Try to make sense of this. Mukesh Ambani is the new partner of the Oberois in East India Hotels. He has taken 14.8 per cent in the company; this has brought the stake of the Oberois down to around 32 per cent. A rights issue of Rs 1,300 crore is on the cards. Ambani has indicated that he will pick up the unsubscribed part of the issue. The market expects him to come out with an open offer because his stake will have breached the 15 per cent mark.
ITC, which had bought a 14.8 per cent in East India Hotels and thus triggered the search for a white knight, has said that it will stay invested and subscribe to the rights issue. Analjit Singh, the original choice of the Oberois, too has said that he will not forgo his share of the issue. He holds around 4 per cent in the company.
Speculation aside, the one thing this clearly shows is that the hotel’s stock is expected to rise sharply in the days to come. One view current in the industry is that Ambani, given his skills in aggregation and profitability, could help the company report better numbers in the days to come. Purists will tell you that this is just the mindset you don’t require to run a luxury hotel chain like Oberoi — excessive focus on the bottom line can ruin the image of the hotel brand. The other view is that the hospitality market is ready to explode, and all hotels, not just East India Hotels, will gain substantially from the boom.
Take a look at the numbers first. Hawaii every year gets 8 million tourists from abroad, Thailand gets 10 million. Manhattan alone is visited by 24 million. India gets just 5 million. Of these, about 2 million are non-resident Indians on their annual visit home, and a million are backpackers. That leaves 2 million. This is indeed a very small number. But hoteliers look at the number with great optimism because it can only go north in the days to come.
A bigger source of business is domestic travel. The industry estimates that 550 million Indians travelled last year. Even if 1 per cent stayed in a rated hotel, it could mean 5.5 million people. Hotels, across categories, say local business is now bigger than overseas business. Even for a premium property like Ananda in the Himalayas, Indians now account for almost 50 per cent of the business, up from about 30 per cent till a year ago. It could rise to 60 per cent in the near future. And the supply is woefully short. Various estimates suggest that there are between 65,000 and 110,000 “organised sector” hotel rooms in India. The gap is huge. Tariffs, as a result, have risen steadily in the last year, though these are still below the 2007 and 2008 levels.
There are 47 global brands that want to enter the country. Experts say a luxury hotel can command a valuation of up to a million dollars (around Rs 4.6 crore) per room in the country. This was unheard of till recently. Valuations had never crossed $200,000 (Rs 92 lakh) a room. Some bit has to do with high real estate prices. Most hotel chains say that there aren’t enough high-street locations available to put up hotels. That’s why existing hotels are in the crosshairs of buyers. ITC, for instance, has also bought 10.2 per cent in Hotel Leelaventures. The Nairs, the promoters, hold 54.8 per cent. To ward off the predator, the patriarch of the family, Krishnan Nair, has devised a new pact between his two sons, Vivek and Dinesh, which says that none can sell his stake before offering it first to his brother. The scarcity of real estate has also made most companies take an asset-light model — they will run the hotel under their brand for a fee, while the hotel will be built and owned by somebody else.
Hotels have woken up to the fact that one brand isn’t enough to tackle the market. New segments of travellers have emerged. One brand doesn’t fit all. Global chains realised it years ago and each one has built a large portfolio of brands. It has struck Indians now. The Indian Hotels Company has four (Taj, Vivanta by Taj, Gateway and Ginger), East India Hotels has two (Oberoi and Trident), and IHHR Hospitality has two (Ananda and Ista). And there’s a lot of action away from the luxury segment. Rahul Bhatia, the man behind India’s most successful budget carrier, IndiGo, wants to put up 200 or so Ibis hotels across the country by 2015. ITC wants to raise the count of its Fortune hotels from 34 now to 100 soon. Bharat Hotels has almost a dozen coming up under Lalit Traveller.
When the slowdown set in sometime in mid-2008 and terrorists struck Mumbai in November that year, luxury hotels saw business evaporate into thin air almost overnight. Visitors cancelled their booking and room rates nosedived. The segment that didn’t see a setback was the one priced around $100 (Rs 4,600) and below. People still had to travel, but they were on the lookout for cheaper options. Hoteliers know that travellers switch to lesser hotels in a crisis; but they don’t necessarily upgrade when the business cycle improves. The long-term prospects clearly look good.