InterGlobe’s Rahul Bhatia plans to roll out almost 200 mid-budget Ibis hotels eyeing the demand from young executives and the growing middle class. Will the move pay off? Scale holds the key to the plan. Rahul Bhatia, the man behind IndiGo, India’s most successful low-cost carrier, wants to put up 6,000 rooms in 200-odd Ibis hotels in the country by 2015. These will fall in the category between three- and four-star hotels, and will be targeted at the growing army of young executives and the ever-expanding middle class. “There is an enormous void in value-for-money lodging in the country, and we think the gap will only grow in the future,” says Bhatia. The tariff is thus close to $100 (Rs 4,600) per night — the sweet spot between luxury hotels and standalone guest houses. Two Ibis hotels (one each in Gurgaon and Pune) are up and running. The third, near the Mumbai airport, will open some time later this year. Seven more are likely to happen next year. A few more are under construction.
Once the 6,000 rooms are in place, Bhatia’s grand plans will begin to unfold. To begin with, he could make combo offers along with his airline to travellers. Those who travel to Bangalore from Delhi or Mumbai on IndiGo, for instance, can be sold accommodation at the Ibis properties there. The hotel chain and the airline can cross-sell on each other’s website. IndiGo flies close to 30,000 passengers in a day. The possibilities are huge. Two, he can tie up with consultancies and information technology companies, which move people across cities in very large numbers, for all their accommodation needs. Three, of course, he will save money on purchases as a large aggregator of orders. Functions like call-centre support can all be brought under one roof.
The investment required for the 6,000 rooms is Rs 3,000 crore. The debt-equity norm in the hotel industry is 1. This means, InterGlobe Hotels, which is owned 60 per cent by Bhatia’s InterGlobe Enterprises and 40 per cent by Accor of France, will have to invest Rs 1,500 crore by 2015. Bhatia’s share of the investment will come to Rs 900 crore. This at a time when IndiGo is in the midst of a 100-aircraft, $6.5-billion (close to Rs 30,000 crore) order with Airbus. So far, 28 of these aircraft have arrived. Meanwhile, the airline has received the government’s in-principal approval for purchasing another 150 aircraft after 2015-16.
The demands on his war chest are many. For some time, there has been the buzz that IndiGo could raise up to $400 million (close to Rs 1,900 crore) from the market. But Bhatia says there are no such plans in the near future, and he will depend on internal accruals for growth. “We have planned for the required investments for our businesses and do not see any challenge as we scale up our aviation and hospitality businesses,” says he. “Our vision is to create, operate and represent brands that have genuine resonance and meaning. Our customers have appreciated our offering and we are confident of strengthening and building all our businesses.”
Cash flows
But how strong are his clash flows? Bhatia’s business is all closely-held — apart from IndiGo, he holds the licence for distribution systems Galileo in India and Sri Lanka and Worldspan in nine markets in the Asia Pacific, manages a broad spectrum of services for 14 top global airlines, represents a clutch of aircraft and helicopter makers (Hawker, Beechcraft, Dornier and Sikorsky) and provides integrated information technology and allied services to travel corporations worldwide.
So, not much is known about his financials. Bhatia expects InterGlobe Enterprises to end the current financial year with revenues in excess of $1.5 billion (Rs 6,900 crore), but refrains from commenting on its profits. “The profitability has remained robust for several years, and a principle portion of the earnings are redeployed in supporting the current portfolio and seeding new business initiatives,” says he. Civil Aviation Minister Praful Patel had said in Parliament last year that IndiGo had made a profit of Rs 82 crore in 2008-09. Its 2009-10 numbers are not in the public domain, though industry experts say profits could have touched Rs 400 crore.
The litmus test that Bhatia puts any hotel proposal through is whether or not it will yield him a return on capital of 20 per cent (apart from the appreciation in the value of the asset) per annum. Interestingly, the low-cost hotel strategy was not inspired by the success of IndiGo. While the joint venture with Accor was inked in 2004, IndiGo placed the first order for aircraft in 2005 and began operations in 2006. Of course, the first Ibis — in Gurgaon — came up in early 2008.
The distribution of work between the two partners is very clear: While Accor puts up the hotels at very low costs (which helps keep the tariff low) and manages them, Bhatia and his men do the business development — which cities to go for, selection of sites within cities and so on. (The two have also set up a fund that will own seven top-end Accor properties in the country with 1,750 rooms.)
