It's off-season, but with demand strong, Mumbai hotels just won't offer discounts

This story first appeared in DNA Money edition on Thursday June 30, 2011.

Hotels operating in the four-star and five-star categories in Mumbai appear to be holding on to their room rates, despite being in the off-season phase of business. The period between May and September generally being a low, hotels traditionally tend to lower rates to beef up business. However, with business yet to reach the peak of 2007-08 levels, hoteliers are playing it safe by not discounting too much, thereby avoiding volatility in business.

Sunil Bhatia, director, sales and marketing, The Mirador Hotel in North Mumbai, said, “Rooms rates are quite stable now as all the correction (if at all any) has already happened during April and May. Currently, hotels are focusing more on maintaining the existing levels of business. The reason being there is enough demand in the market for hotels to operate at a fairly sustainable level. In fact, there are times when demand tends to be almost 1.5 times of the hotel’s room inventory.” A four-star business hotel in Andheri East, The Mirador currently quotes an average room rate (ARR) of over Rs5,500 on a an occupancy of over 70%.

An attempt to make reservations across various hotels in Mumbai for different dates in June and July showed that the room rates quoted were the same for both months.

Except in case of advance bookings (15 days before the actual date of stay) some hotels offered a discounted rate on their current best available rate for the day. For instance, price quoted for room reservation at Trident Bandra Kurla for second week of July was Rs8,000 plus taxes, while the best available rate, including breakfast, was Rs10,000 plus taxes and a room only rate was Rs9,500 plus taxes.

Similarly, The Leela Kempinski Mumbai offered a discounted rate of Rs10,500 plus taxes (from Rs11,500 plus taxes) for room reservations in June and July. The price quoted for a base category room at their Chanakyapuri hotel was Rs15,023, including taxes and breakfast, for June and July.

The approach adopted by various hotels shows that the business environment hasn’t really changed much. However, there have been changes in the booking pattern and lead time, wherein bookings are very unpredictable.

“I had 20 unoccupied guestrooms during one of the days last week. Suddenly by afternoon we received a booking for all. The flow of bookings tends to be slow over weekends and is higher on other days, which is natural for a market like Mumbai. What is really happening is that buyers are shopping very intelligently and are booking rooms on a need-to-book basis. Besides, reservations are coming in volumes so business is certainly there. The only area where hotels are compromising on room rates is for large volumes and long-stay guests. Even for these customers, the discounts do not exceed more than 10%,” said a senior official from a leading five-star hotel in Mumbai.

While there is overall growth in the city of Mumbai, hotels in North Mumbai appear to have benefited the most. The occupancy and ARRs scenario in South Mumbai hotels is pegged in the 55-60% range and Rs8,500-9,000 range, respectively. Hotels like the Taj Palace wing and The Oberoi are estimated to be on the higher side i.e. over Rs15,000 in terms of room rates, though occupancies may not be as strong. Hotels in North Mumbai, however, are fairly neck-to-neck in terms of room rates, while occupancies are higher at 65% plus.

“Some of the big corporates like Hindustan Uniliever have relocated themselves in North Mumbai area as a result South Mumbai hotels are busy identifying replacement business for their respective properties. While business traffic had come down, conferences, training, weddings, etc are to some extent filling in the gap at present,” said the general manager of a five-star property in South Mumbai.

On the current business scenario in other key markets in the country, industry experts believe cities like Pune, Delhi and, in the coming months, Chennai will see pressure on room rates and occupancy.

PR Srinivas, industry lead - travel, hospitalty and leisure, Deloitte Touche Tohmatsu India Pvt Ltd, said, “While Pune continues to feel the heat of oversupply, Delhi is starting to witness the same with The Leela Palace at Chanakyapuri and a few other hotels that have opened and a few others scheduled to open in the coming months. I see a similar situation in Chennai as ITC will open its new hotel with over 500 rooms followed by The Leela and JW Marriot hotels. Together these hotels will add over 1,000 keys to the Chennai hospitality market leading to pressure on room rates and occupancy levels.”

Pratima Badhwar, director of sales, Courtyard by Marriott, Gurgaon, said while there is pressure in the Delhi hospitality market, the scenario in Gurgaon is much better. “Demand is fairly buoyant in Gurgaon and hotels here weren’t struggling much to fill rooms. We are doing 70% occupancy as against 62% last year.

While there has been a minor correction, the rates currently being quoted in Gurgaon hotels are between Rs7,000 to Rs9,500,” said Badhwar.

And more supply will be added to the Gurgaon market in the coming months. Accor will open its Pullman hotel while Hilton will launch its Double Tree brand. A Vivanta by Taj hotel is also expected.

Prime Focus plans units in New York, London

This news story first appeared in DNA Money edition on Thursday, Jun 23, 2011.

Prime Focus, visual entertainment services firm, would spend $15-17 million as capital expenditure on its domestic and international operations in the current fiscal. The expansion will be funded through internal accruals.

