IFC and partners to invest Rs 85.75 crore in agri-warehousing co National Collateral

International Finance Corporation (IFC) - a member of the World Bank Group - and partners are investing in National Collateral Management Services Ltd (NCMSL), which is an Indian local agri-warehousing company. IFC, Rabobank-sponsored India Agri Business Fund, and public sector company Indian Farmers’ Fertilizer Cooperative Ltd will each invest approximately $6 million, $7.5 million and $5 million respectively(i.e. Rs 27.5 crore, Rs 34.5 crore and Rs 23.75 crore respectively).

The investment will help NCMSL build modern warehouses for efficient storage of agricultural commodities that will eventually help reduce waste of food grains and promote food security. It will also look to expand state-of-the-art storage facilities across India and help manage volatility of food prices in the country.

Sanjay Kaul, managing director and CEO, National Collateral, said, the company offers modern, scientific, and IT-enabled storage and preservation services for agricultural commodities. "The funds raised will be deployed over the next two years to create our own network of warehouses in over 40 locations across India,” Kaul said.

The company’s existing investors, India’s National Commodity and Derivative Exchange Ltd, Karur Vysya Bank, and the Haryana State Co-operative Supply and Marketing Federation Ltd, will collectively commit an additional $3.5 million (Rs 16 crore) to support the expansion.

Anita George, IFC Director for Infrastructure in Asia, said that the this investment sends a strong signal to the market on the viability of private solutions to expand critical agriculture-related infrastructure. "By reducing food waste and minimising price volatility, the project will benefit Indian farmers and help stabilise their income levels,” said George.

In India, huge quantities of food items are wasted annually due to inadequate agricultural infrastructure, including storage and transportation facilities. Storage and warehouses are owned predominantly by government enterprises in India. Industry experts believe that the private sector can play an active role in developing additional storage capacity for food and grains and that projects like National Collateral are a testimony to that.

Arch-rivals Zee & Star join hands, set to change TV distribution

This story first appeared in DNA Money edition on Friday May 27, 2011.

Zee Entertainment and arch-rival Star India have joined hands to jointly aggregate and distribute television channels through an equal-stake joint venture called Media Pro Enterprises India. This was through their content aggregation and distribution entities Zee Turner and Star Den Media Services. Zee Turner is a 74:26 venture between Zee and US giant Turner International, while Star Den is a 50:50 venture between Star India and Den Networks.

Punit Goenka, managing director and CEO of Zee Entertainment Enterprises Ltd said the deal was first initiated two years back and took a serious turn about 10-12 months ago. The JV will distribute 68 channels some of which will be free to air. “The partnership will change the face of television distribution in this country,” said Goenka.

“It will help bring transparency and further accelerate the pace of digitisation which is a key mandate put out by the government. The joint venture will work towards creating efficiencies in the distribution sector, incentivise digitisation, address the piracy issue and enable content revolution in India,” he added.

With the objective of bringing as many people together from across industry segments, Uday Shankar, CEO, Star India Pvt Ltd, said putting together this joint venture required a great vision and huge amount of sagacity wherein larger interests were put ahead of individual interests. “That is what all four entities are committed to demonstrate,” he said.

It is public knowledge that for most part of the cable and satellite history in the country, Zee and Star have fought and competed as rivals and at times in a very bitter and fierce manner. Under such a scenario, coming together of two media conglomerates is being viewed as a significant development in the Indian television industry.

“Our rivalry has potentially cost the industry $10 billion. And with this alliance, we intend to grow the industry much faster,” Goenka said.

Shankar said the time had come to take the cable and satellite (C&S) television industry to the next level. “This we intend to achieve by delivering better content, choice, quality of experience and making sure that we make a fundamental intervention in the lacklustre financial and business health of the media industry,” he said.

Both Zee and Star refrained from sharing any financial details related to the joint venture.

