Film makers, distributors find a win-win formula

This analytical feature first appeared in DNA Money edition on Monday, March 5, 2012.

What decides a Bollywood film’s fate? Is it the lost-and-found formula, a hallowed star or a sizzling item number?

While these no doubt play an important role, certain rules set by distributor associations, too, can temper the boom of a blockbuster on the box-office or be a deciding factor as to whether a film will at least recover the investment.

The film fraternity—producers and distributors - claim that rules of distributors’ associations that decide the number of theatres in which a Hindi film would be screened and when the satellite versions will be out have led to losses running into crores for several decades.

However, all that is set to change.

A recent order passed by the Competition Commission of India (CCI) that curbs the power of regional theatre associations has come as a major breather to Bollywood film producers, distributors and exhibitors, who can now wring the last penny as far as the new film releases are concerned.

The film industry feels the order gives them a level-playing field.
It all started in 2010 when Anil Ambani group-promoted Reliance Entertainment decided to take the Karnataka Film Chamber of Commerce (KFCC) head on.

As per the KFCC rules, a non-Kannada movie could only be released in 21 theatres in the state. Reliance Entertainment, the distributor, however, released the film, Kites, in 46 theatres, which prompted the KFCC to ban the movie and stopped the release across the state.

Reliance Entertainment says it suffered losses of around Rs2.5 crore in Karnataka alone as it was not allowed to release Kites across the 200-odd screens in the state. Experts said theatres and multiplex chains, too, collectively lost an equivalent sum if not more because of the KFCC rules.

To avoid a similar situation for its next release, Raavan, Reliance approached the CCI, which gave an interim order before the release and the distributor was allowed to screen the film in as many theatres it wanted.

Sanjeev Lamba, chief executive officer, Reliance Entertainment, said, “We incurred huge financial losses but held our ground; and after two years, this historic order will change the business dynamics of the industry.”

Six months down the line, other producers like UTV Software Communications and Eros International joined in as some of their releases were also facing restrictions by distributor associations.

The film fraternity in the last two years has been resorting to seeking interim orders from courts every time a new film release came up. Experts say the film makers have spent a significant amount of money (believed to be in crores) towards legal expenses for this.

“While large corporate entities could possibly spend on legal costs, it is the small producer, distributor and exhibitor who continued to book revenue losses owing to the restrictions. However, the trade partners can now heave a sigh of relief,” said a top official from a large production house.

Kamal Jain, group chief financial officer, Eros International, feels the ruling will play a crucial role in curbing the non-compete environment. “The compulsion of taking membership of a regional association every time a producer is releasing a new movie meant working in a closed environment. A producer / distributor can now freely release his film without having to worry about the archaic rules and guidelines prescribed by the regional associations. It is going to be a fair play market for everyone and no association can put any restrictions on distribution and exhibition of movies anywhere in the country,” Jain said.

But how does the film market work?

The Indian film distribution market is divided into 14 circuits with each of them having a distributors’ and or exhibitors’ association. Producers and distributors are required to become a member of these associations every time they want to release a film and follow the prescribed set of rules and regulations laid down by these associations.

However, film makers claim utilisation of the cinema screen inventory in a particular region was not optimum because of these rules.

Besides restricting the number of screenings, the association also insisted the producer / distributor to follow a holdback period with respect to monetisation of content across other mediums (television, satellite, compact disc / DVD, etc), which led to under-selling of distribution or telecast rights.

Post the CCI order, Jain said the holdback terms and conditions will now be decided by business partners like IPR owners (UTV, Eros, Reliance, etc) or television channels (Zee, Sony Star, etc).
“I can certainly say that the order will significantly enhance business prospects in terms of monetising the new film content across platforms,” said Jain.

For the exhibitor fraternity, the CCI order means no restrictions on the number of shows and simultaneous release as per the film’s national release date — new Hindi films were allowed a release in Karnataka only after two weeks of its first release.

However, the CCI order does not apply on restrictions put in place by the various states for screening Hindi films. The state restrictions are not severely negative, hence not a big concern for exhibitors, experts said.

While industry players did not exactly quantify the kind of losses or the incremental revenue the fraternity could have booked, they feel it could be in the region of 5% per film.

“Taking a thumb rule average—the incremental revenue for smaller films will be less and vice-versa—the delta could be in the range of 1%-2% for the entire industry. The total film industry is in the region of Rs12,000 crore and the theatrical component roughly is 60% of the overall industry size, that is, Rs7,200 crore. Taking delta of 1-2% figure into consideration, the incremental revenue for the various stakeholders is in the range of Rs72-144 crore,” said the industry expert.

While the figure may appear small given the size of the industry, with the restrictions gone, producers / distributors / exhibitors can put together a better business plan that would enhance revenues.
“Today, India has more than 12,000 screens, but even the big blockbuster movies are released in only 3,000-odd screens. So the whole release plan can be taken to a different level now and the incremental business can be much larger than the 1- 2% being arrived at earlier,” the expert said.

Also, in a few territories, the associations would restrict the membership to only non-corporate entities and a private / public limited company could never become a member of the association.

“One had to be either a partnership or a sole proprietorship to become a member of the association. So partnering with the local guy was the only option for organised players to distribute their films in such territories before, which is not the case anymore,” said a top industry official.

While everything certainly appears hunky-dory for the film fraternity, some analysts feel that the CCI decision may not work for film exhibitors (theatres and multiplex chains).

“They will no longer be in a position to negotiate higher revenue share with film producers / distribution going forward,” said an analyst with a local brokerage.

Kamal Gianchandani, president, PVR Pictures, said, “There is a mutual agreement in place already between distributors / producers and exhibitors to share revenues in a certain manner.

All of that has already been put on paper and agreed up on. So irrespective of the CCI order, there are no concerns for a film exhibitor as far as revenue share is concerned.”

However, the CCI order certainly is a negative for a section of exhibitors who make advance payments to distributors for booking a particular film in their respective theatres. There is an industry practice wherein an exhibitor makes advance payments to the distributor for booking a picture. The advance payment is made to the distributor against the share the exhibitor will generate after the film releases.

For instance, if the exhibitor pays, say, Rs1 lakh as advance to the distributor, but his share is only Rs50,000. The exhibitor will have to recover Rs50,000 (excess advance) being paid to the distributor. If the distributor does not return the money on time, the exhibitor could then take the distributor to the association, which puts pressure on the distributor to clear the amount at the earliest.

“Now this dispute resolution mechanism will go out of the window because of the CCI order. This is because the distributor no longer has to register with the association which was the case earlier. Since the association has no jurisdiction on such disputes, the exhibitor will have no option but to go to the court to recover the money from the distributor,” said Gianchandani.

The general perception in the industry is that going to the court is a very time-consuming process and expensive proposition for such small sums. In fact, one may even end up spending more time, effort and money for it, which doesn’t make business sense.
“This certainly is a problem that will crop up in coming years which is a bit of a negative, particularly for smaller exhibitors. Though it is not something multiplex chains need to worry about,” said Gianchandani.

Similarly, any dispute between a distributor and a producer (with respect to advance payments) would earlier get resolved by these associations as the producer will not be allowed to register the new release unless he has cleared the backlog (if any). Now that the producer is not required to register, the distributor will have no option but to go to the court.

This could also mean that the commercial arrangement between producers, distributors and exhibitors is bound to change as distributors and exhibitors will have to be extremely judicious about producers and the amount of money they pay them in advance. There is no association protection now and the matter will have to be resolved in the court.

The distributor associations are planning to move the Supreme Court against the CCI order as the purpose of their existence is nullified. The procedure, however, prescribes that the associations will have to first file an appeal with the CCI and later move the apex court.

While the distributor associations and film makers battle it out in the court, new Hindi films would continue to be screened in more theatres.

The Complainant

The film fraternity comprising (Reliance Entertainment, UTV Software Communications, Eros International and FICCI Multiplex Association of India) had filed a case against distributor associations like KFCC (Karnataka Film Chamber of Commerce) for putting a restriction on the number of cinemas to release a non-Kannada film and BJMPA (Bihar and Jharkhand Motion Pictures Association) for demanding unreasonable holdbacks for registering its films.

The issue, according to the film fraternity, was that these associations barred studios from exploiting satellite and home video rights in the respective regions. This apart, studios were compelled to register films with the trade body and bend to their archaic rules. As a result, this constrained the market access of the studio for unfettered distribution of its films on non theatrical platforms.

The CCI Order

The CCI ruled that the anti-competitive behaviour of any entity needed to be condemned heavily for effective function of the market. It said that the associations were taking decisions and engaging in practices that were anti-competitive. Consequently, in February 2012, the CCI also imposed a hefty penalty on these distributor associations.

According to the CCI order, the associations will have to stop:

(a) Compelling producers / distributors / exhibitors to become their members as a pre-condition for exhibition in their territories.

(b) Discrimination between regional and non-regional films and imposing discriminatory conditions against non-regional films.

(c) Screen restrictions based on language or manner of exhibition of a film to be done away with.

(d) Holdbacks on satellite and home video, with studios are free to decide such holdbacks.

(e) Compulsory registration of films as pre-condition to release to be done away with.

Reliance Industries acquires Analjit Singh’s stake in East India Hotels

Mukesh Ambani-led Reliance Industries has acquired Max Group chairman Analjit Singh’s 3.73% stake in PRS Oberoi promoted East India Hotels (EIH) Ltd that owns and operates hotels under The Oberoi and Trident brands.