Namit Malhotra, managing director, Prime Focus, said on an analyst call, “Three facilities are being built in New York, London and Mohali. So there will be fairly significant amount of capex for that.”

The facility in New York will be a post-production set up while the London one would be a visual effects facility. These facilities will be operational within the next 3-4 months. In Mohali the company is looking to expand the existing unit.

Nishant Fadia, CFO, Prime Focus, told DNA Money, “The new Mohali facility will be for 2D to 3D conversions. While New York facility will not be very capital intensive, we envisage the London and Mohali facilities to take up a large part of the capital expenditure.”

The Mohali unit currently employs 730 people and the number is expected to more than triple by the year end. “We will be hiring anywhere between 2,000 and 2,500 people for the new facility at Mohali,” said Fadia.

On the back of Hollywood blockbusters like Star Wars: Episode I The Phantom Menace (yet to release in 3D) and the Warner Bros’ Green Lantern, the company sees exponential growth in its 2D to 3D conversion business.

The management believes 3D conversion is the most exciting part of their business and is already contributing substantially to the company’s topline.

“The 3D conversion business has been getting good traction from the international markets and has contributed $40 million to the company’s topline last year. With a robust pipeline for the next 24-36 months, we see substantial improvement in the business,” said Fadia.

The company currently has an order book of Rs350 crore, of which around Rs250-260 crore is for 2D to 3D conversion.

Prime Focus’ 2D to 3D conversion process, View-D, is a proprietary system introduced in September 2009. The company has thus far worked on a host of international projects including Avatar, Clash of the Titans, Cats and Dogs, Chronicles of Narnia and Shrek.

Warburg Pincus to fully exit Max Healthcare

This story first appeared in DNA Money edition on Saturday, June 18, 2011.

Warburg Pincus, the private equity giant, is exiting Max Healthcare Institute Ltd by selling remaining 16.37% stake in the healthcare services provider. A subsidiary of the publicly listed Max India Ltd promoted by Analjit Singh, Max Healthcare operates eight facilities in New Delhi and the National Capital Region and offers services in more than 30 medical disciplines.

Max India, in a notification to the Bombay Stock Exchange, said its board has approved the acquisition 4.76 crore shares of ¤10 each of Max Healthcare, constituting the entire shareholding of Warburg Pincus. The shares will be bought at an acquisition price of Rs29.40 a share for an overall consideration of Rs140 crore. The process is expected to be completed no later than December 15, 2011, after receipt of all regulatory approvals, the company said.

With this acquisition, Max India’s equity shareholding in Max Healthcare would stand increased to 91.84%. Warburg Pincus’ India office refused to comment. A Max India spokesperson said no additional information is being shared at this stage.
Warburg first invested in Max Healthcare in December 2004 when a preferential allotment was made to Madison Holding Ltd and Melany Holdings Ltd — both registered foreign institutional investors (FIIs) belonging to the Warburg Pincus group.Turn to

The allotment represented a 13.8% stake in the equity base of Max Healthcare. The investment, worth Rs 25 crore at that time, got Warburg 1.88 crore equity shares of Rs 10 each at an issue price of Rs 13.25 per share.

In June 2005, the Warburg made a follow-on investment, buying another 2.87 crore shares for Rs 115 crore at Rs 40 per share.
Max India held 70% stake in the fully diluted equity base of Max Healthcare and Warburg’s total investment in the company then stood at Rs 140 crore with a 23% stake.

That would mean Warburg sold the difference - or around 6.63% stake - some time earlier, because it’s exiting the company by selling 16.37% stake. So the price at which that 6.63% stake was sold would be the profit for Warburg since it had invested Rs 140 crore for a 23% stake and sold 16.37% stake for Rs 140 crore too.

Dish TV sees Arpu, subscriber base rising this fiscal

This news story first appeared in DNA Money edition on Thursday June 16, 2011.

Dish TV India, the country’s leading direct-to-home broadcaster, sees its average realisation per user (Arpu) rising this fiscal as it takes price increases and expands subscriber base. With its Arpu rising to Rs150 in the fourth quarter of the last fiscal from Rs142 in the preceding third quarter, Dish TV is keen to increase the realisations this year, too. It is understood to have given an Arpu guidance of Rs160-165 for this fiscal.

Also, the company has set a target of adding 3.3-3.5 million subscribers this fiscal after expanding the subscriber base by 3.5 million last fiscal.

Experts said the company’s business outlook for this fiscal has improved considerably owing to strong subscriber additions and hike in subscription price by Rs5-25 in May 2011. Also, the content costs would be almost fixed with just one contract coming up for renewal this fiscal.

Analysts said based on the subscriber addition and Arpu forecast, the company will be in a position to turn a net profit and become free cash flow positive by the fourth quarter.

Nitin Mohta and Atul Soni, analysts with Macquarie Capital Securities India (Pvt) Ltd, said the company) is fast approaching the inflection point on net profit and cash flow and should achieve these milestones this fiscal.