Industry experts are of the opinion that JV will prove advantageous for the broadcasters. “The monolithic structure will bring (the JV) distribution muscle and pricing power,” said a head of research - media and entertainment affiliated to a leading MNC consultancy firm.

Rahul Kundnani, research analyst, SBICAP Securities Ltd, said, “The deal will boost the subscription revenues of both the broadcasters. Also the deal comes at the right time ahead of digitisation plans announced by the government. They are already commanding almost 70% of the cable subscription revenue. A deal like this gives them more bargaining power to negotiate with the distributors.”

Issue of TV content piracy brought Zee-Star together: Star CEO Uday Shankar

Uday Shankar

This interview first appeared in DNA Money edition on Friday May 27, 2011.

Broadcasters are not getting their fair share of revenues even though there is enough money being generated at the cable operators’ end, says Uday Shankar, CEO, Star India Pvt Ltd. The Zee-Star joint venture will help tackle this issue and get the money flowing in the system. Excerpts...

Your association with Zee for a distribution alliance is a major industry development. Did you face any challenge in partnering with arch rival for this joint venture?

Not many actually. There were obviously concerns initially as this is not the kind of partnership you rush into. These are big calls and the implications, positive or negative, can be very critical. So neither party was willing to rush into it, there was a lot of internal alignment that had to be done. It’s not just about taking approvals from your seniors but also aligning the entire organisation with a new set of goals and objectives, which will eventually gauge the success of such an association.

We were conscious of that and went slow. That is why it has taken us a long time. The conversation started almost two years ago, and then we built the rationale and the need for doing something like this and so on. Given the nature of what we were talking about and the history of the two groups, there was hesitation initially, that had to be tackled effectively. And we did manage to do it efficiently and that is the reason we are now going public with it. So, we have to go ahead and make sure that we deliver on the expectations. Now, the biggest challenge is to integrate the two entities.

What are the key objectives of this joint venture?
The primary objective is that we are able to tackle this issue of piracy, which is a very significant objective. It is piracy that is completely distorting the business model of broadcasting, because money isn’t flowing through the system. This has also completely broken down the business model of multi system operators (MSOs). As a result, they have to now survive only on carriage fees and hence there is an abnormal inflation of the carriage fee.

The broadcasters are not getting a fair share of this subscription revenue, especially the smaller and newer broadcasters. Hence, their ability to invest in differentiating content, high quality talent is very limited. Our primary focus with this initiative is to be able to change most of it, make sure that the flow-through of the subscription revenue becomes smoother and more reasonable.

This will eventually have a huge impact on the entire industry and not just broadcasters. Secondly, the capacity of cable system is very limited in terms of number of channels that it can carry —- with or without carriage fees —- that can be addressed only through digitalisation. That’s creating a lot of challenges and we would like to collectively work in that direction.

But is the Indian legal system effective enough to deal with the piracy situation when defaulters can easily walk out on bail within a day of arrest as you had outlined in one of our earlier interactions?

Yes, we did discuss on that instance. As far as the system is concerned, I’d say it is still work in progress and we will have to devise a model to effectively deal with it. All I can say at this moment is that with two key broadcasters, with many leading channels together, we should be able to bring additional weight to the whole initiative and see how it works out and that’s precisely the objective.

On the capacity part, isn’t the squeeze because of the cable and the technology being used by the cable operators that restrict the total number of channels to around 105?

That is why they need to digitise, because digital cable has a significantly higher capacity and can go up to 900 channels.

But there are concerns being expressed on the investments related to digitisation of the cable industry…
One needs to understand here that the money is very much there on the ground. Every year, the households are paying Rs 18,000 crore and that money should be invested. Every sector has to do what is necessary to reinvent its business and bring it in line with the social, legal and ethical norms. And it’s not that there is no money. The broadcaster and MSOs don’t get enough, but right at the cable operator end, there is enough money. And because almost 90% of that ground money is not accounted for, there isn’t enough money flowing through the value chain. Thus, that unaccounted wealth has to start flowing back into the system and when that happens, there will be enough money for digitisation.