Singh’s investment firms Gaylord Impex and Pivet Finances sold all the 21,315,000 EIH shares in a bulk deal to RIL subsidiary Reliance Industries Investment and Holding Pvt Ltd at Rs90 a piece valuing the deal to Rs191.83 crore. RIL’s current holding has thus increased to 18.53% from 14.8% earlier.

The increase in RIL's shareholding in EIH however does not trigger an open offer because, in August last year, the Securities and Exchange Board of India (SEBI), raised the initial trigger threshold for an open offer, from the 15% to 25%. The market regulator also increase the open offer size from 20% to 26%.

As a result acquirers will now need to make mandatory open offer for further 26% stake from the public shareholders after buying 25% under a private sale. The minimum stake that an acquirer can now obtain in a target company after the open offer if fully subscribed would be a controlling 51%.

With Ditto TV, Zee eyes a game-changer

My colleague Beryl Menezes co-authored this story which appeared in DNA Money edition on Thursday, March 01, 2012.

Zee New Media, the digital arm of Zee Entertainment Enterprises Ltd, is set to change the way television entertainment is consumed in India.

It has introduced Ditto TV, an over-the-top (OTT) television distribution platform, to provide paid entertainment content on portable mobile devices.

Initially available in cities like Mumbai, Delhi, Pune and Bangalore, Ditto TV offers ‘live’ television channels and on-demand video content on devices including mobile phones, tablets, laptops, desktops, entertainment boxes and connected TVs.

Punit Goenka, managing director & CEO, Zee, said with Indian consumers increasingly becoming mobile, smartphones and tablets have really changed the way people work, play or view entertainment.

“The need for mobile entertainment and news has only increased over the last few years. Globally, mobile television has witnessed overwhelming reception. In fact, a recent research by Nielsen said that entertainment and mobile television is potentially showing signs of becoming the first stream of choice for the consumers,” he said.

While the company did not share any investment details, Goenka said, “We have made significant investments in this initiative and will continue doing so in the years to come. Over the next one year, we are targeting a subscriber base of one million active users for mobile TV and are aiming to capture a considerable pie of the six million active 3G audience in India. In the long term, we envisage new media division (which includes Ditto TV), contributing approximately 10% to the total revenue of Zee.”

On the business arrangement with other TV channels that are being distributed on the Ditto TV platform, Goenka said, “We have modelled our business purely on revenue share. It is very similar to what is being followed already in terms of commercial arrangements with broadcasters in the direct-to-home space.”

Ditto TV will initially offer 21 channels offering premium content across GEC, sports, lifestyle, regional, news and other genres. Consumers have a host of subscription options (prepaid cards), starting with `21 per month for a single channel, `49 per month for three channels going up to platinum pack priced as `2,499 per annum for the entire bouquet. It has entered into distribution pacts with retail channels like Croma and Vijay Sales.

Vishal Malhotra, business head - digital media, Zee, said, “We are initially launching in four cities but as 3G grows we will expand to other cities and potential rural markets. The channel offering will be increased to 100 in the next 6-8 months. In another two months, we plan to get into music and movies domain, too.”

The company sees increasing internet penetration across towns, handset manufacturers bringing in new devices with larger and better screens and social media integration increasing demand.

“We are just warming up to 3G. However, devices like tablets and smartphones being in great demand already, mobile TV is bound to see compelling growth numbers,” said Goenka.

The company is simultaneously planning to introduce Ditto TV in countries including the UK, UAE, Australia and New Zealand. It plans to roll out the service in the US in a few quarters.

Ditto TV has partnered with Siemens Communication and Media Technology to develop a strong technology platform that will offer adaptive streaming.

BSNL, Zenga and Apalya Technologies are among the few others that offer mobile TV in the Indian market.

Zenga, a free platform, has a 65-70% share of mobile TV market in India. It says its revenues grew 250% over the last year since the launch and expects it to grow two-fold annually. Mobile TV currently makes up 1% of the total entertainment space.

A Zenga spokesperson said about 90% of its revenues come from 2G users and expects 4G and LTE technologies to give a push to the segment.

Prime Focus to steer AP’s digital drive

This story first appeared in DNA Money edition on Saturday, February 25, 2012.

Prime Focus Technologies (PFT), an Indian content operations solutions provider, has secured a huge contract from The Associated Press (AP) that involves digitisation of the global news network’s unique video archive. AP is looking to take the archive to a whole new audience across the digital spectrum. The project is part of the news agency’s broader strategy of multimillion-dollar upgrade of its video business.

Ramki Sankaranarayanan, CEO, Prime Focus India, and president and CEO of Prime Focus Technologies Pvt, said the fairly large project was part of a public tendering process wherein AP had invited bids from across the globe. “The tender process was kick-started in July last year and we won the competitive process. It’s a large tender though I will not be able to share financial details owing to the non-disclosure agreement (NDA),” he said.

For the PFT management, this deal opens up a very significant business opportunity as several other big networks around the world would be looking to digitise their catalogue as well. “It is a very innovative and cost effective way of dealing with digitisation of content / archive and we are bringing in a lot of value addition to the table. We are expecting this development will drive a significant amount of project traffic to our facilities,” the CEO said.

PFT’s global competitors in this space include the likes of Technicolor and Deluxe Entertainment, among others. However, it could not be ascertained whether the two companies had taken part in this tendering process.

AP’s digitisation exercise is largely fashioned to let the company switch its entire newsgathering, production and distribution system to the high definition (HD) mode. The trigger, AP officials said, was primarily to meet technical, editorial and business requirements of its global customers in this digital age.

AP’s film and tape archive contains around 70,000 hours worth of footage, including more than 1.3 million global news and entertainment stories, in 16 mm film and videotape, dating back to the beginning of the 20th century.

PFT will be driving this project using its proprietary content operations platform and supporting services solution called CLEAR. The digitisation work will be undertaken from its facilities in the US (New York) and UK (London), in addition to Indian facilities operating out of Mumbai and Bangalore.

“Currently, we have a team of over 550 developers writing bespoke scripts to support the innovative workflows required by this project. We will also utilise our own cloud technology for supporting services,” said Sankaranarayanan.

According to Alwyn Lindsey, director - international archives at AP, the company was looking for a partner with the ability to handle their global business needs and a project of this scale and thus, PFT was picked up. “Today’s market is driven by giving customers breadth of content, ease of access, and value for money. While we have already digitised around 10% of our archive, it has been a top priority to get all of our most saleable archive footage online and make it available to our customers, wherever in the world they may be,” said Lindsey.

The stakes are high. News networks like CNN, CBS, Al Jazeera typically tend to deal in their content in a unique way, which explains why the need for content is going through the roof. “All these networks now have a mechanism to fulfil that requirement in an effective manner,” Sankaranarayanan said.

In fact, PFT has already been working with a host of Indian and international entities on digitising archive content.

Some of the organisations currently using their service include British Movietone Library, British Film Institute, Imperial War Museum, IMG, Board of Control for Cricket in India (BCCI) and Eros International.

On the possible size of this market in India or globally and the extent of business PFT will be looking to tap going forward, Sankaranarayanan said, “I do not know if there is any formal research done on the market size.” PFT’s internal estimates, however, indicate that billions of dollars are spent on digitisation. “While this is a split between print and moving images, it is the latter where we see a significant growth happening in the years to come,” he added.

PFT will have to deliver the entire digitised archive and create nearly 4 million new assets in 18 months. The scope of work will involve digitising 3,000 hours of film with an average of 60 news stories per hour (i.e. creating a total of 900,000 files) and 29,000 hours of video with an average of 20 news stories per hour (i.e. creating a total of 2,900,000 files). The newly digitised content will appear daily on AP Archive’s website which will be facilitated by a dedicated connectivity between PFT and AP.

Agri growth scorcher drives private equity activity

This story first appeared in DNA Money edition on Saturday, February 25, 2012.

The vast Indian agricultural market and a pick-up in related activity have triggered a surge in private equity (PE) placements and merger and acquisitions (M&A) in this sector over the past one year.

Pundits believe there is still so much of growth upside left. Raja Lahiri, partner - transaction advisory services, Grant Thornton India, said agriculture as a sector is promising and there is a reasonably good private equity interest, especially in the segment like seeds. “Funds tend to chase businesses that address the bottom of the pyramid theme and investing in agriculture and related businesses do fit in to their investment theme,” said Lahiri. Agriculture and related businesses as a segment include the entire value chain of foods, agriculture produce, seeds, fertilisers, agri-technology, and agri-infrastructure.

While three deals have already been announced in the current calendar year 2012, industry experts see a lot many in the pipeline, which will get closed in coming quarters. Among deals that have already been concluded are Malabar Trading Co’s majority stake acquisition in Protect Nature Pvt, takeover of Hyderabad based Rohini Seeds by agro chemicals company Crystal Group and private equity investment by Song Investment Advisors in SV Agro Processing. Deal value of all these transactions have not been made public though.

Even the terms of trade appear to be gradually changing in favour of agri crops which basically mean the price of agri crops is increasing at a much faster clip than manufactured goods.

Analysing the key factors driving the trend, G Chokkalingam, executive director and CIO, Centrum Wealth Management, said it’s the highly populated countries like China, India, Brazil, Russia, South Africa that have logged the fastest economic growth in the last 7-8 years. “However, the size of cultivable land has only declined in this period. This has put tremendous pressure on agri crops as well as demand for food which is only rising. Interestingly, within India, the fastest growth is coming from the densely populated states like Madhya Pradesh, Uttar Pradesh, Orissa etc. So, on one hand, there is increase in food demand and cost, and shrinkage in cultivable land on the other.” He felt that climate variations will necessitate strong inputs for the agriculture sector in order to improve productivity. “Taking these factors into consideration, I feel the agri and related businesses will attract a lot of attention from investment companies. In fact, I see it as a major theme on the bourses in the next 2-3 years,” said Chokkalingam.