“We have raised the Arpu forecast by 4% in fiscal 2012 and another 4% for fiscal 2013. The management has announced another round of hike in subscription packages last month and we expect it to get fully reflected in the second quarter this fiscal,” said the analysts in their latest report.

They, however, see average realisation at Rs155 for this fiscal. “We believe small but regular price upticks, as done in May, would help the company to meet our forecasts,” the Macquarie report said.

Last February Dish TV launched a high definition (HD) service offering 35 channels at a monthly subscription of Rs450-550. As a result HD’s contribution to the company’s monthly additions improved to 7% as against less than 1% in the thirdquarter.

Targeting customers with HD TVs willing to subscribe to premium packages will have a favourable impact on the Arpu in the current fiscal, experts said.

The DTH industry will see an overall addition of 10-12 million subscribers this fiscal. “Dish TV is likely to have the highest market share of over 25%. As sales increase considerably, we envisage a reduction in their content cost as a percentage of revenues from 39% to 30% in fiscal 2012,” said Rahul Kundnani, analyst, SBICAP Securities Ltd.

The growing DTH subscriber base is led by rising income levels, increasing consumer awareness, a sports heavy calendar in 2011 and lower entry prices for new connections.

For Dish TV, Nupur Agarwal, analyst with UBS Investment Research, said the spurs are in the form of strong financial and operating performance, implementation of mandatory digitisation and likely reduction in licence fee.

“We believe receipt of pending government approval regarding implementation of mandatory digitisation in India is likely to be a catalyst for Dish TV as it could accelerate DTH subscriber growth. DTH is a heavily taxed industry in India, paying service tax of 10.3%, licence fee of 10% on gross revenue, entertainment tax, 5% import duty on set-top boxes, income tax or minimum alternate tax as and when the company starts generating profit before tax. We believe rationalisation of the tax structure or implementation of GST could act as a catalyst,” said Agarwal.

1,250-acre integrated township planned in Panvel

This story first appeared in DNA Main Newspaper on Wednesday June 15, 2011.

In a defining real estate development arrangement Bahrain-based investment bank Gulf Finance House (GFH) has partnered with Mumbai-based realtor The Wadhwa Group to develop an integrated township at Panvel.

A privately held real estate developer, Wadhwa Group will develop the various verticals in the project which is spread across 1,250 acres.

Confirming the association, Srini Gopalan, chief financial officer, The Wadhwa Group, said, “The development documents have been signed by both parties and we are now structuring the nitty-gritty associated with the development. All I can say at this stage is that it’s not an engineering, procurement and construction (EPC) contract nor a joint development agreement. The core infrastructure will be developed by GFH while other verticals will be done by us,” said Gopalan.

The integrated township is part of a huge economic development zone (EDZ) planned by GFH, the land for which was acquired over the last 4-5 years. The land parcel is about 7 kilometers from the new international airport earlier announced in Navi Mumbai.

On the financials related to the development deal, Gopalan said that it is currently being worked out and will be in a position to give out concrete details only after the initial study is being done.

As part of the development plans, Wadhwa will be responsible for constructing verticals like practical homes, schools, graduation facilities, grade ‘A’ office spaces, hospitals, hotels, malls, etc. “In all the development area will be 80-90 million square feet (MSF) of which GFH will take 10 msf and balance will be with us,” said Gopalan.

According to a news report in The Hindu (March 8, 2010), construction work on the $10-billion (around Rs. 45,500 crore) Gulf Finance House Economic Development Zone (GFH EDZ) had commenced with the Chief Minister of Maharashtra, Ashok Chavan, performing the ground-breaking ceremony.

Spread over an area in excess of 1,700 acres at Panvel, the project is touted to be the country’s largest, foreign direct investment (FDI)-driven integrated development.

The project comprises three distinct components, namely Energy City, IT & Telecom City and Entertainment. On completion, the project will house around 1,40,000 residents and is expected to generate direct employment to over 2,50,000 people and indirect employment to 750,000 people.

'Successful sustainable business when created will always have value and buyers'

This Q&A first appeared in DNA Money edition on Monday June 13, 2011

Warburg Pincus India Pvt Ltd went through a leadership transition in India recently. Niten Malhan, and Vishal Mahadevia, both managing directors, in a rare interview together, talked to Ashish K Tiwari and Satish John on the iconic private equity firm’s past and current India investments, and the strategy going ahead, etc. Edited excerpts:

Warburg Pincus was one of the earliest private equity players to enter India...
Niten Malhan: Among the larger private equity firms in the world, we were probably the first or among the first definitely to make a very significant Asia move. If you think about Warburg Pincus, its genesis and growth, it has always played in the entire spectrum with a big focus on growth investing. This doesn’t mean that we don’t do buyouts, it’s, in fact, a large part of our business globally and we are a meaningful player there.

