DLF’s Robert Vadra-linked Saket to sell Hilton Garden Inn Hotel in Delhi

This story first appeared in DNA Money edition on Friday, October 05, 2012.

Saket Courtyard Hospitalty has put the Hilton Garden Inn Hotel, its only operational property with a Hilton association, on the block, according to reliable sources.

Saket is the controversial joint venture between the DLF Group, India’s largest real estate player, and Robert Vadra, an entrepreneur married to Priyanka Gandhi.

DLF owns the land on which the 116-room Hilton Garden Inn is built, by virtue of which it is said to have a 50% stake in Saket.

Saket has given an exclusive ‘sale’ mandate relating to the hotel, located in the vibrant shopping and entertainment district of Saket in affluent south Delhi, to an international property consulting (IPC) firm.

Built in November 2009, the mid-market (four-star) hotel boasts dining and meeting rooms, some unique amenities and state-of-the-art facilities.

A DLF spokesperson declined comment. “We do not comment on market speculation.”

But an industry source familiar with the development told DNA, “The IPC firm is currently in the process of running an Expression of Interest (EoI) process. Valuation details have not been finalised yet, but are likely after the receipt of EoIs.”

It is the first hotel in the Asia Pacific region carrying the Hilton Garden Inn brand. Over the years, it is said to have established itself well in its mid-market segment with strong average daily rate and decent occupancy levels. (Single occupancy tariff is priced Rs8,000 to Rs10,000.)

Siddharth Thaker, managing partner, Prognosis Global Consulting, a hospitality-focused advisory, said the Saket property is “a great product” with “good cash flow” and “stable operations” – factors that help it to “generate good revenues despite the overall stressed market situations”.

Should it be put up for sale, Thaker said, the Saket hotel would attract valuations upwards of Rs200 crore as the land value in the area has appreciated significantly over the past few years.

DLF has been trying to exit hospitality calling it a non-core business. In June, it sold its majority stake in Adone Hotels and Hospitality to a Kolkata-based consortium comprising Avani Projects and Square Four Housing and Infrastructure for Rs567 crore.

The realtor has also reportedly found a buyer for its holding in luxury hotel chain Aman Resorts for Rs2,500 crore.

DLF has been saying that the sale proceeds from non-core businesses are being used primarily to reduce debt on its books.

It is not clear if the sale of the Hilton hotel in south Delhi is a prelude to a potential DLF exit fromthe joint venture firm. A few years back, DLF received negative press and considerable attention from opposition parties for extending unsecured loans of more than Rs3.5 crore to Saket Courtyard Hospitality. Alluding to Vadra’s links to political India’s preeminent family, such loans were labelled “sweetheart deals” and “political equity” by bloggers and Twitterati.

Carnation Hotels in talks with intn'l luxury brands

An edited version of this story first appeared in DNA Money edition on Saturday, October 06, 2012.

New Delhi-based Carnation Hotels is in discussions with international luxury hotel brands exploring a possible joint venture for their India operations. Once concluded, Carnation will be responsible for managing the day-to-day affairs of these luxury hotels based on the brand owner's global service / quality standards.

Confirming the development, Rattan Keswani, co-promoter and managing director, Carnation Hotels, said, "Two international luxury brands wish to engage our company as a joint venture (JV) partner to operate their hotels in the region." He did not share names as the discussions were still on with the foreign hotel brands.

A newly instituted hotel management company, Carnation Hotels (P) Ltd is co-promoted by Rattan Keswani, the erstwhile president of Trident Hotels (Oberoi Group) with Patu Keswani's Lemon Tree Hotels as majority shareholder.

The company was set up as part of Lemon Tree's business restructuring exercise to separate hotel asset ownership and management. To this effect, Carnation will now manage hotels with either Lemon Tree brands i.e. Lemon Tree Premier, Lemon Tree or Red Fox provided the hotels fit the brand architecture and efficiencies or under separate brands.

"For hotels that don’t fit in, we are creating a new brand portfolio for the upscale and mid-scale segments. We shall be able to share details of the new brands in about a month more," said Keswani.

Operational for almost a quarter now, Carnation recently signed its first management contract for a resort in Himachal Pradesh. The company is in active negotiations with 10 other owners / projects for management contracts. "We signed our first resort last week and hope to close two more in the next fortnight. We hope to have over 2,500 rooms under management within the next 18 months. The overall plan is to manage over 4,000 guest rooms by 2015," said Keswani adding the company would consider taking equity positions (with asset owning companies) on a case to case basis.

Supported by the bandwidth of Lemon Tree's corporate structure, Carnation has also got on board hospitality professionals from across functions having experience with hotels chains like Four Seasons, Alila, Taj , Starwood, InterContinental and Marriott . "They will assist and manage the hotels within the brands assigned. And should the luxury brand JVs fructify, we shall enhance the team as needed," said Keswani.

The common structure supporting Carnation Hotels is expected to undergo some change as expansion happens in the coming years. While the present structure can support an addition of up to 1,000 guest rooms under management, the company foresees senior executives moving into leadership roles after new brands are structured.

On what differentiates Carnation's approach to hotels business vis-a-vis existing domestic and international players already operating in the country, Keswani said, the company will bring the best expertise between luxury and mid-scale under one roof-with professionals who have successfully delivered in India.

"The Indian customer shall be our focus different from other international and domestic players. We will leverage expertise to relate luxury with economies/efficiencies thereby delivering the best return on capital employed (ROCE). We build better, quicker and cheaper with better ROCEs than our competitors. We have done that for owned hotels under the various Lemon Tree brands and should be able to deliver similar results for other owners as well," he said.

Is the tide turning for realtors?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Siti leads metro switch to digital cable TV

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

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

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

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

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

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

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

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

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

Price control list may have 274 more drugs

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

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

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

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

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

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

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

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

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

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

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

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

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

(With inputs from PTI)

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

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

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

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

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

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

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

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

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

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

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

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

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

Updates from Arvind Ltd:

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

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

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

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

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

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

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

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

ITC to expand hotels chain by two-thirds

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

74% FDI in broadcast a game-changer

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

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

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

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

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

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

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

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

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

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

Tough times ahead for premium hotels in India

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

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

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

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

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

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

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

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

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

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

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