How do you intend to get this unaccounted money into the system?
The government has a plan and we obviously will have to work together. That is precisely why our coming together will make an impact in this direction.

The jurisdiction for this joint venture operation will be restricted to India only?

No, it will be India and a couple of neighbouring areas like Nepal, Bhutan and a few others.

‘Zee-Star JV will accelerate cable digitisation, which is good for everyone’

Punit Goenka

This interview first appeared in DNA Money edition on Friday May 27, 2011.

Punit Goenka, managing director and chief executive officer, Zee Entertainment Enterprises Ltd (ZEEL) speaks about Media Pro, his new joint venture with rival Star India, and the way forward. Excerpts...

Media Pro is a huge development for the country’s television industry. How did it all really happen?

Around a year back, Uday Shankar (CEO, Star India Pvt Ltd) and me came up with this idea of collaborating in the distribution space which was really the need of the hour. We discussed the possibilities and after a series of brainstorming sessions it was decided that we should do a joint venture through our distribution companies. The entire process of putting together a joint venture has taken close to 10 months and I am really happy at the final outcome.

Could you take us through the key highlights of the venture?

It certainly was a very complex deal given the fact that we are rivals competing for our share of the market. A deal of this nature required a lot of thought, deliberation, internal approvals and so on. While it has taken us long to get the new entity in place I can say now that it was worth spending all that time on this initiative.

What does this mean for the partners in terms of meeting business objectives, distribution and reach?

I don’t think there will be any significant impact on reach because individually both entities are distributed extensively. Just to give some number on the reach part, content from both broadcasters reaches over 80% of the target market. So we don’t see much gain in those aspects. Having said that, what the JV really brings to the table is the formidable power to bring the change required in the distribution business i.e. to curb piracy and influence digitisation. We will be coming up with various incentive schemes for cable operators who are actually willing to digitise and make addressability
a viable option.

It is said that a lot of talk is happening around digitisation in the cable space, but no one is really investing…

See it’s not a question of not wanting to address / invest in digitisation. If you look at the direct-to-home (DTH) segment, it has really revolutionised the distribution business in the last five-odd years. With over 35 million DTH homes today, it doesn’t mean that people are not willing to invest. You have six DTH operators already investing heavily in this business. It’s because of the fragmented nature of the Indian cable TV business with a significantly high percentage of leakages built into the system that there isn’t much incentivisation happening in this space. Thus, the coming together of two large bouquets can very well influence that change and that is precisely what we hope to do.

You believe cable operators will be open to actively pursuing digitisation and invest?

Absolutely. Yes. We will have to make them do so by giving them necessary incentives and putting the right procedures and systems in place.

What could be the incentives to cable operators?

It’s too early to talk about and is it is something the management will work out after taking into consideration things that need to be taken forward. Just to give you an example, we give discounts to DTH operators to shore up penetration. Similar schemes will be worked out for the cable operators as well.

How many channels are you looking to offer in the newly formed JV?

There are 68 channels in all and some of them are free-to-air. These are channels in the Zee-Turner and Star-DEN distribution network and includes channels that do not belong to either broadcasters like on the Star side they have NDTV and we have Turner.

What are the possibilities of bringing WWIL and Dish TV into this collaborative entity?

No, this collaboration is not a vertical but horizontal integration. So entities like WWIL, Dish TV in addition to DEN, Tata Sky and a few others are our customers and we will deal with them on an arm’s length basis just like we work with any other partner in the industry.

Do you see other similar alliances like Sun 18 and One Alliance becoming part of this JV in future?
We are open to working with anybody who wants to work with our shared mission and shared goal. If they are willing to support that, we will welcome anybody. But in terms of the equity structure of this joint venture, it will be only between Star-DEN and Zee-Turner.

You mentioned earlier about 12 to 24 months timeline to assess the success of this initiative. What would be the milestones?