You have a sizeable exposure to India…

Vishal Mahadevia: Since 1994, Warburg has invested over $2.5 billion. The firm has probably invested the same amount in China and India. We have been one of the first large global funds that moved into investing in Asia and India in particular, but probably even one of the fewer groups that has continuously been investing in India. We have seen the various challenging phases in the country thus far, and have continued to invest more and more, gained confidence and today India is a core part of the firm’s investment strategy, philosophy as a global firm.

Malhan: For any business, including the investments, in a new geography and a new kind of business environment, there is an institutional learning that you go through. And I think having been here now for over 15 years, as Vishal put it, we have gone through that learning curve and institutionally understanding the market — the positives, negatives, volatility etc.

It is thus a part of business now; both of us were not part of the 1994 start, but there must have been apprehensions about whether it will work and how. We have gone through that learning and completed the life cycle of investing, seeing investments mature, exiting, returning money to the limited partners (investors in the global fund). We have gone through the cycle quite a few times in India and the process continues thereby building confidence in the management and its overall business here in India.

Between 1994 and 2004, what kind of companies did you look for investments given that private equity was still very new?

Malhan: We are happy to participate in businesses relatively early in their lifecycle and provide capital and whatever help we can through their growth. For instance, there is this Alliance Tire Company which is a very unique mix of various types of investing.

We backed an entrepreneur — Yogesh Mahansaria and his father Ashok Mahansaria — who had come out of an existing business to start a new one in the same area, which is off-highway tyres. We funded and helped them acquire a business in Israel. We then funded them to set up capacity in India; the thesis was that we could use Indian manufacturing, combine it with an international brand and serve export markets etc.

Then we helped do an acquisition in the US to build this business. So we have participated with a high-quality distinctive entrepreneur, provided him with capital and a global footprint and leverage, and he is obviously running and driving the business.

We are quite happy and patient like in the case of Bharti Airtel, which is one of our most famous investments in India. It started with a $30 million investment. We grew over time to become an almost $300 million investment by way of expansion funding etc. So the model is identify high-quality entrepreneurs in scalable businesses and be a partner in their growth.

When you talk about off-highway tyres, does it mean for tractors, excavators?

Mahadevia: It comprises anything that is off-highway, including tractors, mining and construction equipment etc.

How big is this business now compared with when you took it over?

Mahadevia: It was zero when we took over because if you think about it, we were seeding an idea and the entrepreneur had nothing on the ground.

Malhan: The first three months was really spent in identifying opportunities. The debate was, should we do something that’s greenfield or go for acquisition. In the next few months the discussion revolved around potential targets across the globe. Then this Israeli company came up as an opportunity. We valued the business and eventually acquired it as part of a strategic business growth plan for Alliance.

Mahadevia: When the economy took a downturn, we felt more confident with Mahansarias and said let’s go out and find good strategic assets available in the downturn and grow the business. So we business faster and it’s a work in progress. But if you look back four years ago, there was nothing on the ground and today it probably will be one of the top five off-highway tyre producers in the world.

So when the Alliance entrepreneur came to you, he just had an idea and nothing else…

Mahadevia: He had an idea and an excellent track record.

Malhan: He’d run a business like that very successfully prior to our association.

And that was?

Malhan: It was a family business — Balkrishna Tyres — and they had moved out of that entity as part of the family re-organisation. The Poddars continue to own Balkrishna Industries, while the Mahansarias moved out a couple of years prior to that. And they were keen to start this business. This in some ways is an example of the flexible approach to investing that we take where we don’t get bucketed and look for high-quality entrepreneurs and interesting business opportunities.

Patu Keswani of Lemon Tree Hotels would be another similar example of an entrepreneur you’ve backed…
Malhan: Yeah, when we had invested in Lemon Tree, it was operational with just 90 rooms. Today it’s about 1,400 and we hope that over the next 2-3 years it will be 2,700 to 3,000, making it a sizeable player in India. The fundamental point is, we are willing to back an entrepreneur relatively early and be a partner in the
journey.

Not that we don’t invest when businesses are mature. We’d invested in Gujarat Ambuja Cements which was already a large company. When we invested in HDFC it was already an established entity and we saw an opportunity to partner with them. Kotak Bank is another example.

What are the sectors that look interesting these days?

Malhan: There are certain things that have been true 10 years ago and will remain the same in the next 10 years as well. These are themes that are consumption-driven — consumer goods and financial services — to name a few. Things that have emerged today and were probably not so apparent 10 years ago are the broad infrastructure-type themes, which, in the mid-90s, was not as visible.

Mahadevia: Consumption and infrastructure have been the sectors we are investing in and we continue to look at it. There are a few other areas that we have got into recently like power and ports (Gangavaram port), which fall in the infra category but wasn’t available in the mid-90s. When investments in ports opened, we met an entrepreneur who we thought was visionary, was building a project that was transformational. When we’d invested it was just a beach and today it’s India’s deepest and the most efficient port in terms of handling bulk cargo. So we are happy to come at a very early stage and see it grow.

Malhan: Healthcare is another area we have been investing and like to do more because we see it as a very promising sector. In fact, one of the challenges in India is that if you start looking at sectors, you end up basically defining everything.

