DB Realty deal with Starwood Capital in doldrums

This story first appeared in DNA Money edition on Friday February, 18 2011.

Recent controversies surrounding DB Realty may have forced private equity firm Starwood Capital to junk plans for investing in one of its premier projects.

DB Realty, India’s third-largest realty firm by market capitalisation, was in talks with Starwood Capitalto invest Rs 450 crore for a 10-15% stake in the Government Bandra Colony project.

However, a senior executive affiliated to a private equity firm said Starwood Capital is no longer considering the investment.

“There is no substance whatsoever in Starwood Capital participating in this fundraising exercise by DB Realty. It appears to be a desperate effort by the realtors to attract more investor participation to fund this development,” the executive said.

However, a DB Realty spokesperson maintained the deal is in the works. “Starwood Capital is considering investment in the Bandra Government Colony project and we have signed a non-binding term sheet.”

“Due diligence is in progress and we do not have any information of them backing out of the deal,” the spokesperson added.

Meanwhile, lending credence to talk of the deal falling through, DB Realty has restarted negotiations with other private equity firms.

“We were talking to a few PE funds. However, we now have a couple of domestic investors looking at this project and we should quickly be able to finalise the deal and pay the money to the government,” the spokesperson said.

“We are talking to a domestic private equity fund investor to raise Rs 600-800 crore. The stake sale of 25-30% was a back-up to the Starwood one and we are looking to probably close the deal soon,” another DB Realty official said on condition of anonymity.

DB Realty was first in talks with HDFC India Real Estate Fund (HIREF) to raise Rs 450 crore, but the fund backed out.

“The project at present has 3-3.5 FSI and they have valuated everything based on a FSI of 4 that they think they will get because it is a MMRDA project. But if they don’t get the 4 FSI the project is totally inviable. That’s why we backed out from it,” a senior HIREF official said.

That’s when Starwood Capital entered the picture, albeit offering a lower valuation. The developer had indicated in August 2010 that it would sell 20% stake in the project for Rs 1,200 crore, whereas now it is eager to sell off 25-30% stake for half the amount.

The company has to make a payment of Rs803 crore by the end of February to keep the project in its stable.

An analyst affiliated to a domestic brokerage felt the current market situation is not good enough for projects of this size to command premiums.

“The valuations have come down and their plan to sell at Rs20,000 per square feet is now a concern,” the analyst said.

An email sent last week to Starwood Capital’s officials in the US and to Sundaram V Rajagopal, managing director, Starwood Capital India Advisors Pvt Ltd, remained unanswered.

Last week, it was reported in the stock exchanges that Shahzaad Dalal, an independent director on DB Realty board, had resigned. It is learnt that Dalal, vice-president of IL&FS Investment

Managers, had sent his resignation to the company last year in November and the embattled real estate group kept his resignation in abeyance for three months, underscoring a shaky governance record.

Incidentally, Sundaram V Rajagopal also serves as non-executive non-independent director of DB Realty Ltd. Given the controversies surrounding the realtor, there is concern on whether Rajagopal will remain on the company’s board.

“He is close to the DB Realty promoters and is on their board in his personal capacity,” a source said. “His presence on the board cannot be seen as a representation from Starwood Capital. Now whether he will resign from the board or hold on to the position is something he will have to take a call on. Having said that, I’d presume that being the India head of a globally renowned investment firm, he should probably step down from the realty company’s board on ethical grounds.”

(My DNA Money colleague Pooja Sarkar contributed to this story)

Piracy booms, Indian channels bleed

This story first appeared in DNA main edition on Saturday February 2, 2011.

The popularity of Indian soap operas and television shows in the Asia-Pacific region has turned piracy into a booming industry. Cashing in on the craze for serials from Zee, Sony, Star and other channels, local broadcasters are beaming these illegally into homes in Afghanistan.

Tarun Mehra, territory head, Zee International Business, said the company has been monitoring such illegal practices in some countries in the Asia-Pacific region. This is blatant violation of intellectual property rights (IPR), he added.

“There are some channels who legitimately buy our content to show it on their network. However, evidence gathered by our team has shown that Afghan TV is misusing our content and making financial gains from it,” said Mehra.

The spokesperson for Star TV did not comment on the issue while Sony and Colors could not be reached. Officials from the Afghan embassy in Mumbai did not responded to questions either.

The Afghan TV pirates have a carefully thought out business model. Popular television content is procured by downloading it using a direct-to-home box. This is followed by dubbing the shows in the local language (Pashto) and then beaming it on their network.

Afghan TV, sources said, operates primarily with Indian content. Broadcasters say serious money is being lost in the process.

“Estimating that a 30-minute soap can be sold anywhere between $200 and $400, loss of potential revenue in case of every such soap works to around $100,000 per annum. On a conservative estimate, the overall loss of revenue due to piracy of GEC content for all Indian players can be anything upwards of $2 million,” said Mehra.

Zee has taken up the matter with the Afghan Embassy and will pursue it with industry bodies and the government to regularise this stream.

Losses due to piracy are not restricted to Afghanistan alone. Many other countries blatantly violate Indian entertainment content. Experts said piracy has gained momentum in countries like Thailand, Indonesia, Bangladesh, Pakistan, Sri Lanka and the Middle-East too.

