migrate to high and premium segment and the strategy is working for us.

Could you throw some light on the Indian luggage market and its growth trajectory?

The size of the luggage market in India is Rs 5,000 crore growing at a cumulative average growth rate (CAGR) of 15-16% since the last five years. The year 2011 was a very exciting period for the Indian luggage industry which witnessed almost 35% growth thanks to the overall boom witnessed across sectors and especially travel including airline travel. Consumer sentiments is weak in 2012 as a result growth in travel and luggage industry has come down to 8%. However, if you average out the growth in the last 5 years, it would be in the 15-16% bracket.

What is your analysis of the buying trend in the Indian market these days?

Buying trend is slowly shifting to organised / modern retail irrespective of whether we open the market for global retailers or not. The mom-n-pop stores as we call it, are on a self destructive path and we don't have to blame Wal-Mart or Carrefour for that. People have less time, want to shop in more convenient environment and do not have the capability to haggle. They want to buy on an announced sale and will buy when such opportunities (discounted sale) are being offered in the market.

How are the margins like in this business?

It depends from channel to channel and can vary from 10-15% in small stores to 15-30% in case of bigger department stores. Margins also depend on the other retailer's buying / negotiating power.

What is the contribution of company owned and operated (CoCo), franchise stores and modern retail to India business? And how many stores do you have currently?

It's a third each I'd say. The 150 CoCos are largely operated in Tier I and select Tier II cities. Tapping the market beyond these cities is done through 300-odd franchisee stores. The modern retail has over the last few years grown significantly for us and also enjoys the same ratio. We envisage considerable increase in the number of CoCos going forward as a host of markets have grown in size and buying power thereby qualifying to be covered by company outlets.

What are your retail expansion plans in this fiscal?

Our internal plan is to add 50-odd doors every year. Thus, if we are adding those many we also face mortality rate of 5% odd, which means we also close 5-10 outlets. So the net addition is around 40-odd outlets every year. Going by that definition, in three years time we will move up to around 250 doors. On an average our expected investment in the next three years is around Rs 50 crore to be funded through internal accruals.

Could you take us through some of the recent inorganic initiatives?

Sure. Samsonite International has recently acquired a luxury brand called Hartmann, which is into luggage and leather goods targeted at the ultra premium customers. The starting point for a piece of luggage under this brand is $2,000 going up to $15,000 - $20,000. We are still to launch it in the Indian market though as the brand will have a very limited scope hence a very selective approach will be adopted by launching just 3-5 Hartmann stores in India.

High Sierra is another acquisition we have done in the US. This is a casual and adventure wear company with urban active lifestyle products like T-shirts, flip-flops, backpacks, adventure luggage and sports bags. This acquisition help us strategically extend the brand portfolio into the active outdoor lifestyle category and will be targeted at the young segment in the 16 to 35 year age group and positioned between Samsonite and American Tourister with a price range of Rs 2,500 to Rs 10,000.

What is the response for your footwear products?

Footwear is an interesting category and we are still in the learning stage with it. We'd launched it initially with a three year learning phase to be followed by it becoming a profit making category. We are in the sixth year currently and we are yet to take it to the next growth stage.

Having said that, we are confident that this will become a profit making category in the years to come as there are lot of similarities in the overall processes and approach to running a luggage and footwear business. The differences in case of footwear is the cycle of new launches and different sizes. New footwear range needs to be launched every six months as compared to 2-3 years for luggage products.

How is the travel to non-travel ratio in the company?

Non-travel currently is 35% and the balance is travel. However, we are working to increase non-travel to 50% thereby creating equal ratio between the two categories.