Another reason for increased attention from PE firms is that the size of these businesses has reached a certain scale in the last 3-4 years. Earlier, such businesses were too small and would only attract the start-up investors or investments from venture capital funds. Unfortunately, there weren’t many such investment entities in India, thus dampening growth and investments in this sector.

“The real growth capital story will start to unveil now because the sector itself has reached a certain scale ranging between Rs 60 crore to Rs 200 crore. Thus, it now makes sense for funds to look at investments of Rs10 crore to Rs 50 crore in such businesses. My sense is it will largely be growth capital PE deals that will dominate the market in the next couple of years. This is likely to be followed by a couple of buyouts though generally speaking, India is still not ready for such transactions, especially in the agri and related segment,” said Rajesh Srivastava, chairman and managing director, Rabo Equity Advisors (an agri-focussed fund).

IDFC Private Equity has also hopped on to the agri-business investment bandwagon by acquiring a significant minority stake by investing Rs 150 crore in Jaipur-based Star Agri Warehousing and Collateral Management. Girish Nadkarni, partner, IDFC PE, said, “The placement has been done through our $650 million IDFC PE Fund III.”

The funds will be deployed by Star Agro for expanding the warehouse network and creating a pan India network of allied post harvest management services. We are expecting the investment payback time frame to be 3-4 years from now.” He did not share precise details on their expected rate of returns though, “It would be in the same region as is the case with any standard internal rate of returns (IRRs) with PE investments,” he said.

Additionally, Bombay Stock Exchange (BSE) listed Onelife Capital Advisors Ltd is currently in the process of considering a proposal to acquire a group company Oodnap Agrotech Ltd (OAL) engaged in the agricultural and related business activities.

According to data compiled by Grant Thornton India, agriculture and related business segment attracted 14 M&As and 8 PE deals amounting to $586.56 million and $19.12 million respectively in the year 2011. The number was significantly higher in 2010 wherein the sector witnessed 26 M&As and 8 PE deals worth $354.73 million and $157.41 million respectively.

Srivastava said that the number of funds targeting this space has increased significantly vis-a-vis just a handful of sector-focussed firms in the past. “This is a good development for the sector because ultimately PE investors are seeing value in such businesses which will eventually help them expand better in the coming years. From the perspective of both volume and number of deals, 2012 will be better than 2011 for PE investments in this sector.”

In fact, Rabo Equity Advisors is expecting to close 3-4 fresh deals in the next couple of quarters and will raise a new fund as the existing corpus will get exhausted post the new placements. “The new fund will be launched by the end of this year. Precise details on the same will be finalised in over a couple of months from now,” said Srivastava.

PE investor in Ginger is a Tata Capital firm

This story first appeared in DNA Money edition on Thursday, February 17, 2012.

Indian Hotels Co Ltd (IHCL), the Tata group hospitality flagship, had last March announced Rs320 crore investment by Singapore based private equity firm, Omega TC Holdings Pte Ltd, into its subsidiary Roots Corp Ltd (RCL) that runs the Ginger chain of budget hotels in India.

The IHCL management had then said that Omega TC was chosen after discussions with a few PE players and the investment, which was to be made in various tranches till 2014, included buying out some of the existing investors in RCL.

Curiously, IHCL then was not willing to share any details about the ownership and other information on Omega TC. The IHCL annual report for 2010-11 also has no information about the ownership details of Omega TC.

It now emerges that the Singapore PE is an entity backed by Tata Capital, a Tata group company.

Responding to a DNA query during the third-quarter results about media reports on Tata Capital picking up stake in RCL, Anil P Goel, executive director - finance, IHCL, had said, “Omega TC is actually Tata Capital.” He, however, did not share any details on it.

A request for a meeting with the IHCL management to get a better understanding of the PE firm’s investment in RCL was denied.

Tata Capital, too, when approached, did not offer any comment.

Later responding to a DNA uery, the Tata Group media agency said, “Omega TC Holdings is an investment holding company of the Tata Opportunities Fund LP, a limited partnership fully subscribed by global investors. The Tata Opportunities Fund is one of the private equity funds sponsored by Tata Capital Pte Ltd, Singapore.”

Meanwhile, experts tracking the company development said proper disclosures should have been made about the PE investor into the IHCL subsidiary.

“To what extent is this investment transparent is something I fail to understand. What is its purpose, how was the transaction valued, whether it was done to set a valuation benchmark, or largely to give an exit to existing investors because no other investor is willing to come in, are questions that only the company officials can answer,” said a top official of a leading hotel chain requesting not to be identified.

The PE placement was also being viewed as paving the way for RCL’s initial public offering, which is likely to happen in the next couple of years.

During an IHCL annual general meeting in August 2010, Ratan Tata, chairman, Tata Group had responded to a shareholder query saying, “The Ginger hotel chain would be listed in the next couple of years, depending on a series of circumstances.”

Roots Corporation was set up in 2003 and currently operates 24 Ginger hotels across India. While a significant proportion of the Ginger portfolio is owned, there are a few joint projects like Ginger Rail Yatri Niwas (operated under PPP arrangement) and two management contracts in Manesar and Agartala.

The Ginger pipeline currently comprises 10 hotels under various stages of development including Ginger’s Mumbai debut at Navi Mumbai. These hotels are likely to add another 1,000 guest rooms to the existing portfolio.

Lemon Tree out to prove a point with business recast

This story first appeared in DNA Money edition on Monday, February 17, 2012.

Warburg Pincus-funded Lemon Tree Hotels has embarked on a major restructuring of its business with an eye on unlocking value.

The company plans to separate ownership and management of hospitality assets and is also weighing setting up a third-party hotel management company and introducing new hospitality brands.

Patu Keswani, chairman and managing director, Lemon Tree Hotels Pvt Ltd (LTHPL), confirmed the move to separate brand management from asset ownership. "It certainly is part of our long-term strategy. We will have a very clear division and I hope to do something specific even before our IPO, which should happen within a couple of years from now. To start with, we are planning to merge Red Fox into Lemon Tree and amalgamate the two. Eventually, we will have a company that will own both Lemon Tree and Red Fox brands, the management will reside there and so will a lot of assets," he said.

Lemon Tree is open to distinct identities for projects provided they "come with tax benefits," said Keswani.

"What it basically means is we will not downstream or move around any asset that will entail payment of duties, taxes and so on."

The company has 4-5 projects — with 100% asset ownerships — in its portfolio.

As a long-term strategy, the management is looking at aggregating them to create an asset company.

"It is an ongoing process, and we are in talks with lots of people to invest with us in the asset company. And as long as we own a majority of that company, we will be open to creating multiple asset companies," he said.

On the buzz about a Dutch pension fund coming on board as an investor, Keswani said "We are talking to many people, including investors from Europe. Nothing has been finalised yet."

And is Warburg is in the exit mode?

"Not at all," said Keswani. "We certainly are hoping that Warburg will stay as it has invested in the main company (LTHPL), which is both an operating as well as a property company."

Why is the company bringing in new investors then?

Keswani said the company has around six hotels that are with independent subsidiaries whereas LTHPL either owns 100% or a majority stake. "When we tie up with funds --- sovereign, pension or a private equity --- we may move some of our existing assets that are tax-friendly and we will have new hotels in these asset companies. So, right now, we have 3-4 companies that can loosely be termed as asset companies because they are downstream and pure assets," he said.

The company is also looking at creating a property company, though the timeframe will depend on when the new investor comes in. "It could take anywhere from the next six months to maybe 2-3 years, depending on when we partner with somebody (financial investor), the quantum of investment, the alignment and so on," said Keswani.

LTHPL is keen to keep a majority stake, while allowing the new investor in the property company to bring in at least `1,000 crore. It is likely the investor will secure a very small stake in Lemon Tree Hotels as well. "In fact, whatever conversations we are currently having with a few funds, the figure is in the neighbourhood of Rs1,500 crore," said Keswani.

Lemon Tree also has its eyes set on management contracts.

"It is going to be a step-down company where we will do joint venture with other people. It could also be a subsidiary of Lemon Tree where we will be managing hotels of other asset owners," Keswani said.

"We intend to do management contracts only in the mid-scale, upscale and deluxe categories. Thus, three new brands are currently being conceived and the work is at a very preliminary stage. The new brands will be with the management company and we should be ready to unveil them in another 3-4 months from now," he said.

The company is backing up its intent with some high-profile recruitments.

Murlidhar Rao, who was vice-president (operations) with Alila Hotels & Resorts in Singapore, has already taken over as the chief operating officer (COO) of its newly launched Lemon Tree Premier brand of hotels.

Similarly, Saurabh Nandi, shopper marketing manager - ASEAN, Procter & Gamble, operating out of Thailand, is expected to join as LTHPL's chief marketing officer by mid-March. Nandi will also be entrusted with spearheading new branding initiatives expected to be rolled out before June.

Thomas Cook says no piecemeal sale of company

This story first appeared in DNA Money edition on Friday, February 17, 2012.

Despite the financial stress faced by its UK parent, travel operator Thomas Cook India, which has been put on the block, on Thursday said the proposed sale is not a distress sale and the decision was taken based on the number of unsolicited expressions of interest received for the company.

Madhavan Menon, managing director, TCIL, said, “From the UK parent’s point of view, they clearly recognise that this is a business that is doing well and is a major player among the businesses present in this country. It is not a distress sale and unless the parent sees a value, a sale will not happen.” Menon said.