While it wasn’t that big a phenomenon earlier, the practice has picked up significantly in the last few years. Based on Cable & Satellite Broadcasting Association of Asia estimates, broadcasters peg the overall losses from piracy in 2010 to be over Rs9,000 crore.

An annual pay-TV piracy survey of 15 Asia-Pacific markets conducted by the association in 2009 estimated annual revenue loss of $1.94 billion while the annual pay-TV revenue leakage in Asia in 2008 was estimate to be $1.75 billion.

Cox & Kings expects foreign buyouts by June

The story first appeared in DNA Money edition on Wednesday February 09, 2011.

Cox & Kings Ltd, the tour operator, said it’s in the final stages of making more than one acquisition by June this year. Peter Kerkar, executive director, Cox & Kings, said the company is currently in negotiations.

“The advantage for us is that, we are in a position to act fast and conclude the transaction the moment the opportunity is appropriate. We expect to do so within the quarter ending June,” said Kerkar. The buyouts being looked at include in Europe, the UK, the US and China. Funding will largely be done through monies raised by the company in the recent past.

Cox & Kings currently has liquid funds of Rs1,052 crore, earmarked for acquisitions. Of this, approximately Rs640 crore is parked outside India. Anil Khandelwal, chief financial officer, Cox & Kings, said, the large sum is parked outside because there are certain jurisdictions where a serious discussion with an acquisition target cannot be had unless funds are shown as available.

Morgan Stanley analysts Nillai Shah, Hozefa Topiwalla, Girish Achhipalia and Ashwini Kamath in a recent report estimated that Cox & Kings is currently trading at 17 times its next fiscal’s earnings and has close to Rs1,200 crore of cash on its balance sheet. “While the markets seem overlyconcerned about it destroying capital through acquisitions, the company also has a successful track record in creating value from acquisitions, and this cash presents an attractive option value for investors. If it can deploy this cash at even half its current adjusted return on capital employed (RoCE), the returns thereon would double current profits,” the quartet said.

Cox & Kings recently announced its financial results for the third quarter ended December 31, 2010, where net sales rose 37% to Rs108.31 crore compared with Rs78.89 crore earlier. Net profit rose 20% to Rs23.34 crore compared with Rs19.53 crore in the year-ago period. Diluted earnings per share stood at Rs3.52 compared with Rs4.07 in the corresponding period of last fiscal year. “The decrease in earnings per share is due to fresh issue of shares during GDR in August 2010,” said top company official.

Operators, experts laud revised plan for cable TV digitisation

The story first appeared in DNA Money edition on Tuesday February 08, 2011.

The information and broadcasting (I&B) ministry’s revised schedule, for digitisation of cable TV across the country, is seen as a significant development by operators. This move, according to industry experts, is a positive and practical step.

According to analysts Nikhil Vora and Swati Nangalia at IDFC Securities, the I&B ministry’s response to Telecom Regulatory Authority of India’s (Trai) recommendations, is a critical development for digitisation in the country.

“We expect India to reach 86 million digital homes by 2015, as against over 30 million currently. However, the regulatory push towards digitisation could potentially underpin faster growth in the overall industry. The Cabinet approval is the final step for these proposals to get implemented, which is likely to be received in the next three months,” the analysts said in their report

In the next 5-odd years, India is likely to be the second largest digital market in the world, aiding the addressal of the industry’s biggest bane of ‘under-declaration’. This will lead to a significant leap (6.5 times) in the organised industry to $7.7 billion (from the current $1.2 billion). Similarly, the capital requirement of the industry would be pegged at $5 billion.

Some of the leading players in this segment include WWIL, DEN Networks and Hathway Cables. Analysts covering the space envisage over 50% returns on the stocks of these companies from current levels.

The cost of digitisation, largely, requires setting up optical fibre network and supplying set top boxes (STBs) to subscribers.

The key challenge, however, comes from local cable operators (LCOs), who have a vested interest in operating the analogue version and hence are not supportive of the digitisation policy. However, with the policy amendment expected soon, it will be mandatory for LCOs to adopt digitisation, which will improve the overall health of the cable TV industry.

A senior official from a leading cable TV company asserted that digitisation is very crucial for multi-system operators (MSOs), as it will bring in complete transparency as far as subscription numbers are concerned.

“MSOs are losing money on account of under declaration by LCOs. Digitisation will solve this problem to a great extent. Besides, the subscriber will now get better services at very attractive prices, since cable operators will get a level playing field to compete with the direct to home (DTH) players,” said the official requesting not to be identified.

A media and entertainment sector analyst with a domestic equity research firm, speaking on condition of anonymity, said, “The development is positive in the medium term for industry players. LCOs resorting to disclosing just about 10 to 15% of their subscriber base will eventually have to make complete disclosure. However, DTH operators will now have to face inter-segment competition in the metros and Tier I cities, as MSOs will be able to offer comparable services to subscribers. There is a possibility that average revenue per user (ARPU) for DTH operators may come under pressure. However, Tier II and III markets will continue to see growth in DTH subscriber base as MSOs / LCOs may take a while to spread their network there.”

In August 2010, Trai had suggested key recommendations for the Indian cable distribution space, including a sunset date of December 2013 for complete migration.