Right now we have a vision about the set objectives to be achieved under this joint venture. Now we will have to work out a roadmap on how these objectives will have to be achieved. From there will emerge the milestones etc. It’s still very early to talk about roadmaps as we have just started and we will see a lot more action happening as we proceed from here.

Will this alliance also impact advertising and distribution revenues?

Advertising is not impacted as this is a pure distribution entity. As far as deals on distribution revenues for multi-system operator (MSOs) or cable operators are concerned, our objective is not to milk them but to make the industry healthy. Today what is happening is that the MSO’s business is restricted to only the carriage fee and is not able to collect any money from the ground. We will have to effect that change. So the money which the consumer pays has to find its way in the value chain including the government — for that matter by way of service tax and things like that which the government doesn’t getting paid for at the moment. The impact of those changes will actually result in each individual in the value chain getting his fair share of the money and that’s that we want to achieve.

On the piracy part, can you throw some light on how will it get addressed and curtailed effectively?

Piracy is a national subject and the moment you try and switch off one cable operator, piracy starts. With this initiative in place, it will be a far more aggressive fight against piracy. We will have a collective, dedicated management teams reporting to the board, and will focus on enforcing anti-piracy. Those caught indulging in piracy will be dealt with very strictly. And with the coming together of two large networks, the chances of curbing piracy will be far better than before.

Dish TV focus on Arpu, HD paying off

This story first appeared in DNA Money edition on Thursday May 26, 2011.

Dish TV India, the country’s leading direct-to-home company, has halved its net loss in the fiscal ended March 31 to Rs30.7 crore as compared to Rs60.6 crore in the same period of the previous fiscal.

Standalone revenues for the quarter under review grew 41.4% to Rs451.7 crore year on year. Operating profit rose 93% to Rs108.9 crore during the March quarter.

Subhash Chandra, chairman, Dish TV, said despite a highly competitive six-player market, the company’s initiative to drive average revenue per user (Arpu) has delivered good results. “The enhanced high-definition (HD) bouquet coupled with cricketing season enabled significant addition of HD subscribers who, in turn, contributed their bit in driving the Arpu,” said Chandra.

The launch of 35-channel bouquet improved HD’s contribution to the company’s monthly additions to 7% as against less than 1%
earlier.

The management’s decision to hike prices in the third quarter coupled with movement in packages had a positive impact on the blended Arpu that increased from Rs142 in the third quarter to Rs150 in the fourth quarter of the fiscal.

“While we are still much lower than the optimal, an increase in Arpu, while maintaining leadership, demonstrates the underlying strength of the company’s business model,” Chandra said.

Standalone revenues for the full fiscal 2011 stood at Rs1,524.6 crore, while operating profit for the year was Rs326.8 crore with a margin of 21.4%.

Standalone net loss for the year reduced to Rs189.7 crore as compared to Rs262.1 crore in fiscal 2010.

Dish TV added one million new subscribers in the fourth quarter taking the total subscriber base to gross 10.4 million and net 8.5 million at the end of the quarter. The gross additions almost doubled at 3.5 million vis-a-vis 1.8 million in the previous year.
Subscriber acquisition costs increased marginally to Rs2,224 in the fourth quarter from Rs2,142 in the third quarter due to higher but budgeted spends around Cricket World Cup 2011, officials said.

Jawahar Goel, managing director, Dish TV, said the overall numbers have been achieved despite an addition of 3.5 million new subscribers in the fiscal.

“At the same time, all our key operating metrics registered a marked improvement over the previous year. With over 10 million subscribers now, we have started fiscal 2012 on a strong note and are committed to deliver better on all operating parameters,” he said.

Surendra Goyal and Aditya Mathur, analysts with Citi Investment Research & Analysis, in their latest report on Dish TV, said, “Encouragingly, increase in subscription Arpu by 6% on a quarter-on-quarter basis and 9% on year-on-year basis was ahead of expectations,” the analysts said in their report.