When you exited Bharti, people felt that you exited too early. But now in hindsight, that seems fine…

Malhan: Our CEO often says a hindsight fund can have infinite returns but that’s not the way we look at businesses. Yes Bharti turned out to be a fantastic investment for us and we are very happy about it. Yes, we could have timed it better, but we don’t spend too much time thinking about those things. We are not into timing things.

If you knew that three days later something would be better you’d obviously wait for it. But based on your best judgment at the time if you did well … I have spent about 10 years in the firm and have never been in a discussion where people have sat and agonised about, ok, if we had done that, what would have happened. That’s not the culture of the firm.

Mahadevia: Just to add to that, the philosophy is that if we do a good job partnering and helping build a sustainable business it will always grow in value after we exit. So any time we look at it, our hope is that the value of the business will be greater from the point which we exited otherwise we have not helped build a great business.

Would you take a relook at the telecom sector now?

Malhan: We haven’t spent any proactive time on it but there is no reason why we wouldn’t. It’s not about whether a sector is good or bad. If we feel there are interesting opportunities that can be catalysed by finding an interesting entrepreneur and if that turns out to be in telecom, so be it.

Which are the sub-segments in telecom where you still see an opportunity?

Mahadevia: Telecom has huge, continued potential in India. Now the point is whether to invest in the carrier, the mobile value-added service provider or a handset manufacturer. Looking at that value chain there are very different themes within telecom. So when entrepreneurs come to us and when we meet interesting people they may have very different themes. I think terming telecom in its entirety as not interesting would be wrong because there is an entire ecosystem around it.

Warburg recently added real estate to its investment portfolio by backing, again, Patu Keswani. What prompted the move given the current state of realty?

Malhan: Yes, it is pretty much our first investment in realty. There are some conversations but we haven’t yet started anything concrete. Our view on real estate is that in the long run there will be a lot of activity and value creation. We have built a very significant real estate portfolio in China in the last 4-5 years. We would love to do that in India as well. If you are taking a 5-7 year view, I think it’s a very attractive sector.

The reason we got talking to Patu is that we know there is a need for housing, especially mid-market — something very similar to his hotel product. And if someone can deliver that with a manufacturing sort of a mindset — like for instance, when you buy a car you get treated in a certain way as a customer. I don’t think you get treated the same way when you buy a house. Most of us feel pretty sad about the whole experience, especially when we buy a property in Mumbai. We’d like to do more in that sector like we have in China.

Could you take us through your investment in ACB India? That’s also one of your very unique investments…

Malhan: Yes it is, and it certainly doesn’t fit into a particular stage of investment. The core of ACB’s business is coal beneficiation or coal washing, which is removing ash and impurities and making the coal more transportable. And over time they have now built a business where they use some of the byproducts to fuel power. ACB is also now getting into mainstream power. When we had made the investment, some of it was to be used to set up the first power plant of scale based on coal rejects.

That plant should be commissioned sometime this year and ACB plans to proceed further in this business. The investment is now five years old and the management has filed to go public and we’ll see how it goes.

Warburg also recently invested in the NDR Group. Can you explain the logic?
Mahadevia: The NDR Group is in the logistics space. When you take a macro look, as the economy grows, logistics will continue to be a more and more important part of both the customer’s and the supplier’s value chain. Logistics costs in India are extremely high partly because of infrastructure bottlenecks and partly because there is no real strong organised sector.

There is an opportunity for smart entrepreneurs to invest in strategic infrastructure assets and build a supply chain management capability to reduce costs for customers. So as we spent time meetings different entrepreneurs we met Continental Warehousing, which is a part of the NDR Group, and we were very impressed with the management team and the entrepreneur and thought this is somebody who has the opportunity to really grow in this space and take it forward and we could provide them with growth capital.

Some of the individuals you have backed like Analjit Singh, Narottam Sekhsaria, Ajay Piramal and Uday Kotak have also got into the private equity business. They competing with you now…

Malhan: Different people are developing those businesses differently. All of them have created very sizeable and successful businesses and are now diversifying into other things. We have never thought of them as competitors. In any case, if you think about most entrepreneurs in India, once they have created wealth they do want to diversify.

There is this talk about investment firms focusing more on proprietary deals as against those coming from investment bankers thereby avoiding overvalued transactions…

Malhan: It’s a wishful thinking. Sure there are transactions occasionally which happen that way. The reality for any market, including ours, is that for any entrepreneur when we are talking of a sizeable investment, he does want the comfort of some price discovery. There are situations where this doesn’t apply, especially in the early-stage investments.

Mahadevia: And in many of these cases, the entrepreneur is looking for a partner and longer-term, patient capital. A lot of our time is spent meeting and talking to entrepreneurs who don’t need any capital today. There is no immediate transaction but we are building relationships. And ultimately, when you have established the relationship and comfort level, that’s when it leads to a situation where you are the preferred capital provider.