The ministry’s new rollout schedule in Phase I, suggests the launch of the new format, starting with four metros by March 31, 2012 instead of March 31, 2011, as proposed by Trai. In Phase II, which include cities with population of over 1 million to be covered by March 31, 2013, while the rest of the country is to witness analogue to digital migration by March 31, 2015. Paucity of STBs and related supply issues, in addition to the need for increased investments towards digitisation, were cited as key reasons for deferring Trai’s recommended sunset clause.

MGM Hospitality signs first hotel in India

MGM Hospitality has signed a definitive agreement to operate its first destination hotel in India. The MGM Grand and Skylofts New Delhi will be part of a dynamic multiple-hotel development in the national capital of Delhi.

MGM Grand, Las Vegas

Located a mere 350 meters from National Highway 8, the site has convenient access to the burgeoning business city of Gurgaon, posh South Delhi, the diplomatic enclave, the Central Business District and the new commercial and hospitality district near the New Delhi International Airport.

In partnership with Silver Resort Hotel India Pvt Ltd (a company promoted by Blue Coast Hotels Ltd), MGM Hospitality will provide design assistance and operate this luxury hotel facility under the legendary brand of MGM Grand. The new hotel will feature approximately 480 MGM Grand guest rooms, along with a number of exclusive Skylofts brand suites and serviced apartments.

“This development marks our entry into the burgeoning India marketplace,” said Gamal Aziz, president and CEO of MGM Hospitality. He added “Our brands are known the world over, but being welcomed into a new nation is always exciting, especially one with a hospitality market as dynamic as India’s.”

Groundbreaking on the project is scheduled for March 2011. MGM Grand New Delhi is anticipated to welcome its first guests in early 2014.

MGM Hospitality is a wholly owned subsidiary of MGM Resorts International (NYSE: MGM), that was formed to operate hotels, resorts and residences in key destinations around the world under the brands Bellagio, MGM Grand and Skylofts.

Silver Resort Hotel (I) Pvt Ltd is promoted by Blue Coast Hotels Ltd. The Company has acquired 5.03 acres of land from Delhi International Airport Limited (DIAL) in the hospitality district of the Delhi International Airport. The gross built up area is 7.30 lacs sq. ft. for an upscale luxury hotel with hotel apartments.

Blue Coast also owns the 251 room five-star deluxe luxury resort Park Hyatt Goa Resort & Spa in Goa which is the first and the only ‘Park Hyatt’ in India. The group has handled green field projects from land acquisition to making of the market leaders and has relationships with leading International hotel chains such as Hyatt and Sheraton.

Egypt unrest impacts Indian tourists' plans of visiting the pyramid country

An edited version of this story first appeared in DNASunday edition on January 30, 2011.

Smitha Nair (name changed on request) and her fiance had planned an April honeymoon trip to Egypt post their March wedding. However, the couple has now decided to call it off and travel elsewhere instead after the news of political unrest there making it to the headlines.

While potential Indian visitors to Egypt are cancelling their travel plans and considering other destinations, those already in the country are working out ways to get out to safer destinations. However, with all modes of communication including internet and mobile phones being shut down, Indians in Egypt are having a tough time connecting with their family members, travel service providers back home.

Ashwini Kakkar, vice chairman, Mercury Travels, said his office has been busy tracking their customers in Egypt especially after all the violence that began post Friday night prayers. Though some of their clients have chosen to stay a few others have decided to come back.

“Quite a few of our customers are currently in Egypt and we are trying to locate their whereabouts. A honeymoon couple has been moved out of Cairo and is currently on the Nile River Cruise post which they will be heading to Sharm El Sheikh. Another family consisting of senior citizens wanted to come back and we have managed to put them on a flight back to India. Efforts are being made to get in touch with an Ahmedabad-based family currently in Egypt, hopefully we should be able to connect with them soon,” Kakkar said.

Egypt's instability is clearly spelling trouble for the country's travel and tourism industry in 2011 more so because December to March and to some extent April is considered to be a business season. A very popular destination for holiday, honeymoon and lately business conference related travel for Indians, industry experts are of the opinion that the current business season has being ruined already.

According to leading travel companies including the likes of Thomas Cook, Cox & Kings, Kuoni Travels and Akbar Travels nothing untoward has been reported with Indian tourists in Egypt so far. However, they were not in a position to give out details in terms of number of Indians currently in Egypt, cancellations being witnessed in the last 24 hours and possible remedies being adopted for Indian tourists stuck in this situation.

Travel trade experts however are of the opinion that approximately 250,000 Indians visit Egypt every year and at any given day there would be a minimum of 1,000 Indians visiting the country on business or leisure.

According to a PTI report, the embassy of Indian in Cairo has said that nationals in Egypt, which is witnessing violent protests since last four days, are safe but advised its people against travelling to that country. "The embassy of India in Cairo, is in touch with members of the Indian community, who are reported to be safe. There are about 3,600 people of Indian origin (PIO) in Egypt, of which some 2,200 are in Cairo. In view of the prevailing situation in Egypt, Indian nationals are advised to avoid non-essential travel to Egypt for the present...," a statement by the external affairs ministry said. Indian embassy has also set-up a round-the-clock control room for information, the statement said.