Menon said a detailed process being conducted by Credit Suisse was a two-staged one and is yet to begin. “We would try and complete the process quickly because when there is a stake sale it can lead to some amount of distraction from the business. And it is our intent to finish it (sale) at the earliest,” he said.

Menon said there would not be any piecemeal deal and Thomas Cook India will be sold as one piece. “At this stage, however, it would be speculative on my part to speak anything about
what the new owner would do with the business after having acquired it because we don’t even know who
the owner could be,” he said.

Reiterating his views on the Indian entity, Menon said that Thomas Cook India has operated independently of the UK parent, be it financially or commercially. For TCIL, foreign exchange is a major contributor to its overall business while it is the packaged holidays for their UK parent.

TCIL also said that the company management did not have a preference as to who the potential buyer would be as it entirely depends on what value the parent expects to obtain from such a sale.

“I don’t want to get into the expectations of the parent, because it is too early to speculate as to what they want. It is also driven by the fact that there are rules and regulations that govern the price, given that we are publicly-listed company. We are going through a process whereby there will be a price discovery and we will have to wait for that to happen,” he said.

To a query on whether TCIL would prefer a financial investor as a buyer who will retain the existing management as against a strategic buyer who may not, Menon said, “We have a successful management team and anybody who buys this business would obviously see some value in it because the team has built up this company over the last six years.”

The new buyer will have to negotiate the terms for the use of the Thomas Cook brand.

“The brand is available for a minimum 7 years and it will depend on what the bidders make of it and what value they appropriate towards it,” said Menon.

Rattan Keswani quits after over three decades with Oberoi Hotels & Resorts

An edited version of this story first appeared in DNA Money edition on Monday, February 13, 2012.

Rattan Keswani

Rattan Keswani, president-Trident Hotels at East India Hotels (EIH) – Ltd is set to part ways with the company (popularly known as Oberoi Hotels & Resorts) he has been associated with for over three decades now. Industry sources said that Keswani has already put in his papers and is currently serving notice period.

“Keswani is serving notice period till end of April. While there is no concrete information about his new endeavour, there are talks he is launching own venture,” said a source privy to the development.

While Keswani could not be reached for a comment, EIH Ltd spokesperson confirmed the development saying, “He (Rattan Keswani) is moving out of Oberoi Hotels & Resorts to start a new venture,” without sharing any further details.  “And we have not appointed anyone in his place as yet,” added the spokesperson when asked if the company has got a replacement in place.

Keswani began his association with the Oberoi group as a student of Oberoi School of Hotel Management (OSHM) – now Oberoi Centre for Learning & Development (OCLD) – in the year 1981. Except for a brief stint with Holiday Inn Worldwide in 1987-88, Keswani has been an ‘Oberoi’ man for his entire professional life thus far. Starting as an assistant front office manager at The Oberoi in Mumbai in 1983, Keswani has held various responsibilities (India and overseas) in the group before taking over the reins of Trident Hotels in April 2008 as president of the five-star business hotel chain.

For PRS ‘Bikki’ Oberoi promoted Oberoi Hotels & Resorts this will be the second high profile movement in the company in the last 12-odd months. Last year Liam Lambert stepped down from his position as president of Oberoi Hotels & Resorts after serving notice period in April 2011. In-charge of The Oberoi chain of luxury hotels, Lambert joined the Oberoi Group on May 01, 2009 after serving as director of operations, Europe, Middle East and Africa at Mandarin Oriental Hotel Group.

What is really surprising though is that even after almost a year since Lambert’s resignation, the EIH management has not appointed any one to take over his responsibilities at Oberoi Hotels & Resorts. Considering EIH spokesperson’s statement that no replacement has been identified as yet for the president’s post at Trident Hotels, this could be a possible indication of a shift in the Oberoi management’s approach to manning the two top positions in the company.

Deutsche Bank exits Lodha with 55% returns

This story first appeared in DNA Money edition on Friday, February 10, 2012.

Deutsche Bank has got a 55% return on its Rs1,640 crore placement in Lodha Developers, despite having invested at the peak of 2007-08. The lender got back Rs2,542 crore — including fresh debt of Rs825 crore and Rs1,720 crore from internal accruals — from Cowtown Land Development Ltd, a Lodha subsidiary.

Lodha, which has earlier provided exits to JP Morgan and HDFC Venture Fund from its other projects, currently has investments from the likes of ICICI Ventures and Old Lane, besides HDFC Venture Fund.

Earlier this year, private equity firm Kotak Realty Fund took the promoter buyback route to exit its stake in 3C Company’s information technology park project in Noida. The investment firm said it earned a return of less than 30% from this exit.

With most funds nearing expiry of their term and investments getting matured over the years, industry experts feel 2012 and 2013 will see a good number of transactions in the real estate space.

“When the fund expires, private equity (PE) firms have to return a significant amount of money to investors. Besides, demonstrating returns is very crucial if one is raising a new fund. Given the current market situation, deliberated and negotiated exits will be more in number as compared to natural exits, wherein the latter (natural exits) would see superior returns,” said Amit Bhagat, chief executive officer and managing director, ASK Property Investment Advisors.

Jones Lang LaSalle said in a report recently that 2012 will be a big year for real estate exits by private equity players. It sees PE exits worth $2.5-3 billion (around Rs15,840 crore) this year — that’s equivalent to the total quantum of PE exits in the last four years.

According to Shobhit Agarwal, joint managing director - capital markets, Jones Lang LaSalle India, multiple investments took place in the 2005-2008 period involving both domestic and foreign funds.

Thomas Cook will sell India arm lock, stock & barrel

This story first appeared in DNA Money edition on Thursday, February 9, 2012.

It’s official. Thomas Cook is exiting its Indian subsidiary.
After a series of denials over the last three weeks or so, travel and tour operator Thomas Cook (India) Ltd, or TCIL, has informed the Bombay Stock Exchange that its UK parent has finalised plans to sell its entire 77.1% stake in the entity.

The sale is part of a global restructuring exercise that will see Thomas Cook Group Plc close 200 of its 1,300 high-street stores.
The UK parent is launching a formal sale process for its stake, said the filing, adding that it has received a number of unsolicited, informal expressions of interest from third parties to acquire the stake.

The company stressed, however, that the sell-off will happen only if a compelling bid is received.

“If the offers are attractive, the company will consider selling the stake and use the proceeds to continue to strengthen the group’s balance sheet. TCIL is a strong business, operating in an attractive market. Both the business and the market are growing and Thomas Cook will only sell its stake if a compelling offer is received,” Sam Weihagen, group CEO of Thomas Cook, was quoted as saying.

However, the filing did not disclose either the profiles of potential buyers or the likely timeframe for concluding the deal.

The market, however, is rife with rumours of potential suitors including the likes of Cox & Kings and Travelex in addition to leading global private equity players KKR, Actis, Bain and Carlyle. DNA Money could not independently confirm the participation of any of these entities.

The UK parent reported a pre-tax loss of £151.7 million ($241.2 million) in the three months to December 31 compared with a loss of £99.3 million a year earlier even as revenues increased 3% to £1.86 billion mainly because the operating expenses climbed 10% to £482.1 million.

The group, which has been under financial stress for a while now, sold off its Spanish hotel chain Hotels Y Clubs De Vacaciones to Grupo Iberostar for 72.2 million euro last year.

A Sunday Times report had, on February 4, 2012, said that the UK parent has hired Credit Suisse Group AG to sell the foreign exchange business in India. The BSE filing did not mention any such detail.

TCIL management continued to remain silent on the entire development.

TCIL has presence in 70 Indian cities across 153 owned locations and has close to 65% revenues coming from the foreign exchange business. The company employs 2,700 people in India and has a network of 110 ‘Gold Circle Partners’ and 184 preferred sales agents in over 100 cities in the country. It also has operations in Mauritius and Sri Lanka.

High Street back with a vengeance

An edited version of this story first appeared in DNA Money edition on Wednesday, February 8, 2012.

India witnessed addition of over 15 million square feet (msf) of organised retail mall space across primary and secondary locations in the calendar year (CY) 2011. Interestingly, approximately 60% of the overall space i.e. more than 9 msf was added in the period between July-December (H2) 2011.

And according to a CB Richards Ellis (CBRE) report, more than 90% of the entire organised mall supply during the review period was led by cities like Mumbai, Pune, Bangalore and Chennai.  The CBRE study reviewed retail real estate developments in seven cities including NCR, Mumbai, Bangalore, Chennai, Hyderabad, Pune and Kolkata.

Anshuman Magazine, CMD, CBRE South Asia Pvt Ltd, said the increased retail activity across key cities is an indication of the growing confidence of both domestic and international retailers in the India growth story. “On the back of growing urbanisation and an increase in the acceptance of organised retail, retailers have been expanding their operations across the country. The government allowing 100% FDI in single brand retailing has been a welcome step, however the caveats put by the government like making it mandatory for retailers to source 30% of their requirements locally are a dampener,” he said.

Presenting a promising outlook based on considerable increase in retailer inquiries, the report further said that retail mall rentals witnessed growth in prime city micro markets. However, the rental were stable in suburban (supply laden) destinations in key cities like NCR, Mumbai and Bangalore. A few micro markets of Pune, Chennai and Hyderabad witnessed correction but only with select mall developments.

While CBRE expects a significant increase in the transaction activity and size as a result of anticipated incremental demand, the experts also envisage a possible downside owing to large, retail mall supply pipeline in most leading cities. ‘This might lead to a demand – supply mismatch which might eventually lead to long-term pressures on retail rents in select micro markets’, the report said.