Malhan: We invested in Patu a year after first contact. We invested in Gujarat Ambuja over a year-and-half after first talks. With Uday Kotak, it was an existing relationship. Alliance - Yogesh Mahansaria … we had actually started talking to him while he was with Balkrishna Tyres … we were looking at Balkrishna at that point in time.

Has there been any company you thought could have been a very good investment but you didn’t do the deal and now it has flowered to a particular scale?

Malhan: Look, there are always successful investments that people make in the market, about which we would ask, why didn’t we make them?

Mahadevia: It goes back to the hindsight theory. I don’t think we ever fool ourselves that we’d get everything right. We hope to give ourselves more chances to do things right than wrong.

Of the overall portfolio so far, have most of Warburg’s investments been very positive?

Mahadevia: Net-net, I’d think we will be happy to say we are more positive than negative.

Which are potentially the more defining, Bharti-type deals?

Malhan: It’s hard to say when things are still in process. After we bought into Bharti, there was a time when the value of our investment was below cost. So it’s kind of hard to say what will be a success and by how much. That’s part of the risk and the fun of equity investment. While Bharti was a defining deal, we have had pretty reasonable success with a bunch of other investments.

HDFC, Gujarat Ambuja, Sintex Industries, Kotak and Max are very successful investments. There are others in the making that we hope will be very good and there are others where it is less clear at this point.

You have discovered quite a few high-quality entrepreneurs in the last 10-15 years in India. Could you tell us who among them — or generally in India — could be emerging as business leaders in the coming years?

Malhan: I am sure India will throw up a lot of leaders. I don’t know who they are. I hope some of them are in our current portfolio. It is very hard to say five years from today which of them will emerge as business leaders because it is linked to many other things. Some of these companies that are young today will become large and very different enterprises and the people at the helm of those companies will be very different in stature five or seven years from now.

Just to pick a name, five years from now, if Lemon Tree becomes, as it aspires to, one of the largest hotel groups in India, Patu will have a very different stature than now. If Diligent Power becomes a large power company with several billion dollars of investments five years hence, Girish Agarwaal will have a completely different stature from today. I think it’s a function of how these companies grow. We would hope that some of these leaders are from companies we have backed.

Mahadevia: If you look at our investments and portfolio, the entrepreneurs / management teams we’ve backed have all got proven track records. When we invest in them, the aspiration is all of them will continue to grow and become business leaders. How large their companies become and how visible they are within the Indian business context will differ from one to another. Even if you look at some of the companies we have invested in five years ago, all of them were at a very different scale from today.

On the exit part, is there a Warburg strategy?

Malhan: When we make an investment we tend to be less fixated on what the exit option will be. Our belief is that a successful sustainable business when created will always have value and buyers. What that form of exit is that comes up 5-7 years later is very hard to predict. Whether capital market or strategic is a function of what the entrepreneur wants to do, what you as an investment firm want to do.

Mahadevia: And with all our exits, we worked very closely with the entrepreneur to understand what is right for him, the business and the company. Certain businesses better tap the capital market, while others are better staying private and just have a financial investor. There are multitude ways and exit decisions are always taken in conjunction with the entrepreneur and the company.

So which is the exit option that has been the most prominent one for Warburg in the last 15 years in India?
Malhan: It’s been the capital market. My sense is that the capital market will continue to be the predominant form of exit for us. Unless both (entrepreneur and the investment firm) decide to sell the company — and there may be some of that too.

Mahadevia: We have made a few exits to financial investors but I don’t think we have ever done a strategic exit.

With ACB India you are looking at a partial exit. What is the push factor behind such an approach?

Malhan: It’s a function of how long you have been in an investment, what was the thesis behind it, have you seen it play out, etc. There are several instances across the world where we have not exited in an IPO, because we think there is still some way to go before our thesis plays out fully. Then there are others where we would say if you hold a significant share in a company you can’t exit in one go in any case.

For example, let’s say if you own 20-30% of a company, you’ll have to do a phased exit to avoid disruption. So you exit a third of it in the IPO, then I have to wait for a year to do the next tranche because you want to stabilise your exit as well. So you tend to keep some of those factors in mind. In the case of ACB, we have been around five years now holding over 20% stake. It seems appropriate that we start to find some path to liquidity.

So we will do a part now and over time as the company hopefully keeps doing well we will exit more in the market. In fact, our Bharti exit was also in tranches because at a 20% position you are not going to be able to exit quickly without disrupting.

Mahadevia: If you think about growth investing, Warburg Pincus globally has taken 125 different companies public over the last 10 years across 11 stock exchanges around the globe.

Warburg did five deals last year. Will you maintain the tempo in this fiscal as well?

Mahadevia: We hope so. It’s not a market-share game and we hope to find more than five good opportunities. We are only limited by the number of opportunities available and we continue to look for them. In the coming 3-5 years, we will continue to expand the team and commit and be more aggressive about investing in India. So over the next five years I’d hope at least for this pace, if not more.

Beaming times seen for entertainment channels

This story first appeared in DNA Money edition on Fridday, June 10, 2011.