An Ibis room costs as little as Rs 32 lakh to put up if real estate is excluded and Rs 45 lakh if it is included. For a five-star hotel, the cost can be upwards of Rs 1 crore (without real estate). For ITC’s Fortune chain of budget hotels, which is the largest player in the segment, the cost without real estate can go up to Rs 50 lakh. This is where Accor’s expertise comes in — it runs no fewer than 900 Ibis hotels around the world. How it manages to keep the cost low is a closely-guarded secret. “I don’t know what’s the magic sauce,” says Bhatia. But it is clear that aggregation of orders for equipment at such a large scale helps it bring down costs. “We are able to industrialise many of the hotel elements and save costs. These include bathrooms, in room air-conditioning systems and the hotel kitchen,” says an InterGlobe Hotels executive. The design of an Ibis hotel is such, according to InterGlobe Hotels President & CEO Uttam Dave, that more rooms are fitted into the same space.
Valet services, concierge and bell desk services, room service and so on are not provided in an Ibis. This helps to keep the roll call short. While most Indian hotels have three or more employees per room, Bhatia says Ibis has one employee for three rooms. In addition, Ibis employees are trained across functions such as front office, banquets, housekeeping and so on. As a result, its employee costs add up to just 13 to 14 per cent of running expenses. For most Indian hotels, it is as high as 22 or 23 per cent. Savings could take other forms too.
At the moment, it can take up to three years to put up a hotel from scratch in the country. Bhatia wants to shrink that time, so that the asset can be monetised in the quickest possible time. “I will be very happy if we can do it in two years,” says he. And there are options available. ITC, for example, has done some co-development for its Fortune hotels with landowners to cut the go-to-market time and bring down costs. “If a company is strapped for time and wants to expand with a smaller investment, then co-development is the way to go,” says ITC Executive Vice-president (hotels) Pawan Verma. But Bhatia doesn’t feel the need: “At present we have no plans for looking at co-development of properties.”
Location and revenue
The other side is revenue. What is crucial here is the location of the hotel. According to Dave, the company is reluctant to go to leisure destinations and would like to stick to business districts of Tier I & II cities. Here’s why. An Ibis hotel, with a tariff of about Rs 4,600 per night, requires an average annual occupancy of 67 per cent to break even. The leisure market is seasonal and the average occupancy is between 52 per cent and 54 per cent, says he.
Also, the leisure market is heavily dominated by tour operators who are past masters in driving down tariffs. Within a city, the idea is to put up an Ibis in the business district. “If there is at least 10 million square feet of A-grade office space around a site, then we become confident that the hotel will do well,” says Dave. So, how have the Guragon and Pune hotels done so far? The occupancy at Gurgaon, says Bhatia, is 72 per cent — well above breakeven — but is low at Pune because of over-supply and low demand. All told, InterGlobe Hotels, according to him, is already profitable.
Bhatia adds that he would like to plant an Ibis next to seven-star hotels in downtown areas of cities like Delhi and Mumbai. This will help him get traffic from these hotels. The Ibis tariff of around $100, he thinks, is the biggest hedge against any economic slowdown. When money becomes tight and travel budgets get slashed, companies look for cheaper alternatives like Ibis. This is a lesson that several five-star hotels in India learnt the hard way during the slowdown that began in 2008 and lasted almost a year.
They got dumped en masse by the corporate travellers. Some large companies even set up sprawling guest houses to accommodate their in-transit staff. “It is easy for somebody to come to a value-for-money hotel in a slowdown, but it is very difficult to move back to a five- or seven-star hotel in the upturn because he gets used to the low tariff,” says Bhatia.
Almost 80 per cent of Ibis’ revenue comes from the rooms, about 18 per cent is food & beverage and 2 per cent allied services like laundry. For a five-star property, rooms contribute not more than 60 per cent of the revenue. The upshot is that Ibis needs to market its rooms aggressively. And since 85 per cent of the guests are corporate travelers, it needs to focus on companies. At the moment, the two Ibis hotels are marketing themselves on their own. Once it hits critical mass, a more evolved marketing plan is likely to emerge. “As our scale grows, with another eight Ibis hotels becoming operational in the next 12 months, we may look to establish a central marketing group to enhance awareness of our offering,” Bhatia adds. That is also the time when Bhatia plans to leverage his relationship with travel agents to sell Ibis rooms.
So, is the business plan foolproof? Not everybody is convinced. Some analysts point out that ITC will have 100 Fortune hotels in five years’ time. Its existing 34 properties have 3,000 rooms; so, 100 hotels could give it 9,000 rooms. Its footprint across the country will therefore be bigger than Ibis’. And it has no qualms about going to small towns and leisure destinations. “Fortune already has the experience. Ibis will have to learn more about the consumers,” points out a rival. Bhatia, on his part, has the track record and experience of Ibis to fall back on.