In fact, pressure on retail mall rentals has started showing up in a select few categories already. The developer of the recently launched Phoenix Market City Kurla was faced with the challenge of leasing the multiplex space in the mall. Industry sources said that, while PVR Ltd was initially approached by the mall developer for the multiplex lease, the film exhibition company (PVR) turned it down citing higher lease rentals.

“Eventually, a deal was inked with Reliance BIG Cinemas. However the multiplex chain walked out of the deal at the time of taking delivery as it felt the lease rentals were on the higher side. The mall developer then re-approached PVR with a mutually workable lease rental rate. PVR is currently in the process of getting the multiplex ready for launch which is likely to happen within the next few quarters,” said the source familiar with the development.

The general feeling in the retail sector is that while re-negotiations haven’t started yet, the process is likely in the first quarter of financial year 2013 (Q1FY’13). “Retailers who have already negotiated rates will take stock of the market situation by the end of current fiscal. Given the current economic scenario with financial standing of real estate companies, it is very likely that retailers will discuss rentals which will lead to some correction in the market. Having said that, high street locations will continue to enjoy a premium,” said a top official from a leading Indian retail company.

Echoing the sentiments, Pankaj Ahuja, proprietor, Rapid Deals (a Mumbai-based real estate consultancy firm), said rate negotiations are not happening in the established malls operating in south central and western suburbs of Mumbai. “However, some of the new mall developments that are not fully operational are facing challenges with lease rental rates. I wouldn’t be surprised if some of them take to reducing the rentals per square feet in an attempt to fill the retail space,” he said.

The quality of retail real estate is another problem faced by the Indian retail industry. A recent report by the research and real estate intelligence service of Jones Lang LaSalle (JLL) India cited that while substantial mall space is being built, only half of it is worth a second glance from retailers.

Ashutosh Limaye, head - Research and Real Estate Intelligence Service, Jones Lang LaSalle India, said in the report , “The trend is not confined to Mumbai as almost all cities in India are witnessing it. We are still stuck with the mistakes we made three or four years ago - jumping on the bandwagon and creating too many malls without reason. Few understood that building and running malls is a science, and that factors like catchment viability, location, supply benchmarking and mall management matter in their success.”

JLL estimates that 2011 saw a retail real estate supply of 13.8 million square feet hit the market, with 10.7 million square feet getting absorbed – it amounts to 130% of the figures for the years 2009 and 2010 put together.

With delays in completion and few retail-conducive projects being launched, it is malls, malls everywhere and nowhere to go for retailers. “Retailers have finally decided that enough is enough and have started scouting for stand-alone properties. With their eyes on old mansions, mixed-use buildings and small office blocks in established as well as emerging locations, big-format retailers and giant chains are mandating property firms to broker these deals for them,” said Limaye.

So while high streets were never out of form, they are now back with a vengeance. Properties which, with retrofitting, can enable retailers to start selling in no time at all are fast becoming precious assets for big retail companies. Even constructing glass cubes on plots that house the 'building next door' is seen as preferable over having to wait for properly located and configured malls to come along.

“In the world of retail, stagnation is the same as dying and these retailers have no intention of slipping into a market-induced coma. Moreover, these stand-alone stores are the perfect way of giving shoppers a personalised experience that many shopper often find missing in malls,” said Limaye.

‘Credit Suisse will steer Thomas Cook foreign exchange business sale’

This story first appeared in DNA Money edition on Tuesday, February 7, 2012.

UK-headquarterd Thomas Cook Group has appointed Credit Suisse Group to sell off its foreign exchange business in India, according to a Sunday Times report. The paper didn’t divulge the source though.

The tour operator is learnt to be pushing ahead with divestments of its non-core assets to raise £200 million in an attempt to lighten its debt load and shore up the balance sheet. Repeated calls and an e-mail seeking clarifications to the management went unanswered.

All along, the company has been in a denial mode. In a statement last month, Madhavan Menon, MD, Thomas Cook (India) (TCIL), had said the UK parent has no plans to sell its stake in the Indian entity. Media reports had earlier indicated that the Indian unit’s founders — Thomas Cook UK and TCIM — have pledged their TCIL’s 77.1% stake in favour of Royal Bank of Scotland (RBS) and that RBS has been engaged to find a buyer for the Indian unit.

On speculation in the British media about the parent company selling its foreign exchange business, reports had earlier quoted Menon saying, “We do not have such plans.”

TCIL’s foreign exchange business mainly deals in small-value remittance with Thomas Cook Express and money transfers with Moneygram or Express Money.

In 2006, the travel company had acquired LKP Forex and has over the years expanded its operations to 72 cities from the earlier 17.
Forex operations contribute approximately 65% of TCIL’s revenue. The company currently enjoys a sizeable market share — close to 50% — in the business and is witnessing a growth of 9-10%.

Thomas Cook swung to an annual loss last year after a series of profit warnings and the resignation of chief executive Manny Fontenla-Novoa in August. The mass-market travel group has taken a big blow from the economic slump, as consumers increasingly turn to the Internet to book their own vacations.

Dish TV eyes biggest pie of digital switch

This story first appeared in DNA Money edition on Friday, February 3, 2012.

Dish TV India, the country’s top direct-to-home (DTH) player, is gearing up to garner the maximum share of subscribers who would migrate to digital from analogue cable television in the four metros before June, the deadline for the switchover.

Industry experts say about seven million homes are likely to make the switch (from analogue to digital cable) in Mumbai, Kolkata, Delhi and Chennai, thereby opening up a potential market of 10 million new subscribers (homes with multiple television sets) for DTH and cable TV operators.

Of the six DTH players in the country, Dish TV India, the biggest, is optimistic of garnering a giant’s share of the new subscribers.

RC Venkateish, CEO, Dish TV India, said since digital cable has considerable presence in the four metros, close to 60% of the new subscriber base will be tapped by the DTH players.

“We expect to get anything between 26% and 28% of the new subscriber base that will switch from analogue to digital,” he said.

The Dish TV management has been working on this by readying the infrastructure to meet the surge in demand and will be pursuing it aggressively through above-the-line (ATL) and below-the-line (BTL) ad spend in the coming months. A new promotional campaign featuring film actor Shah Rukh Khan is on air.

In another technological innovation in the DTH industry, Dish TV has introduced a new product that offers unlimited recording capacity.

Christened Dish truHD+, the high definition (HD) box is being offered at no extra cost and will be sold at the price of existing box.

Salil Kapoor, chief operating officer, Dish TV India, said the unique feature of this box is its compatibility with any universal serial bus (USB) flash drive or hard disk drive (HDD).

“The new HD box comes with a software upgrade that allows consumers to simply plug-n-play an existing USB stick or HDD and builds an entire library of their favourite programmes. While most DTH operators charge a premium for their digital video recorders (DVRs), our idea is to expand the DVR market by making it accessible at the price of a normal HD box,” he said.

Dish truHD+ has a dual advantage of all HD and DVR features and the price includes the new box, along with one month Dish truHD Royale Pack.

As part of the promotional offer, Dish TV will provide a four gigabyte USB flash drive free.

Finding the best drinking water — by accident

This story first appeared in DNA Money edition on Wednesday, February 1, 2012.

In early 1990, Naveen Luthra, then just over 30, and his friend Deepak Mohan, who was the captain of an oil tanker, drove down through the sylvan, thickly forested Sahyadiri ghats towards Mulshi, about 100 km from Lonavala.

It was to be a fateful trip.

“He had made his pot of money and wanted to invest in land in India,” Luthra recalls.

They arrived in Luthra’s Maruti Gypsy at a site where they met some landowners, but the captain found the land valuations very high and soon gave up on the idea of investing.

“Deepak went back to the sea and unfortunately died two years later. However, I quite liked the place and ended up buying 100 acres as an investment with the idea of doing something when I would retire from my Customs clearance business,” said Luthra.

Later, during the monsoon sometime in 1996, Luthra took another trip and was completely mesmerised by Mulshi’s ethereal beauty. He started accumulating more land between 1996 and 2000.

“It’s a little over 1,500 acre now. I initially bought at Rs5,000 an acre but at the end of the entire exercise, my average buying price was about Rs10,000 per acre. While land prices were reasonably cheap then, my buying price would still be termed expensive in those days,” he said.

Luthra wanted to do something related to tourism and planned to develop a one-of-its-kind-in-Asia ‘cave-room’ hotel project at the site.

He had absolutely no idea how to source water for the project — as also for his personal bungalow being built there.

“I realised I will need huge supplies especially for the hotel project and started looking around. I even approached the Tatas to buy water from the Mulshi lake which they have a lease on, but they turned my request down. Digging borewells was very expensive in those days, especially because my requirement was 3 lakh litres per day, and I didn’t know how many borewells would have been needed for that.”

One day, a local familiar with Luthra’s land informed him about a natural spring on the property as the solution to his water problem.

An excited Luthra got two pumps installed and started drawing it out, just to assess the quantity available.

“It was May and we were pumping out over 3-4 lakh litres from the spring and the water level refused to drop any further. We realised there was enough, so we ran a test to see if it was also potable. We got the tests done from 3-4 different places and on the day the report came to my office, I showed it to my friend who was in the business of importing filtration equipment and exporting water treatment plants. On reading the reports, my friend inquired about the source saying the water was of very high quality. Another unique aspect was that the water was pesticide free,” he said.

What Luthra had drilled into was a biological hotspot, or “biologically richest and most endangered ecoregions”.
British environmentalist Norman Myers, who pioneered the concept, said a region must meet two strict criteria to qualify as a hotspot: it must contain at least 0.5% or 1,500 species of vascular plants as endemics, and it has to have lost at least 70% of its primary vegetation.