“Dish TV is well placed to benefit from the strong industry growth. Attractive content agreements, scale and management focus on Arpu will ensure a good turnaround,” the analysts said.

Banks find film financing a touch too hot

This story first appeared in DNA Money edition on Thursday May 26, 2011.

Banks seem no longer interested in financing films, an area they had ventured into almost a decade ago. Indeed, the lenders appear to be in the process of reducing their exposure to the business in view of the uncertainty involved in repayment of loans. For one, IDBI Bank, one of the more active players, has decided to go slow. The bank did not fund any movie last fiscal. At the end of March 2010, movie financing formed a very small part of its portfolio at around Rs200-250 crore, down from Rs250-300 crore at the end of March 2009.

“Earlier, we used to finance many movies. But now we are in a consolidation phase. We are reviewing the financials and will want to see how things move,” said Viney Kumar, executive director, IDBI Bank.

“IDBI Bank might have decided to slow down in film financing because they just do not want to focus on only volumes, they want profitability as well,” said Chaitra Bhat, banking analyst, LKP Securities.

The Export-Import Bank of India, or Exim Bank, which had financed blockbusters like Veer Zaara, Dhoom and Dhoom-2, has also curtailed its exposure to this business. The bank, which finances films with the objective of boosting export earnings — films which promote India as a country and its trade — currently has a film financing portfolio of less than Rs200 crore.

“Exim Bank has been given a mandate by the government for financing various export-oriented businesses. We look at opportunities in the film business and lend to filmmakers as per our set parameters,” said TCA Ranganathan, chairman and managing director, Exim Bank.

Bank loans for making films are typically for 1-2 years. The interest rate charged is about 15% per annum — around 2% higher than on other loans — and the repayment period is up to 18 months.

But why are the banks shying away from films?

IDBI Bank’s Kumar cites a paradigm shift in distribution of movies. “Earlier, there was a system of minimum guarantee under which the producer used to start discharging the liability to the lender (bank) as the distributor used to give a minimum guarantee payment to the producer. In such a scenario, the loan given by the lender would have got repaid irrespective of the movie’s performance at the box office. Now the system of minimum guarantee is not there.”

Bobby Bedi, managing director, Kaleidoscope Entertainment Pvt Ltd, also agrees that the way films are made and distributed has changed, impacting the involvement of banks. “I’d say it’s a mixed bag when it comes to film funding from banks. IDBI Bank certainly has reduced its exposure to film financing. I believe they have had some bad experience and hence the management’s decision to relook at funding filmmakers. Exim has been very selective in its approach and continues with the philosophy of funding film projects with global appeal and potential to be exported out of India. Having said that, there are a few others, like Union Bank, which are keen on getting into this space,” said Bedi.

The film fraternity feels IDBI Bank lost money because it did not stick to set structures. “They did not follow the structures and hence lost money. As a result, the management has lost confidence in the business and hence wants to stay away,” said a film producer, requesting not to be identified.

Bankers bring up yet other issues.

“Both filmmakers and bankers have difficulty in predicting the success of movies,” said Karan Ahluwalia, executive vice-president and country head (media, entertainment, luxury and sports banking group), Yes Bank. “From a banking perspective, the fragmented nature of production houses needs to be addressed since a credible track record, sound balance sheet and good corporate governance are key enablers of organised funding as well as other innovative financing products.”

Yes Bank had financed Break Ke Baad and a few other movies last fiscal.

Industry experts, though, rule out any long-term impact of banks curtailing their exposure to films.

“The quantum of bank loan in movie financing was never very high. It was just one source of finance. There are many corporate, which are into film financing, and they will continue to fund films,” said Rajesh Jain, executive director and head of media and entertainment, KPMG (India).

Kaleidoscope’s Bedi pegs the proportion of bank funding of films at 15-20%. “The balance is still sourced from the private/ individual investors. Of late, we have seen participation from the corporate sector as well as film-focused funds, besides other avenues like studios including Fox-Star and the like,” he said.