Responding to an email query a spokesperson for Thomas Cook UK & Ireland said, “We continue to monitor the situation in Egypt and are in close contact with the FCO. Our experienced teams on the ground assure us that no tourist areas at the Red Sea have been affected in any way by the recent demonstrations. They are fully operational and holidaymakers are continuing to enjoy the popular resorts of Sharm el Sheikh and Hurghada.” However, as a precautionary measure, Thomas Cook UK & Ireland has cancelled its excursions from the Red Sea resorts to Cairo up to and including February 2, 2011.

A Cox & Kings spokesperson said, “We do not have people travelling to Egypt at this point in time. And those booking a holiday hereafter are being advised to assess the situation before finalising their bookings.”

Manoj Gursahani, chairman, Travelmart, said that while serious travellers are not holding back their plans, it is better to wait and watch and take a call accordingly. “In case of Egypt, we have not come across any tourist reactions at the moment. It would depend more on how things shape-up in the coming weeks and the media attention that it attracts,” he said. On possibilities of ticket prices getting impacted, he added, “Cutting ticket prices will only happen in case of prolonged strikes. For instance, the situation in Thailand, ticket prices were impacted significantly,” he added.

The Indian travel fraternity also expressed that people these days do not opt for a travel insurance and that they should have it while travelling overseas. “With uncertain eventualities like the one in Egypt, it is largely advised to have a travel insurance in place to avoid any loss in case of cancellations etc,” asserted Kakkar.

On the air travel front, the country's national carrier Egypt Air, Emirates and Etihad Airways form the key carriers for Indian travellers visiting Egypt. While Egypt Air couldn't be reached, Emirates and Etihad Airways are offering passengers relief flights for those looking to cut-short their travel, as a special case situation. However, both Etihad Airways and Emirates have been operating flights on the planned schedule, with no major changes.

“At this stage, all scheduled flights to Cairo and Alexandria are operating as planned, however customers are advised to check the airline's website for the latest updates. Etihad is also working closely with the UAE authorities to operate two special relief flights to Cairo today and overnight to help accommodate passengers in Egypt that wish to return to Abu Dhabi, and is currently assessing opportunities to provide additional relief flights over the coming days,” said the spokesperson from Etihad Airways.

Emirates, however has rescheduled a couple of flights departing from Cairo. While, there have been delays, the airline has confirmed that it will continue to operate flights from and to Cairo on full schedule. “Due the political unrest in Egypt, some of Emirates’ flights have been rescheduled to allow passengers, staff and crew to travel to and from Cairo International Airport. Emirates can confirm, that as of Jan 29th, flights from and to Cairo will continue to operate a full schedule,” said the Emirates spokesperson.

On a precautionary note, the travel trade fraternity is of the opinion that Indian travellers looking to continue with their plans of visiting Egypt should wait for another week or 10 days at least to analyse the overall situation and then travel if at all they have to.

(My DNA Money colleagues, Lison Jacob and Amritha Pillay contributed to this story)

Mandarin Oriental, St. Regis vie for Oberoi Realty's Worli hotel site

This story first appeared in DNA Main newspaper edition on Saturday, January 29, 2011.

Two global hotel chains are in the final race to flag their iconic luxury hotel brands in the Indian hospitality market. The hotel site being fought for is in Mumbai, and the project is coming up in the upmarket Worli area on Dr Annie Besant Road. While one of them is a second-time entrant, it will be an India debut for the other challenger.

Mandarin Oriental Hotel Group and Starwood Hotels & Resorts are in the advanced stages of discussion with Mumbai-based realtor Vikas Oberoi-promoted Oberoi Realty Ltd to lock-in the hotel site for their respective brands. The brands on offer include the flagship 'Mandarin Oriental' from the Mandarin Oriental Hotel Group and St Regis from the Starwood Hotels’ bouquet.

Pegged to be the biggest project from the Oberoi Realty stable, ground work on this 3.1mn sq ft land parcel has already started. Located between the Crompton Greaves building and Grasim headquarters, the plot used to be a slum and will now be redeveloped. The slum dwellers will be relocated to a nearby area. Oberoi Realty has already hired South Korean construction major Samsung Engineering & Construction (Samsung E&C) for this project. The firm was the lead contractor for Dubai’s Burj Khalifa, the world’s tallest tower at 828m.

A senior official at Oberoi Realty said that the company is the final stages of negotiations with Mandarin Oriental and Starwood Hotels & Resorts for a possible association and that a final announcement is likely to be made very soon. “Slum dwellers at the three different parcels will be rehabilitated to one site. This will completely free up the 3.1 mnsqft, wherein 0.4 mnsft will be allocated for a five-star luxury hotel, 0.6 mnsft for commercial office space and 2.1 mnsft of branded residency,” said the official.

The Goregaon-based developer expects a revenue of Rs7,500-8,000 crore from this project, the official added. Vikas Oberoi, managing director of the company, declined to comment.

Once the hotel-cum-branded residence operator is finalised, the duo will enter into a 25-year contract. Oberoi Realty is planning to launch the residential segment sales by June 2011.

Mandarin Oriental has had a short stint in the Indian hospitality market through an association with IHHR Hospitality Ltd's flagship spa destination called Ananda in the Himalayas in Rishikesh. For St Regis however, this will be the luxury operator's first signed hotel if the agreement between Starwood and Oberoi Realty goes through.