The broadcasting industry in the country is expected to witness considerable growth in advertising revenue this fiscal. More significantly, given that the recently concluded Indian Premier League (IPL4) saw less-than-expected viewership, general entertainment channels (GECs) are expected to surpass the industry growth.

A recent report by Kotak Institutional Equities Research said the flagship cricket property’s grip on viewers weakened in the fourth season with an average all-India rating of around 3.4 TRP compared with more than 4.0 TRP in the previous three seasons. The Indian team’s victory in the Cricket World Cup, which preceded the IPL season, impacted viewership somewhat, Amit Kumar, analyst with Kotak Institutional Equities Research, said in the report.

Over the last four years, the IPL has become a Rs800 crore advertising property, with the exception of the calendar 2009 season, which was hit by the economic downturn.

As far as IPL’s impact on advertising for cable and satellite (C&S) broadcasters in the first half of this fiscal is concerned, analysts estimate it to be modest, at around 5% as against 10% previously, mainly due to the advertising overdose by many categories during the Cricket World Cup.

“We believe the structural impact of IPL on cable and satellite advertising and overhang on general entertainment channels is past, even though a marginal recovery in IPL ratings is possible next season,” said Kotak’s Kumar.

Rahul Kundnani, analyst, SBICAP Securities Ltd, said advertising revenues for GECs is likely to increase 10-15%, also because most players have released new programming content.

“Channels typically wait for big sporting events like the IPL and Cricket World Cup, which is why fourth quarter (Q4) tends to show a marginal decline compared with the other quarters,” said Kundnani.

“Thus, sequentially, advertising revenues will go up for GECs because of a considerable line-up of new programming content in Q1FY12. Generally, second and third quarters are the best quarters for GECs owing to festival season. While the overall Indian broadcasting industry is expected to see 15% growth in advertising revenues, market leaders are likely to surpass the industry growth rate,” he said.

Colors and Sony TV have already gone on air with new content in the form of reality shows like Khatron Ke Khiladi (season 4), X Factor (music reality show) and a few other fiction shows.

Big-time rivals Star TV and Zee have announced their new non-fiction and fiction shows, but are yet to go on air with them —- Zee’s music reality show Saregamapa Little Champs is the only exception and it has just got on air.
Officials of both Star TV and Zee were not available for a comment.

A questionnaire emailed to the spokespersons of the companies remained unanswered at the time of going to print.

Leading Indian advertising agencies Mindshare and Madison have projected a 20-26% growth in advertising for the C&S players this fiscal.

Analysts tracking the sector, however, attribute the marginal slowdown in advertising growth to the fact that the estimates have taken into account the rising interest rate and moderating economic growth scenario.
Going forward, analysts see the base of C&S households/ viewers growing as direct to home (DTH) spreads in rural India. This, in turn, is expected to show improved traction in advertising rates of broadcasters.

“The 10-12% traction in advertising rates of broadcasters and our assumed 15% advertising growth (Zee) compares weakly to over 10% CAGR in C&S households in last few years, notably given the market expansion in the Hindi belt,” noted Kumar.

Despite a modest advertising slowdown estimated in FY12, analysts feel the structural growth in advertising and subscription revenues of Indian C&S broadcasters remains intact. However, competition and fragmentation continue to be key risks, especially with existing players such as Sony TV targeting resurgence.

The recent FICCI-KPMG report on the Indian media and entertainment industry estimates the Indian television advertising space to be around Rs11,800 crore. The Hindi GEC space, however, is very cluttered, with a size of over Rs2,700 crore, attracting nearly 30% viewership. It is envisaged the sector will continue to attract robust revenues and also see consolidation going forward.

25% visa rejection rate hampering travel industry growth, says C&K

This story first appeared in DNA Money edition on Saturday, June 4, 2011.

Travel company Cox and Kings Ltd has registered a decline in net profit after tax (PAT) margins in FY'11 vis-a-vis last fiscal. While its earnings before interest, tax depreciation and mortisation (ebitda) margin for FY'10 and FY'11 has remained constant at 47%, there PAT margin has come down from 26% in FY'10 to 24% in FY'11.

The Cox and Kings management however maintains that growth has not be impacted and the marginal decline is mainly because of an exceptional item on the balance sheet.

Reasoning the same, Anil Khandelwal, CFO, Cox and Kings Ltd, said a slight decline in PAT margings is because of interest and finance charges which is at Rs 54.3 crore in FY'11 as against 26.9 crore last year. “An acquisition in the European market is currently being worked out and interest carry cost has been accounted for in the said period,” he said. The company continues to maintain status quo on the time frame for concluding the European acquistion.

Also, there is a foreign exchange gain of Rs10.29 crore on account of foreign currency loan revaluation in FY2011 as against Rs28.38 crore in FY2010. As a result, the PAT is marginally lower for the year ended 2011 as compared to the previous year, said the company in its analyst presentation.