On steps being taken by the film fraternity to encourage bank participation, Bedi said banks need some extent of handholding when it comes to film financing. “There are certain aspects about film financing that need be understood clearly and the industry body (Ficci Frames) is looking at taking some initiatives in that direction. We want to rebuild their confidence and bring them back into funding film projects,” he said.

Bedi, former chairman and member of the entertainment committee at Ficci Frames, said the industry body is looking to hold a meeting with top officials of leading banks sometime soon to discuss the subject and work out a solution.

My colleague Neelasri Barman is the lead writer of this story.

European leader RTL Group and India's Reliance Broadcast sign television JV

A leading European entertainment network (part of Bertelsmann AG) RTL Group has joined hands with Anil Dhirubhai Ambani Group (ADAG) promoted Reliance Broadcast Network Ltd (RBNL) for a joint venture to launch thematic television channels in India.

RBNL (among India’s youngest media conglomerates) through its subsidiaries will form a limited liability company (LLC) with RTL Group and will together act as shareholders with an equal equity interest (50:50) in the joint venture. This development marks RTL’s foray into the Asian TV market and is RBNL's second international partnership after CBS Studios International.

Tarun Katial, CEO, RBNL said the joint venture brings the European leader in to the Indian market and that it will be at the core of creating a revolution in the Indian English entertainment space.

"We are committed to offering audiences unprecedented international television content, and RTL Group’s, extensive library and lineage compliment the partnership perfectly. The synergies, values and visions that both Companies share, will allow this joint venture to offer value to audiences and marketers alike,” said Katial.

The partnership will also give the JV access to RTL Group’s content production arm FremantleMedia’s content.

Refraining from divulging precise financial details, RBNL officials said that the initial scope of investment in the JV will be for two English-speaking thematic TV channels. One will be a reality channel with international content, mainly from RTL Group’s production arm FremantleMedia, and the second one will primarily target male viewers with action-oriented content," said the company spokesperson.

Andreas Rudas, executive vice president - regional operations and business development (Central and Eastern Europe) for RTL Group, said, the company believes strongly in the Indian market. "It's a market with a young population which loves TV and impressive potential for further growth. We are thrilled to be here with Reliance Broadcast for our first broadcasting venture in Asia,” said Rudas.

RTL Group With a market cap $15.5 billion, has a portfolio of 40 television channels and 33 radio stations in 10 countries. With RTL owning Fremantle, it is also one of the world’s leading producers of television content such as talent and game shows, drama, daily soaps and telenovelas, including Idols, Americas Got Talent, The X Factor, Good Times - Bad Times and Family Fortune, The Apprentice.

RBNL brings to the JV significant muscle in sales and marketing along with key understanding of the local market and consumer dynamics. It's strong robust distribution network will also allow for optimising content besides its ability to also leverage the Reliance Group media assets across mobile, online, multiplexes and gaming. As for RTL, it brings in a rich experience in the television broadcasting business, strong depth in content library with high quality formats, production and promotion expertise.

Key financial highlights of RBNL:

Consolidated – accounting period ended March 31, 2011

- Total revenue of Rs. 141 crore

Standalone Key Performance - quarter ended March 31, 2011 vs. quarter ended March 31, 2010

- RBNL recorded revenues of Rs. 71 Cr, up by 30%

- Radio Operations records revenue of Rs. 47 Cr up by 25%

- Radio remains EBITDA positive at Rs. 9 Cr, growth of 176%

- Radio inventory utilisation growth of 20%

- Intellectual Property business revenues grew by a remarkable 240% to Rs. 15 Cr on the back of 8 properties

- OOH business posted a robust 15% growth sales performance driven by innovation and marquee properties

Indian Hotels Co says US operations eating into profits

This story first appeared in DNA Money edition on Wednesday May 25, 2011.

The Indian Hotels Co Ltd (IHCL), the Tata group hospitality company, finally seems to have come in terms with the fact that its US operations are eating up profits generated in the home country.