Officials of Mandarin Oriental Hotel Group could not be reached for a comment, while those at Starwood denied having signed any agreement for their St Regis brand in India. “Starwood has been exploring opportunities for a partner to bring the St Regis brand into India and Mumbai is one of the cities apart from Delhi and a couple of others that we are looking at. While we are in talks with potential partners, we do not have anything signed as yet,” said Nikhil Manchharam, vice-president, aquisitions and development, Starwood Hotels & Resorts Pvt Ltd for India, Bangladesh & Maldives.

Oberoi Realty has also signed a letter of intent for a redevelopment project in the western suburbs and the final development agreement would be signed in a month. The realtor expects to generate Rs 15,000-20,000 per sq ft from the sale component. The company is also launching Oberoi Exquisite phase II of 1.4 mnsft and 3.3 mnsft development of Oberoi Exotica at Mulund at Rs 7,000-8,000 per sq ft.

Mandarin Oriental

A global hotel investment and management group, Mandarin Oriental currently operates (including those under development) 42 hotels representing over 10,000 rooms in 27 countries – 18 hotels in Asia, 12 in The Americas and 12 in Europe, Middle East and North Africa. The hotel company defines Mandarin Oriental as a family of individual hotels and resorts, each with their own distinct personality yet inherently linked to their exotic oriental roots. In addition, the group operates, or has under development, 13 Residences at Mandarin Oriental, connected to its properties. The Group has equity interests in many of its properties and net assets of approximately $2.1 billion as on June 30, 2010.

St Regis

Starwood's St. Regis brand was created by Colonel John Jacob Astor IV with the idea of developing a new style of luxury, focused on tangible advancements in the comforts afforded the wealthy. These innovations were debuted inside Astor’s classic Beaux Arts landmark, The St. Regis New York, when it opened in 1904 on 55th Street and Fifth Avenue. Before his untimely demise aboard the Titanic, Astor was able to fulfill his vision of creating a hotel where gentlemen and their families could feel as comfortable as they would as guests in a private home. Currently there are 40 The St. Regis hotels across the globe (including those under development). Middle East, Europe, Central & South America, Asia Pacific, Africa, Mexico and North America.

(My colleague in DNA Money, Pooja Sarkar contributed to this story)

Top-brass churn shows improving climes for hospitality sector

This news story first appeared in DNA Money edition on Friday, January 28, 2011.

In a confirmation of sorts of the improvement in business sentiments, the hospitality industry has started seeing churn at the top management level.

The most notable movement is that of Duet India Hotels CEO Dilip Puri, who has taken up a much larger responsibility with leading global hospitality company Starwood.

Navneet Bali, chief investment office, Duet India Hotels, confirmed Puri’s exit, but gave no detail of his new assignment or the person replacing him at Duet.
Vasant Prabhu, vice chairman and chief financial officer, Starwood Hotels & Resorts, too did not give away specifics.

“Dilip will be joining us to take charge of the India operations with additional responsibilities in the region. We at Starwood believe in having local talent to spearhead operations in the country/ region and Dilip’s appointment is very much part of this strategy,” he said.

Industry sources said Puri has joined Starwood Hotels & Resorts as managing director - India and regional vice-president - South Asia on January 24 and is currently undergoing orientation at Starwood’s Singapore office.
Replacing him at Duet is a person from a non-hospitality background who has extensive work experience in the fast moving consumer goods space and has worked as a turnaround specialist for a leading global private equity fund, industry sources said.

“Vikram Seth, erstwhile CEO of the supermarket chain Nilgiris, will be replacing Puri as the new CEO. Pegged as the global private equity major Actis’ turnaround man at Nilgiris, Seth was also associated with FMCG major Hindustan Unilever’s Russia operations and was with Unilever RUB for four years,” a source said.

Calls made to Duet’s Navneet Bali and chief operating officer Naveen Jain for a confirmation of Seth’s appointment did not elicit any response. An email sent to both also remained unanswered.

Among other notable exits, Ashish Jakhanwala, regional director of development - India, Accor Hospitality/ InterGlobe Hotels, has decided to move on.

Jakhanwala, currently serving notice period with the hotel company, is tightlipped on his future plans.

But industry sources said he is planning an entrepreneurial venture with some leading names in global hospitality. The new venture is very likely to be a fund focussed on owning hospitality assets in the country.

An yet-to-be announced movement is that of Harsh Verma, regional vice president - India, Dusit Bird Hotels, who is understood to have taken up a new assignment with Graviss Hospitality Ltd. A BSE-listed entity promoted by Ravi Ghai, Graviss owns The InterContinental Hotel at Marine Drive in South Mumbai, besides a chain of banqueting facilities operating under the brand Mayfair Banquets, a chain of ice cream parlours under the Baskin Robbins brand, and is into high-profile indoor and outdoor catering business.

Verma will be replacing Raman Mehra as the new head of hospitality, foods business and chief executive - Graviss Hospitality Ltd.

Raman Mehra, on the other hand is set to join JHM Interstate Hotels Indian Pvt Ltd, a leading third-party hotel management company promoted jointly by Interstate Hotels & Resorts and US-based JHM Hotels Inc. JHM’s current portfolio includes Four Points by Sheraton properties in Jaipur (already operational), Pune (launching sometime in 2011) and Visakhapatnam (launching sometime in 2011). The properties are owned by hotels focussed private equity fund Duet India Hotels.