To put in perspective, India has 2,800 water brands of which only two are free of pesticides — Mulshi, and Aava from Sheelpe Enterprise, a Gujarat-based firm.

Luthra then spent another four years trying to identify the best way and means to bottle the water without disturbing its natural qualities. He launched the Mulshi Springs water brand briefly in 2008 but stopped to fine-tune it, and made the product ready for launch in 2009.

Immediately after the launch, a friend sampled Mulshi spring water with Oberoi Group chairman P R S or ‘Biki’ Oberoi,who personally visited the Mulshi spring, inspected the treatment and bottling plant and approved its use across his Oberoi and Trident hotels under their private label L’Quila.

Today the Oberoi group buys 17,000 bottles of Mulshi spring water every day. The pinnacle of acceptance for Luthra has been at Colette, one of the finest water bars in the world based in Paris.

“We consciously chose to be in Colette because gaining acceptance there would mean getting accepted globally. The thought was since I have one of the finest waters in the world, there is no reason why it should not be available at Colette,” Luthra said.

“Besides, it didn’t take me too much of a sales effort to convince them. The deal was concluded in a 30-minute conversation with the Colette management, of which 25 minutes was taken by them just to digest the fact that this water was coming from India especially because they didn’t think very highly about Indian quality and hygiene standards. We were able to change that perception and are now the only Indian water brand available in Colette. We may look at commercial exports in 2013-14,” he said.

Apart from Oberoi, private-label deals are on the cards with The Leela Group and ITC Hotels.

If you feel like taking a sip in Mumbai, it’s also available at BIG Cinemas, fine dine restaurants such as Hakkasan and Yauatcha and world food store dolce*vita at the Palladium Mall at Phoenix Mills.

RPG’s Spencer Retail is also likely to create a private label water brand to be sold in its retail stores across the country.

Today, Luthra Water Systems has a capacity for 25,000 glass bottles of and 40,000 PET bottles of water — which is not enough to meet the growing demand.

Another bottling plan with a capacity of 150,000 bottles is underway and will be operational by Diwali this year.

“Together the plants will have a capacity of 215,000 bottles daily. Work on the new plant will start immediately after 80% funding is cleared from Oriental Bank of Commerce. Total capex for the plant is around Rs25 crore,” he said.

A 750ml bottle of Mulshi Springs is priced at Rs50 in Maharashtra and Rs55 outside the state.

The 52-year-old Luthra said when the capacity expansion is completed; the company could be doing business of Rs30 lakh a day.

Not a bad rate of return from a parcel of land bought at Rs10,000 per acre.

Whoever invented the phrase money flows like water clearly had Luthra in mind.

Phoenix replaces hotels with residences

This story first appeared in DNA Money edition on Saturday, January 28, 2012

Phoenix Mills Ltd (PML), multi-use integrated property developer, is replacing hotel development plans of its hospitality subsidiary with residential due to change in economic scenario since 2007 when the projects were first planned.

Majority of the hotel plans of Phoenix Hospitality Co Pvt Ltd (PHCPL), including the one in Mumbai, have been changed to residential, commercial-cum-retail and residential-cum-hotel developments.

Interestingly, the commercial and retail spaces will be created for sale.

Shishir Shrivastava, group CEO and joint managing director, PML, said, “The environment has changed drastically since then (2007) and Phoenix Hospitality is not developing a few of these land parcels it held as hotel projects. As a result, certain formats have been changed to make the projects more viable. The idea is to monetise the land parcels by developing assets to be sold, replacing hotels which would have eventually ended up debt heavy.”

As per the changed plans, while the Pune land parcel will continue with residential development, the site earmarked for a hotel in Mumbai will be replaced with retail-cum-commercial space.

Similarly, the hotel project at PHCPL’s Bangalore (West) land parcel will be replaced by almost 1 million square feet of residential development. In Chennai, it will be a combination of residential and a small boutique hotel as against a hotel project. PML will, however, construct a 150-room hotel at Agra, as per earlier plans.

PHCPL was set up in 2007 as a special purpose vehicle, through which PML owned stakes in many assets (land parcels) across the country. A majority of these developments were earlier planned to be hospitality assets.

Under the original deal in 2007, PML was to invest Rs350 crore for raising its stake in PHCPL, which then had land parcels worth Rs120 crore.

Since then, PML has invested Rs154 crore in PHCPL and the funds were with the company as share application money.

PML has an option to invest another Rs200 crore and increase its stake to 75% in PHCPL from 56% now.

As for new projects, PML will launch a phase-wise residential project in June 2012 in Bangalore.

Spread across 16 acre, it will comprise nine towers of 30 floors each with two apartments on each floor. In all, the development will house 1,300 residential apartments of 2 and 1/2 BHK and 4-5 BHK, targeting the premium and luxury market segments.

Hero set to launch an Edition with Marriott

This story first appeared in DNA Money edition on Thursday, January 26, 2012.

Hero Group, India’s largest two-wheeler maker, is in advanced stages of discussion with New York Stock Exchange-listed Marriott International Inc to launch the global hospitality major’s ‘Edition’ hotel brand in India.

Industry sources said the creator of Edition, Ian Schrager — who is also known as the godfather of trendy boutique hotels globally — was in India last week for a discussion with the Munjals.

“He (Schrager) also visited their recently acquired cold shell in Gurgaon to get an idea of the site and its suitability for the Edition brand. The latest on this is that officials from Marriott and Hero Group are currently working on the finer details of their arrangement and an announcement to this effect can be expected soon,” said a source familiar with the development.

A Hero Group spokesperson did not respond to repeated calls and text messages.

Marriott International’s India office, however, confirmed the development.

“We are in discussions with them (Hero Group) and Ian Schrager was in the country recently to discuss the possible association. We are in the process of finalising the details. The team is currently working on the hotels design element and we are hopeful to start work on the project in another six months from now,” said Navjit Ahluwalia, senior vice president - hotel development (India and subcontinent), Marriott International.

With 250-280 guestrooms and a host of other facilities, the Gurgaon Edition will mark Hero Group’s foray in the Indian hospitality market. The hotel, to be operational sometime in late 2013-14 or early 2014-15, is being developed on a 3.9 acre plot that was acquired by Hero Group through a bidding process organised by Punjab National Bank.

The overall cost of getting this project operational would be Rs650 crore, Pankaj Munjal, managing director of Hero Motors, had said in an earlier interaction.

Edition's global development pipeline include hotels in six major global gateway cities on three continents by 2015. Among various locations being identified include one of Manhattan's (New York) landmark buildings – the Clock Tower, a historic building formerly known as the Berners Hotel in London and a hotel under construction in the former Seville Hotel at the Miami Beach location. These projects are owned and operated by Marriott International in an attempt to reflect confidence in the brand's future growth and success.  Hotels to be operated purely under management contract include under construction properties in locations like Bangkok, Abu Dhabi, Los Angeles and Gurgaon (India).

On the competitive set for Edition, Ahluwalia said the brand currently has no competition in the market and is addressing a space that has been left untapped / not captured yet by most global hotel companies. Interestingly, the Edition hotels will be operated by Marriott’s Ritz Carlton management team with the promise of offering a completely distinct level of service.

“Edition hotels are very unique properties addressing the next generation’s needs. We have been looking for partners who want to own a distinct customised hotel that customers will be looking for in the coming years. I think Munjals have that kind of a vision and they have already demonstrated it in some of their other businesses,” said Ahluwalia.

On the possibilities of a multi-property arrangement with the Hero Group given they have historical land bank in the country, Ahluwalia said, “Once we have a good relationship / partnership, we will explore other markets to go in to, together and do more Edition hotels across the country.”

Given the potential, Marriott International is optimistic about having more Edition branded hotels in the Indian hospitality market. “In fact, Schrager during his recent visit could very clearly feel the excitement in the Indian market for a customised luxury hotel. We certainly feel the markets of Mumbai, Bangalore and Goa would be ideal locations for future developments,” said Ahluwalia.

When asked if Marriott will take the investment route like the hotel company did in New York and London, Ahluwalia said, “We are not shy of investing in the Indian hospitality market and have already committed $30 million for the development of Fairfield brand with SAMHI Hotels Pvt Ltd. While our model has always been management contracts, we do invest wherever we feel there is a need for it. The Edition hotels in New York and London are owned by Marriott and we will eventually get an equity investor to buy these properties while we retain the management contract.  I think India has so many wealthy individuals who would want to own unique luxury lifestyle properties negating our need to invest. Instead, we are focusing on the right asset partners with ideal locations that can sustain a product like Edition.”

Introduced in 2008, the Edition brand is positioned as luxury lifestyle hotels combining the personal, individualised and unique experiences that Schrager is known for globally. The Istanbul Edition is the only operational project at present under this brand. In fact, media reports also indicated that another Edition development in Honolulu moved out of the network in August 2011 and its asset owners (M Waikiki LLC) had subsequently sued Marriott, saying the company had not developed the brand as much as promised.

Oriental Hotels exits Roots Corp

This story first appeared in DNA Money edition on Thursday, January 26, 2012.

Oriental Hotels Ltd (OHL), a subsidiary of Indian Hotels Co Ltd, has exited its investments in Roots Corporation Ltd (RCL), which owns and manages budget hotels under the Ginger brand.

The Compulsorily Convertible Preference Shares (CCPS) held by OHL were acquired by Singapore-based Omega TC Holdings Pte Ltd.

Anil P Goel, executive director - finance, IHCL, said the CCPS buyout has been converted and the entire deal is over.