Anil P Goel, executive director - finance, IHCL, said while there has been a growth in the company’s topline, the management is concerned about some pockets in the overseas operations. “We are very much concerned about our US operations. The business there is still under pressure and is actually denting the overall profitability at the consolidated level,” said Goel without sharing details on the extent of impact on profitability.

IHCL has three hotels in the US — Taj Campton Place in San Francisco, Taj Boston and The Pierre in New York. While the San Francisco and Boston properties are owned by the company, the New York hotel is on a long lease.

Goel said the management is doing everything that needs to be done to turn around the US operations. “It will have to be done in a timebound manner. The idea is to make sure that the high-quality assets being acquired over the last few years start contributing towards the overall profitability,” he said.

In another development, IHCL has decided to increase its stake in one of the associate companies — Piem Hotels Ltd — which owns the Vivanta by Taj President in Mumbai among other properties in the country. The management will invest Rs51 crore to increase its stake to over 50% from the current 42.6% in Piem.The additional stake in Piem will be acquired by IHCL directly or through an investment arm. Post acquisition, Piem will become an IHCL subsidiary.

During the current fiscal, IHCL will add close to 2,143 guestrooms to its portfolio of 12,795 rooms across 107 hotels globally. The additions will be spread across 16 new hotels to be opened between IHCL and its subsidiaries.

For the fiscal 2011, the company expects to make capital expenditure of around `300 crore, of which Rs150 crore has been already committed. IHCL has also retired debt of Rs600 crore in March 2011 and currently has Rs1,700 crore in debt on a standalone basis and Rs3,600 crore on a consolidated basis. Its current debt-to-equity ratio is 0.7:1.

On a standalone basis, for the fourth quarter of the fiscal 2011, the hotel company reported 57% increase in net profit at `93.93 crore from Rs59.91 crore in the same quarter of the previous fiscal. However, on a full-year basis, the company reported a decline in net profit from Rs153.10 crore last year to Rs141.25 crore in fiscal 2011.

Mumbai five-star hotels reeled under pressure in March

This story first appeared in DNA Money edition on Tuesday May 24, 2011.

Five-star hotels operating in the Indian commercial capital – Mumbai – have witnessed pressure on business during March 2011 as compared to the same period last year. A business performance data compiled by CRISIL Research indicated a southward trend in revenue per available room (RevPAR) for hotels in South Mumbai while north Mumbai hotels managed a very marginal increase despite decline in average room rates (ARRs). In fact, Mumbai and Agra were the only hospitality markets among other cities viz. Delhi, Bangalore, Goa, Chennai, Kolkata and Jaipur that experienced decline in ARRs.

“The south Mumbai hospitality market witnessed a decline from last year’s occupancy levels resulting into a downward pressure on ARRs due to competition, which lead to RevPARs declining by 12% on a year-on-year (y-o-y) basis. However, despite an increase in occupancy levels, north Mumbai saw downward pressure on ARRs, which declined by 5% (y-o-y), due to additional inventory and competitive business scenario,” said Ajay Dsouza, head of research, CRISIL Research. The business performance data compiled by CRISIL pertains to five-star and five-star deluxe hotels only.

Occupancy levels in south Mumbai hotels declined from 70% in March 2010 to 65% in March 2011, while the north Mumbai hospitality market witnessed an increase in occupancy from 64% in March 2010 to 68% in March 2011. “Though south Mumbai witnessed a decline in occupancy levels, it is most likely a temporary dip rather than a signal of declining demand,” said Dsouza.

The average room rate in both south and north Mumbai markets was down by 5% from Rs 11,050 to Rs 10,508 in March 2011 and Rs 8,932 in March 2010 to Rs 8,511 in March 2011 respectively. The decline in room rates significantly impacted revenue per available room (RevPAR) for south Mumbai hotels in particular by 12% - down from Rs 7,715 to Rs 6,805 in March 2011.