Another portfolio change is with InterContinental Hotels Group’s (IHG) Indian operations, which has brought in Chris Moloney, a specialist in running joint venture operations, who was earlier the chief operating officer handling Japan & Korea markets. Moloney takes over IHG’s India operations from Jolyon Bulley, vice president - operations, Southeast & Southwest Asia and was handling India sitting out of Singapore.

IHG confirmed the development saying Moloney, designated chief operating officer - Southwest Asia, has assumed India office starting January.

Moloney’s appointment seems connected with IHG’s plans to ink in a joint venture with Duet India Hotels to roll out a chain of Holiday Inn Express hotels in the coming years.

A senior industry expert said the people movements show that with business improving, hotel companies are beginning to hire senior management personnel to implement expansion plans that had taken a back seat following the economic downturn. “In fact, investments that were held back have also started flowing into the Indian hospitality sector, which is evident from the increased level of activity in the last few quarters.”

FDI trend still in India’s favour, says Ernst & Young

This story first appeared in DNA Money edition on Tuesday, January 25, 2010.

Inward investments have continued to rise since the sharp drop witnessed in 2009, following the global financial crisis. Hiccups notwithstanding, foreign investors see huge long-term growth potential in the country.

In fact, going by Ernst & Young’s first Indian Attractiveness Survey, as much as 75% of global businesses already present in the country are looking to considerably expand their operations going forward.

The survey also confirms that India is undergoing a transition, both in terms of investor perception of its market potential, and in reality.

“With GDP growth projected to surpass 8% annually and the number of people in the Indian middle class set to treble over the next 15 years, with a corresponding impact on disposable income, domestic demand is expected to grow exponentially. India’s young demographic profile also helps it provide an increasingly well-educated and cost-competitive labour force. These factors put India in a good position to attract an increasing proportion of global FDI,” said Rajiv Memani, country managing partner, Ernst & Young India.

According to market data, owing to a slowdown in global investment flows, the number of foreign direct investment (FDI) projects in 2010 remained constant compared with 2009 at around 750, said the report.

The relative decline of the United States as a source of FDI in India also continued in 2010. As a result, the number of US FDI projects in 2010 (206) was the lowest since 2003 and almost half that in 2006.

While project numbers and jobs created are still some way off highs reached in 2008, which saw 971 projects, the trend over the last decade has shown a consistent, if not dramatic, upward movement. Overall project numbers in 2010 were up 60% over 2003 and the number of jobs created up 30%.

For the survey, E&Y interviewed more than 500 global business leaders in late 2010 to understand their views about the potential of the Indian market.

“A large majority believe that, as early as 2020, India will become a global leader in education, R&D, innovation, and as a producer of high value-added goods and services,” said Memani.

However, to enhance its attractiveness, India will have to focus on expanding infrastructure, make high-quality education available to more people and continue with business-friendly national and state-level policies.

Farokh Balsara, partner and markets leader, Ernst & Young India feels the strong domestic market enabled India to deliver a resilient performance during the global economic slowdown. “It is today emerging as a manufacturing destination, both for the domestic and global markets. As business leaders compete for growth in the new economy, there is a sense of urgency among leading players to seize the prospects offered by the Indian market,” he said.

In terms of potential new long-term trends identifiable in the interim 2010 data, the most significant is the rapid growth of China (and to a lesser degree, the United Arab Emirates —- despite Dubai’s financial problems in 2010) as an investor in India. The 19 projects initiated by Chinese companies in 2010 was dramatically more than the seven implemented in 2009, and represented an increase of 92% compared with the medium-term average. With this, China jumped from being the 16th-largest investor in India in 2009, in terms of projects, to the ninth-largest in 2010.

Software and IT services continue to be the most attractive industry, favoured by 31% of survey respondents. However, sectors such as automotive, consumer products and infrastructure have started drawing significant FDI. “This apart, there has been a sharp rise in investment healthcare (209%), space and defence (180%), plastics (142%), renewable energy (105%) and medical devices (87%), demonstrating the diverse opportunities that India has to present to foreign investors,” said Memani.

In terms of business activity, manufacturing attracts the most FDI projects in India. The country is now also emerging as a hub for manufacturing export, particularly in sectors such as automotive.

This is followed by sales, marketing and support, business services, design, development and design.

The number of FDI projects in the electricity industry showed the highest annual rate of growth, while the number of projects in shared service centers experienced the sharpest decline.

'The market will not see new heights anytime soon'

Rahul Bhasin

This interview first appeared in DNA Money edition on Saturday, January 15, 2010. 

Rahul Bhasin, managing partner of Baring Private Equity Partners India and senior partner and global board member of Baring Private Equity Partners International, speaks about private investment business scenario in the aftermath of various scams/frauds, the role of government in policy making, creating business sectors with global leadership and challenges before the country. Excerpts from the interview:

How do you view the recent scams and their possible impact on the private investment sector? You think limited partners (LPs) in the funds will now keep a regular tab on how their money is getting utilised?

I think these scam have got nothing to do with private equity investment business whatsoever. The LPs expect PE firms to be professional and they do have particular standards of running private investment business. Given the way industry operates, they'd expect us to not fall victims of scams/frauds. It's a very baseline expectation since the scams which are being spoken about are diversion of funds in some passive accounts and I don't think it has any co-relation with our line of business.