The company registered consolidated net profit after tax (PAT) - after excluding effect of exceptional gain – at Rs 46.67 crore for the quarter ended March 31, 2011. The PAT figure was 10% higher as compared to Rs 42.60 crore in the corresponding period last fiscal (Q4FY10). On a full year basis, consolidated PAT - after excluding effect of exceptional gain- for grew by 13% to Rs 120.30 crore as compared to Rs 106.43 crore in the corresponding period of last fiscal year (FY10).

“Growth however is slower,” said an analyst from a domestic brokerage firm requesting no to be quoted. “While domestic business has grown considerably, there's pressure on internatonal operations,” the analyst added.

Addressing the concerns, Peter Kerkar, director, Cox and Kings Ltd, said, slight pressure on business was witnessed owing to a few unexpected international events. “Events like the unrest in Egypt and earthquake in Japan did impact overall travel industry. While the Middle East region contributes to the extent of 25% to UK operations we didn't see a very significant impact on overall business.

“We didn't have cancellations as far as Egypt is concerned but the travellers had to be booked into alternate destinations while maintaining the costs. The incident in Japan didn't have any impact because the business season had already ended by the time earthquake hit the destination,” Kerkar said at an analyst call.

Analysts however are of the opinion that the impact of Japan earthquake on the company's international operations will get reflected in the current fiscal. "I think the actual business impact of earthquake in Japan will be seen in the first quarter numbers for FY'12 when it gets announced in the coming months," said another analyst requesting anonymity.

Outlining some of the key challenges faced by travel companies in India, Kerkar said that while demand generation was not a problem at all, it was meeting this demand in the best possible manner that is the key challenge for the industry.

“Just to elucidate, of the 300,000 student visas in UK being requested for last year only 150,000 were issued. There is enough demand for outboud travel in India, but embassies are unable to meet up the demand as a significant proportion of these visa applications either get rejected or take so much time that they do not sync with the travellers' schedule. On an average, the Indian travel industry witnesses over 25% visa rejection rate as a result the sector is unable to optimise business,” said Kerkar.

Regional films will make 50% of Eros International portfolio

This story first appeared in DNA Money edition on Thursday, June 2, 2011.

Eros International Media Ltd, a film entertainment company focused on Hindi film genre with blockbusters such as Housefull and Dabangg under its belt, is now looking to make it big in the regional language movie space.

Kishore Lulla, group executive chairman, Eros International, said, “We are expanding our new film catalogue and will be looking at films in Tamil, Telugu, Bengali and Bhojpuri languages to name a few. We are currently in various stages of discussion and should be in a position to make details public in 4-6 months,” he said on an analyst call.

In all, the company is currently looking at 24 projects in the regional films space, which it may acquire or co-produce.
A small percentage of its regional pipeline will be big budget films like

Rajnikant’s Rana, which is being made in Telugu, Tamil and Hindi.

Kamal Jain, chief financial officer, Eros International, said, “It will be a mixed bag as not all regional films require huge budget. And returns are quite significant even for a sub-Rs5 crore film. The idea is to establish leadership position across all high business potential language films.”

Of its overall catalogue of 1,100 plus movies at present, about 50% are regional films, primarily Punjabi and Marathi movies. Majority of these, Jain said, are acquisitions with a very small percentage of owned and co-production films.

Jain said funding would be finalised once the pipeline is set.
Rahul Kundnani, analyst, SBICAP Securities Ltd, said, “With equal emphasis on regional films, which is a high-margin business, the company will be able to enhance profitability taking its operating profit margins to around 40% in fiscal 2012 from 22% in the last fiscal.”

Eros doubled its investment in content to Rs536.5 crore last fiscal as compared to Rs262 crore in fiscal 2010.

The company closed fiscal 2011 with 77 releases across languages and 50% of the dozen-odd blockbuster Hindi films were from its stable, it said. Among its biggest grossers were Housefull, Golmaal 3, Endhiran and Dabangg.

In fiscals 2012 and 2013, the entertainment company has a pipeline of about 50 releases, of which the mix between Hindi and regional films is 50:50. Its line-up for this fiscal includes a number of big releases like Ready, Murder 2, Zindagi Na Milegi Dobara, Mausam, Rockstar, Desi Boyz, Agent Vinod and Ra.One.

Thunderbird's India project to launch in late 2011

Thunderbird Resorts Inc, an international provider of branded casino and hospitality services, said that its India affiliate Daman Hospitality Private Ltd (DHPL) has received the equity component of the completion funding from Delta Corp Ltd.

As part of the India transaction, Delta Corp Ltd had the option to execute a subscription agreement to purchase 840,000 shares of Thunderbird common stock. However, Delta did not execute the final share subscription agreement by the required deadline and the option has now automatically expired.

Now that project completion fund has been received by DHPL, the management expects the hotel construction work to resume within two weeks. The completion of work is expected to happen in phases and the property is likely to see a full-fledged opening sometime in late 2011.

Also Read: Delta Corp takes control of distressed Daman Hospitality