Despite decrease in ARRs, hotels in north Mumbai saw a marginal increase in RevPAR by 1% from Rs 5,716 in March 2010 to Rs 5,787 March 2011 mainly owing to increased occupancy levels. RevPAR is total room revenues divided by total room inventory of a hotel — irrespective of the number of rooms occupied. It shows how much the whole asset is actually earning.

Officials from Taj and Oberoi groups with very significant hotel room inventory in south were not available for comment. A detailed questionnaire sent to representatives of both the companies remained unanswered at the time of going to print. However, requesting anonymity, a senior official from one of the groups said business has progressed well and hotels did registere growth in the said period though it wasn't very significant.

“The south Mumbai market saw new room supply as Taj's palace wing and The Oberoi got re-introduced at various stages in 2010. While there was initial pressure, new inventory has got absorbed and rooms rates have stabilised. I'd say a decent growth was registered in March 2011 vis-a-vis same period last year,” said the official.

On April and May months till date, the official said that the new fiscal has started on a very positive note. “We see the momentum continuing in the coming months except for the monsoons which traditionally is a lean season. However, meetings / conferences and weddings will make it up to a large extent,” he said.

Echoing the sentiments were hoteliers in north Mumbai. Rajiv Kaul, president of The Leela Palaces, Hotels & Resorts, said, “Occupancies are certainly holding up and we are seeing 10-15% improvement in business on a year-on-year basis. The situation is very much true for all our operational hotels in the country.”

On the outlook going forward, industry experts are of the opinion that hotels in most destinations have managed to arrest the downward trend in ARRs seen over the last couple of years and some destinations have even seen a substantial increase. “Overall most destinations are likely to continue to see improved demand over last year. While there will be a decline in occupany and ARRs in coming months, it will be more due to seasonal reasons (end of the tourist season). Having said that, increasing costs and competition will place pressure on profitability,” Dsouza cautioned.

Additional Reference Points:

- Driven by increase in foreign tourist arrivals (FTAs), leisure destinations such as Jaipur, Goa, and Agra saw sharp increases in RevPARs (between 20-30%), driven largely by an increase in occupancy levels

- Amongst business destinations, Kolkata and Chennai saw sharp improvements in occupancy levels, boosting RevPARs by 27% and 23% respectively

- Delhi saw a sharp increase in occupancy from 72 to 79%, while ARR growth was relatively muted at around 3%. Driven by the increase in occupancy, RevPAR in Delhi increased by 14% on a year-on-year basis

Hotel Leela set to raise Rs 1,000 crore

Hotel Leelaventure Ltd (HLL) will raise to the tune of Rs 1,000 crore. The company board met on Monday (May 23, 2011) to review the progress of equity raising plans. Approval from shareholders will be sought in the coming weeks for this fund raising exercise.

While company officials are tight-lipped, a senior management personnel had earlier stated that the company is looking to raise money by issuing fresh shares of around 14.95% to 'prospective investors' to help cut debt and lower interest costs. In this regard, the company management is believed to have initiated discussion with top global private equity firms operating in India. Industry sources also said that names like Blackstone, KKR, Carlyle and TPG are among the leading PE players being spoken to for the potential capital infusion.

The luxury hotel operator also announced its results for FY'11 wherein its earning before interest, tax, depreciation and amortisation (ebitda) increased by 19% from Rs 153.45 crore last year to Rs 182.63 crore in 2010-11. However, owing to higher interest burden, its consolidated net profit declined 7.84% to Rs 37.84 crores in FY'11 as against Rs 41.02 crore last year. The company's consolidated net sales for the three months period ended March 31, 2011 increased 17.05% at Rs 525.82 crore as against Rs 449.19 crore in the same quarter last fiscal.

Commenting on the performance of the company, CP Krishnan Nair, chairman, Hotel Leelaventure Ltd, said, "With the improved performance of existing hotels and addition of New Delhi hotel, the company's revenue and ebitda is expected to go up by about 45% in the current fiscal."