What about the companies or managements being invested in? Is there a likelihood of funds getting mis-managed at that level?

No industry or individual is exempt from fraud or scam. Given the extent of diligence and the depth of engagement that happens, the probability of something like that happening in the PE industry is very low. Such incidents might be an issue for a novice entity which has little or no knowledge about inner workings of the private equity industry but it certainly is not applicable to seasoned players.

What is your analysis of the public / primary markets in the country? Where do you see it heading in 2011 given the volatility experienced in the recent past?

Market is a function of demand and supply. As far as supply is concerned, there is going to be a lot of primary issuance since there is a big pipeline. On one hand, we have government companies raising money and or government divesting shares, and on the other hand, there is issuance from companies trying to chase growth. A new category of companies approaching the equity markets of late is infrastructure and related asset owning companies that are raising funds. The flip side, however, is the supply of investment money, the primary portion of which has largely come historically from the insurance companies and the mutual fund industry.

If you look at the Indian market relative to a lot of the other markets, you'll notice a few peculiarities. One, our earnings multiples are higher than anyone else's. Two, we are running higher fiscal and current account deficits than anyone else. Topping it all is the high inflation which is a direct result of high fiscal deficits. So when you have this kind of a scenario, the only policy regime available with the government is to keep raising rates. When that happens it leads to devaluing of the equities or any other financial instrument for that matter. This is because the measuring yard itself is getting tougher and as a result the same set of cash flows will get discounted at a higher rate.

Given that we already have such expensive markets which are pricing in a lot of aggressive growth it is fairly unlikely that the foreigners will put incremental allocation of capital to India. My own view is that they all overweight India and while continuing to do so they will cut the relative overweight. For example, if they (foreigners) were initially 30% overweight they are likely to go 15% overweight. Thus, on a net basis this will either slow down money into India or defer it to a fair rate.

It's not a structural call I am making but more of a short-term impact of valuations being stretched. To my mind anything between six months and a year is short term. The market/index as a whole will not be able to see any new heights anytime soon. I think the market is ripe for a correction.

Having said that, individual companies and managements will still do well. One should also remember here that this is just a lull because underlying growth of the economy is still there. Tightening interest rates will slow it down but it will be from a short-term perspective without having any impact on the structural growth rate of the country.

Do you think companies can still look at the option of raising money through an IPO?

While there will be a lot of supply of paper, the demand from overseas will be challenged because of their worries on the currency side, inflation, interest rates and valuations. The retail shareholders have been largely absent because with majority of the IPOs in the last 3-4 years, they have systematically lost money. And that is because of rampant over-pricing of these IPOs.

Essentially every upside is captured in the pricing of the IPOs and as a consequence retail investors have lost money post the issue. As a result the general public has lost faith in IPOs. The only reasonably good and successful IPO in which people made money has been Coal India. So government companies might still get subscribed as a consequence but if you go back and look at companies like NTPC and a host of other government companies, people have not made money which has had a dampening impact.

My view is that irrespective of any sector or company, IPOs will do well as long as they are priced reasonably. The challenge arises when companies start chasing crazy pricing and as a result the IPOs do not get done. As long as the IPO pricing is leaving something on the table it will attract investors and will be successful.

Is there a role for the regulator to play in rationalising IPO prices? What about companies looking to go public, is there a need for introspection?

One of the most overdue reforms from Sebi has been disclosures from investment bankers akin to what it has for listed companies. They should make it mandatory for all investment bankers to report performance of all the IPOs they have done in the last few years. The minute such disclosure norms are put in place, investment bankers will then be cautious about pricing the issues right. My concern is the issue should be fairly priced and not under-priced or over-priced. I seriously do not understand why Sebi isn't insisting on IPO performance disclosures from investment bankers.

The second issue of course is that the government will have to control fiscal deficit if it wants to sustain long-term growth. Spending more money or for that matter printing money will not help and hence fiscal discipline is a must. The biggest issue with the fiscal deficit is that we do not even recognise what the true fiscal position is because we keep insisting on this cash system of accounting. Our budgets are all cash budgets and not accruals. All of corporate India has accrual accounting so why doesn't the government? This is leading to deficits being understated, which is a big area of concern.

A lot of entrepreneurs forget that IPOs are a big brand-building exercise for their respective organisations. The IPO does determine to a large extent how the brand will be perceived in the capital markets. This is very important for companies having a long-term perspective and I think they are not been well advised.

The fiscal so far has been very optimistic for the private investment sector. How do you see things panning out in the last quarter?

Markets are not cheap and people are paying a lot for growth. The pivot of this discussion is now whether all the growth will actually play out or not.

Do you see hiccups ahead?

Not really. But a lot depends on the policy makers and my major concern is the lack of bigger vision from the government's perspective, especially in terms of how to make our different industries more competitive and to work in tandem with them.

How would you like to see the government work towards for the benefit of the industry?

The Indian government can take a cue from South Korea and Taiwan which have developed the semi-conductor industry. They have created a global body of expat South Koreans and Taiwanese who are experts in their fields. They have brought in consultants, built infrastructure and attracted talent from across the globe. To shore up their initiatives they have built an educational system to train people in various aspects of the industry. They have facilitated people to set up clusters so that enough companies could be set up. Today, South Korea and Taiwan are significant players in these industries.