“We had some investment from OHL in Ginger hotels so they have exited,” he said without giving details about other entities that exited though the CCPS conversion route. The deal is understood to have concluded sometime in the second half of 2011.

OHL is the Chennai-based associate company of Tata Group promoted Indian Hotels Co Ltd (IHCL) which owns eight hotels operated under Taj, Vivanta and Gateway brands across various south Indian cities.

The OHL deal was a part of Omega’s arrangement with IHCL announced in March 2011, under which the investment firm was to acquire the CCPS held by some existing holders for Rs70 crore.

Under the deal, Omega had also agreed to invest Rs150 crore in tranches for a minority stake, taking its overall investment in RCL to Rs220 crore.

Meanwhile, IHCL has posted a marginal increase in its net profit at Rs50.48 crore for the third quarter ended December as against Rs50.29 crore posted in the same period of the previous fiscal. Net sales rose 7.44% to Rs521.48 crore.

As costs bite, companies step up in-house recruitment

My colleague Promit Mukherjee is the co-author of this story which first appeared in DNA Money edition on Tuesday, January 24, 2012.

The slowdown appears to be pushing corporates to cut corners anywhich way possible.

That includes filling key positions with in-house talent rather than go for lateral hires.

The idea, experts believe, is mainly to save on costs they would otherwise incur by outsourcing the process to professional staffing and executive search firms.

The phenomenon is picking up slowly.

However, staffing and executive search firms operating in the outsourced recruitment business feel it is a matter of concern as it is eventually going to impact their business, which is already under pressure owing to a decline in the overall recruitment activity.

Dony Kuriakose, director, Edge Executive Search P, said more and more companies appear to be taking this route and that is likely to take shape of a trend as other companies are following suit.

“There were fewer companies earlier using internal human resources talent to do the sourcing and recruitment of candidates. Our interaction with a host of companies, however, indicates that the number of such companies is increasing and is likely to increase if the economic environment continues to deteriorate further,” said Kuriakose on the sidelines of the Seventh CEO Conclave organised by Executive Recruiters Association (ERA), which is a non-profit Chamber of Commerce representing more than 200 Indian executive recruitment consulting firms.

While using internal resources to hire people is being done across levels, the approach is more visible while filling entry-to-mid level positions.

“In fact, there are a few companies which have used this approach to identify and recruit top-level positions as well, though the number of such organisations is very small,” said Nikhilesh Mehta, CEO of the Pune-based Krehsst Recruitment Solutions.

While companies operating in the information technology and information technology enabled services sectors appear to be doing it more often, others in the pharma and life sciences, among others, have begun using internal HR resources to fill positions in their respective organisations.

Amit Zutshi, partner - commercial advisory services and transaction advisory services, Ernst & Young P, however, feels the outsourced recruitment fraternity should not worry much about this development.

“I think it is a very sporadic and seasonal trend adopted with a short-term view of saving on costs. There are companies who have tried doing it under stressed business environment in the past and there will be a few who will try doing it again,” he said.

Another challenge faced by the staffing and recruitment firms is the fact that companies have started asking them to scale back their fees per candidate.

The reduction, according to industry players, is 10-15% of the earlier agreed sum.

Vipul Varma of Focus Management Consultants P chipped in, saying companies indeed are bringing down fees for staffing and recruitment services. “For instance, if a company was using more than one recruitment consultant to fill the vacant positions earlier, consultants have started taking the assignments as an exclusive mandate while reducing their charges. The reduction in remuneration to a great extent gets hedged by the increase in the number of candidates being hired,” he said.

Dutch retailer Spar eyes more tie-ups to expand

This story first appeared in DNA Money edition on Thursday, January 19, 2012.

Spar International, one of the world’s largest independent food retail chains, is scouting partners to tap newer markets in India with its supermarket and hypermarket stores.

The company currently has 10 operational stores in India under a licensing agreement with Dubai-based Landmark Group’s Max Hypermarkets India Pvt Ltd.

Under the licensing deal, Spar offers knowledge transfer and international best practices, while the Indian partner takes on the responsibility of the entire business operations including capex outlay, day-to-day operations and management control.

Gordon Campbell, managing director, Spar International, said, “We are exploring new partnerships for expanding presence in India, especially in the eastern and southern regions.” Campbell was in India to participate in the Retail Leadership Summit organised by Retail Association of India.

The company has already tasted success with this approach in countries such as China and Russia and is confident of replicating it in the Indian market.

Asked whether discussions have been initiated with prospective partners for the new regions, Campbell said, “We intend to get on with that exercise soon. The partnerships will be for both large supermarket stores spread across 1,000 square metres (10,763 sq ft) to the standard range of hypermarket stores.”

Spar’s hypermarket stores generally occupy retail space between 3,000 square meters (32,291 sq ft) and 7,000 square meters (75,347 sq ft).

The Dutch chain’s India business is pegged at euro 70 million and currently has 10 stores — three in Bangalore, two in Hyderabad and one each in Mangalore, Coimbatore, Delhi, Pune and Gurgaon.

Of the 10 stores, five were added last year. The company will open its second store in Pune next month. Spar has set a target of 20 operational stores within the next three years.

“We have had a great response for our retail stores in India and it is quite heartening that majority of these outlets are profitable. A few new ones will enjoy that status after completing six months of business from the time of their launch,” he said.

On the company’s expansion plans with Max Hypermarkets, Campbell said, “There are over 20 retail sites for new Spar stores in active consideration across the geographies outlined in the licence agreement with them.”

Clearwater Capital Partners circles Kamat Hotels

This story first appeared in DNA Money edition on Thursday, January 19, 2012.

Investment firm Clearwater Capital Partners will be coming out with an open offer for shareholders of Kamat Hotels (I) Ltd (KHIL) to acquire another 26% of the share capital. This has become necessary after the firm exercised its right to convert the final tranche of 5,966 foreign currency convertible bonds (FCCBs).

Clearwater has offered to acquire 4,964,283 equity shares representing 26% of the post-conversion paid-up equity and voting capital at a price of Rs135 per share. The offer will open on March 6 and close on March 20.

KHIL promoters currently hold 51% in the company, which will creep up to 57%, post the merger exercise. The management had earlier said that it’s in the process of merging other promoter-owned businesses, including thehighly profitable restaurant operations and Lotus Resorts, into itself. This, the firm said, would lead to an integration of hospitality and food and beverage verticals, with strategic assets acting as a growth platform.

A successful open offer could give Clearwater Capital Partners (Cyprus) some management control, but that’s easier said than done as the KHIL promoters won’t be in a mood to dilute their holding in the company any further. In such a scenario, Clearwater Capital will only remain a significant minority shareholder.

Clearwater’s decision, according to the management, is positive for the balance sheet of KHIL as approximately Rs93 crore of debt gets converted into equity, besides substantially reducing the interest burden. It will also improve the company’s debt equity ratio from 2.86:1 (before FCCB conversion) to 1.61:1 (post conversion). KHIL’s market cap at conversion price of Rs125 per share will jump by Rs135 crore.

Thomas Cook denies move to sell stake

This story first appeared in DNA Money edition on Friday, January 13, 2012.

Thomas Cook India (TCIL) said its UK parent has no plans to sell stake in the Indian business.

Media reports had earlier indicated that the Indian unit’s founders—Thomas Cook UK and TCIM Ltd — have pledged their TCIL’s 77.1% stake in favour of Royal Bank of Scotland (RBS) and that RBS has been engaged to find a buyer for the Indian unit.

“Thomas Cook India will not comment on any market speculation,” a company spokesperson said.

In a media statement, Madhavan Menon, managing director, Thomas Cook (I) Ltd, said, “The creation of a pledge by Thomas Cook Group Plc is a standard requirement in procurement of its enhanced financial facilities. In fact, TCIL has been reaffirmed with a rating of A1+ for short-term borrowings and AA- for its long-term debt by Crisil. This is a clear indication of our strong and viable commercial standing. I would like to re-iterate that the statement issued by Thomas Cook Group Plc has no impact on TCIL’s financial position or operational performance.”

Thomas Cook India officials maintained that it is completely independent of the parent. The standalone entity and has no financial inter-dependencies with Thomas Cook Group Plc which is only a shareholder in the Indian unit.

According to Pawan Agrawal, director, Crisil Rating, the recent rating action on Thomas Cook India was a reaffirmation of an already existing one.

“Like any other rating, reaffirmation has been done after analysing the company’s business and financial risk profile on a standalone basis. We expect that the Indian entity will neither receive nor provide any financial support to its UK parent. TCIL has a healthy and stable business profile coupled with average debt protection metrics — this is indicated by a comfortable gearing of 0.85 times as at December 31, 2010 —the gearing continues to remain at similar levels at the end of September 2011 as well.”

Crisil also said that while the UK parent has a weak credit profile, the Indian entity continues to enjoy a good credit profile which is unlikely to be affected even if the sale happens. For nine months in 2011, TCIL registered net revenues of Rs286 crore and the profit figure stood at Rs51 crore.

Thomas Cook Group Plc had earlier said that a pledge has been created on the securities held by the promoters, TCIM Ltd and Thomas Cook UK Ltd in Thomas Cook (I) Ltd of their total shareholding of 163471449 shares, representing 77.11% of the issued share capital.

TCIL claims to have registered impressive growth in the last summer holiday season and will continue to see strong demand for all their products.

“Our forward bookings are showing strong demand on the holiday side as well. This development (pledging of shares) will have no impact on our business, people, customers, suppliers and the services we provide. We continue to operate business as usual,” said Menon.

Hyatt makes a splash, to add 950 guest rooms in 2012

This story first appeared on the web-version of DNA Money edition on Friday, January 13, 2012.