In the Indian scenario, power is going to be a big item of growth. However, the government is not taking enough steps to make us a global leader in the segment. There is a huge opportunity but we don’t see any discussions or affirmative actions in this aspect. It's been done already in the software, applications and 10 other aspects of software and it can replicated in power as well.

A few other sectors to be looked at are pharmaceutical and construction industries. We can become global leaders in these sectors in the next 20 years. But there is no discussion on the matter to make it happen. India is not only facing economic but also social and several other challenges now.

You think the various events in the country in the recent past will impact foreign investments?

Right now we are in that serendipity zone, because everybody believes that we are still performing well. However, these are all statistics which is making us feel good by explicitly saying that we have grown so much.

Could you elaborate?

For example, currently the size of our economy is $1.2 trillion. Assuming that we grow at 10% the overall growth would be $120 billion. But if we divide it by a population of 1.3 billion, the change in the per capita figure becomes very insignificant. Now take the US economy which is at $14 trillion growing conservatively at 2-2.5% and showing growth of $350 billion, adding more wealth this year despite of a troubled scenario. US added $350 billion on a population of 300 million and on the per-capita basis it added $1,000 while we have only touched the $80 mark. The gap has actually widened in this scenario. I think if we do not address this reality and keep looking at the statistical representation of an X% growth and self-congratulating ourselves, we can never grow significantly.

What are the other areas you think we are lagging significantly?

Another reality that has been missed is when countries get richer they urbanise and have a concrete plan for urbanisation in place. This implies that government needs to deliver public goods, services and facilities and make provisions for water, power, sewage management, urban transportation and so on. The standards need to be set to ensure the levels for delivering these public services. We need urban planning to implement this.

The reality is that in 1971 we had 61 million people living in the cities and the number currently is 250 million, expected to reach 600 million by 2030. The only planning when we talk about urbanisation is ‘for the government and by the government’ and they only plan for the bureaucrats / politicians and how they are going to live. They exclude common citizens from this process.

If the government does not plan for urbanisation, this will result in citizens breaking rules. When illegal work gets undertaken, bureaucrats / politicians play it safe by saying they should not bash this down because everybody breaks rules. The issue is, why have we not made the rules stringent enough in the first place for people not to break them? This is a very serious perception building up in the common Indian's mind that breaking rules will lead to prosperity. This is a grave issue and needs to be addressed at the earliest possible.

What is your take on the recent microfinance issue in Andhra Pradesh?

The microfinance institutions are facing flak because they were asking their money back. The bottomline is that if they don’t get their money back they will not lend. The issue highlighted here was that they were charging 25-26% per annum interest rate which is exorbitant. The MFIs didn’t force people to borrow. People borrowed because the only alternative was to seek funds from a local lender at 4% per month, which comes to around 50% per annum. This was a far better option than what was available to them.

The government has now said that for giving every loan you must pre-clear it. The recent move by the government has significantly raised the operating cost for MFIs, a policy unclear to many of us. While the government continues to preach that it is protecting the poor, in practice it is doing just the opposite.

How do you see the MFI situation panning out for the players and their limited partners?

I think they are in a horrible shape. They will go through a tough time and there is no doubt about it. The central government isn't taking note of it nor is it asking the state government for reasons behind their approach on addressing this issue. According to me, the global financial institutions including the IFCs of the world and the development agencies should be raising their concerns and seeking justification on the matter.

The government on its behalf should encourage more MFIs to come into this business, compete with each other and bring down the rates. Why is the government limiting access for financing to people, when they need it the most? For example, when a person has borrowed around Rs 7,500 and has no other means of raising money, he walks into a bank, the doorman will not even let him enter. Here I am not referring to foreign or private banks only because this is very much true in case of public sector banks as well. The person who is borrowing money might need it to eat his next meal or meet some emergency medical expenses and so on. By doing so, you are depriving the person of credit and access to credit, which is unfair.

What are your views on the Indian realty sector?

I firmly believe we need a Sebi equivalent to regulate the real estate industry. For example, a very small percentage of Indian population buy shares. However, look at the number of people investing or buying real estate. Housing comprises the single most important purchase people make in their lives and majority of people end up getting a raw deal when it comes to property transactions. The person has no recourse because he is fighting an unequal battle, as he does not have the same resources as the builder. That's why it becomes imperative for the government to protect him and a Sebi-like body will come very handy.

Last year we saw a bunch of PE veterans floating their own private investment firms and embarking on the fundraising journey. Not many have really managed to do so though. What is your take on this?

Just like any other business, there are different aspects that newly set up private equity firms need to bring to the table. LPs will invest only after considering things like economies of scale, value proposition and differentiation the entity offers. Just simply saying that the individual will set up a PE shop isn't enough. Those with strong value proposition for the investors, employees / talent and companies including investment bankers that are going to partner with will succeed else not.

As far as availability of capital is concerned, I think there is no shortage for the right product. I don't think prior fundraising experience really matters as such because this is a competitive business. I have a feeling that a lot of people took to starting a PE firm because it was so fashionable and there was a time when it was so easy to raise money as a result everybody thought it to be a piece of cake. I don't think we are in a bubble nor are we in a bust kind of a situation yet. So it’s a business as usual scenario at present. All the people setting up funds aren't equal and while some have done their homework work well others have not.