The NYSE-listed Hyatt Hotels Corporation will be adding approximately 950 guest rooms across six new hotels in the country in 2012. The global hospitality chain currently owns hotels under the Hyatt Regency, Grand Hyatt and Park Hyatt banner and the new launches will be under Park Hyatt, Hyatt and Hyatt Place brands.

The new hotels will be operated under Park Hyatt Hyderabad (209-room with 42 serviced apartments), Park Hyatt Chennai (204-room), Hyatt Raipur (104-room), Hyatt Place Hampi (116-room), Hyatt Place Pune, Hinjewadi (117-room) and Hyatt Place Bangalore, Whitefield (200-room). Once operational, Hyatt’s India portfolio of operational hotels will go up to 14 hotels — from 8 hotels — taking the total number of guest rooms to 3,639 rooms from 2,989 earlier.

In a related development, Hyatt will be introducing a new extended-stay brand in India christened Hyatt House and a management agreement has already been signed in North Mumbai to this effect.

Steve Haggerty, global head of real estate and development, Hyatt Hotels Corporation, said, “The introduction of Hyatt House in India, combined with our decision to make India the first location outside the US for our Hyatt Place brand, reflects our commitment to offering our extended-stay and select-service brands in one of the world’s fastest-growing markets.”

In addition to Hyatt House Mumbai, the hotel major has also signed new agreements for five additional Hyatt brands viz. two Andaz hotels in Jaipur and Delhi; one Hyatt hotel in Raipur; 14 Hyatt Place hotels in Chakan, Delhi, Gurgaon (2), Goa, Hampi, Hyderabad, Jamshedpur, Kochi, Mohali, Munnar, Nashik, Sriperumbudur, and Thiruvananthapuram; three Hyatt Regency hotels in Raipur, Hyderabad and Neemrana and two Park Hyatt hotels in Delhi and Jaipur. With this, the total number of announced Hyatt-branded hotels under development stands at 53. The hotel chain currently has eight operational properties with 2,689 guest rooms under Hyatt Regency, Grand Hyatt and Park Hyatt

brands. On the upcoming Hyatt House concept, company officials said it was unveiled in September 2011 and is rooted in extensive consumer research and offers casual hospitality in a smartly designed, high-tech and contemporary environment.

Located near Mumbai’s vital commercial and industrial districts and within close proximity of Chhatrapati Shivaji International Airport, the hotel will feature 170 guestrooms, a multi-cuisine restaurant and bar, and meeting rooms, as well as business and fitness centres and a swimming pool. “We are leveraging our more than 30-year experience in India to become the most preferred hospitality brand for a growing number of affluent, domestic travellers within the country. Guests will soon be able to enjoy our full portfolio of brands in many of India’s most popular business and leisure markets,” Haggerty added.

UPDATES from Hyatt Hotels Corporation On July 13, 2012.

Hyatt Hotels Corporation said that Hyatt affiliates signed management agreements for an Andaz hotel in Gurgaon and a Grand Hyatt hotel in Kochi, bringing the total number of announced Hyatt-branded hotels under development in India to 56.

"We are focused on creating preference by enhancing distribution of our full-service, extended-stay and select service brands in both new and established markets in India where our guests are increasingly traveling," said Ratnesh Verma, senior vice president - real estate and development, Asia Pacific for Hyatt Hotels & Resorts. "Creating a strong presence for our complete brand portfolio in India is critical to Hyatt's leadership in the global hospitality sector."

"The new agreements, along with the previously announced properties under development, demonstrate growing confidence among owners and developers in the strength of Hyatt-branded hotels in India," said President and Chief Executive Officer Mark Hoplamazian.

Slated to open in Q4 2014, Andaz Gurgaon will offer 275 guestrooms and 75 serviced apartments. Additionally, the hotel will feature a three meal multi-cuisine restaurant, a specialty restaurant, a bar and a gourmet store, a six-treatment room spa, a fitness center, and a swimming pool. The hotel will also offer more than 11,500 sq ft of meeting space, including five Andaz Studios and a ballroom. Located in Gurgaon, the industrial and financial center of the state of Haryana, Andaz Gurgaon will be situated on the junction of the National Highway 8 (NH-8) and Northern Peripheral Road (NPR), which provides access to many of the city's main business districts, including Cybercity and Udyog Vihar, and manufacturing districts, including Industrial Model Township (IMT).

Grand Hyatt Kochi, will be located on Bolgatty Island in Kochi, which is situated on the eastern coast of the Indian state of Kerala. It will feature 250 guestrooms and amenities including a three-meal multi-cuisine restaurant, two specialty restaurants, a bar and lobby lounge, a 10-treatment room spa, fitness center, swimming pool, and Grand Club lounge. The hotel will also offer more than 60,000 sq ft of meeting and event space, including a 26,000 sq ft ballroom. Expected to open in Q1 2017, Grand Hyatt Kochi will be in close proximity to many key areas of the city, including Ernakulam, the main commercial district; Fort Kochi, the main tourist center of the city; Willingdon Island, which houses Kochi Port, the Kochi Chamber of Commerce and Industries, the Naval Air Base; and the International Container Transhipment Terminal, one of the largest container terminals in India.

Hyatt plans to open three new hotels in India in the remainder of 2012 across its Park Hyatt and Hyatt Place brands, including:

-- Park Hyatt Chennai, a 204-room hotel set to open in late 2012, will be situated in the capital city of the state of Tamil Nadu. The property will offer an innovative food and beverage outlets, residential style meeting and event space, and recreational facilities, including a spa and fitness center.

-- Hyatt Place Hampi, a 115-room hotel planned to open by the end of the year, will be situated near the Bellary industrial district. Hampi, which features spectacular views of the Sandur ranges and is home to a group of monuments classified as a UNESCO World Heritage site, also serves as a popular leisure destination. The property will include a multi-cuisine restaurant, meeting rooms, and a fitness center, and swimming pool.

-- Hyatt Place Pune, Hinjewadi, a 117-room property set to open at the end of the year, will be located within the Rajiv Gandhi Infotech Park at Hinjewadi, a prominent software hub. The hotel will feature a multi-cuisine restaurant and meeting space, as well as a business center, fitness center, and swimming pool.

With 56 hotels under development in India, Hyatt currently plans to offer its full portfolio of brands, including:

-- 18 Hyatt Regency hotels under development, in addition to five already open

-- 5 Grand Hyatt hotels under development, in addition to two already open

-- 5 Park Hyatt hotels under development, in addition to two already open

-- 23 Hyatt Place hotels under development

-- 3 Andaz hotels under development

-- 1 Hyatt House hotel under development

-- 1 Hyatt hotel under development

As part of this expansion, Hyatt is seeking to attract and develop high-quality talent in India in order to drive future growth. Currently, more than 3,500 associates are employed at Hyatt hotels in India, and with the development effort, it is expected that more than 7,000 new associates will be welcomed into the Hyatt family. Hyatt is investing in training curriculums and accelerated leadership programs in order to ensure that new associates support the company's mission to deliver authentic hospitality and to develop new professional opportunities for its associates.

Yash Birla Group to invest Rs13,000 crore in Andhra Pradesh

Marking its foray into the development of sports and wellness related infrastructure development, the Yash Birla group has submitted a proposal to the Andhra Pradesh (AP) government for setting up an international-standard sports city in its Pearl city- Hyderabad.  Group chairman, Yash Birla proposed an investment plan of Rs13,000 crore in his meeting with the Andhra Pradesh chief minister N Kiran Kumar Reddy. This project would be the largest investment made in the state by any conglomerate making it a one-of-a-kind venture.

Yash Birla, chairman, The Yash Birla Group, ”Our investment is part of the group’s plan to develop the sports sector in Andhra Pradesh. This will not only be the single largest investment made by the Yash Birla Group but will also boost sunrise sectors- alternative energy, healthcare and education in the state. Our constant endeavour has been to innovate and deliver the best lifestyle experience to the society.”

The outlay includes investment of Rs 10,000 crore for a polysilicon-plant by power solutions. The company will be producing solar grade polysilicon, silicon wafers, solar photovoltaic cells, solar photovoltaic panels at the plant. The Group has sought 450 acres near the Rajiv Gandhi International Airport at Shamshabad and another 250 acres for a wellness centre. The capital will be generated through private equity dilution, internal accruals and proposed IPO.

A global integrated ayurvedic village by Birla Wellness and Healthcare division will be set up with an investment of Rs1,000 crore. This investment will house an integrated ayurvedic centre promoted by Birla Wellness and Healthcare division, which will provide ayurvedic products and services to offer comprehensive range of both preventive and curative treatments. The total project investment would be Rs 750 crore. The integrated ayurveda complex would generate employment opportunities for 4,500 people.

Birla Edutech is aiming for a sports city with an investment of Rs2000 crore. The sports city will have all kinds of sports infrastructure along with a manufacturing centre and a wellness centre. At the facility, local sporting talent will be developed to match international standards. The sports city aims to be a leading development project with a distinct focus on sport and sporting excellence that will attract local, regional and international participants. The complex will have facilities built to specifications for international sports bodies and will host academies for swimming, track and field, volleyball, tennis, golf, badminton courts among others. The project will include high rise towers, banks, business centres and shopping malls making it completely self- sufficient.

The Yash Birla Group is an Rs30 million conglomerate of over 20 diversified companies which run the gamut from established sectors like auto and engineering, textiles and chemicals, and power and electricals to emerging sectors of today like wellness and lifestyle, education and IT. The group currently has 10 listed entities in India.

30% local sourcing curbs retailer play

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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