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Must catch up with the leader

Feb 11, 2000

There are only two stars in the horizon of the Indian hotel industry. The big star is obviously the Taj, owned by Indian Hotels of the Tata group. The other star, which has lived in the shadows of the Taj is the Oberoi. The Oberoi has always trailed the Taj in valuations, despite the fact that it entered the industry earlier.

EIH, (formerly East India Hotels) is India's second largest hotel chain, with a capacity of over 1,800 rooms and manages another four hotels. It operates two chains - Oberoi (five-star deluxe) and the Trident (budget chain). Four of the company's hotels are members of The Leading Hotels of the World. The company also operates flight-catering services at Delhi and Bombay airports

The company, run by the Oberoi family, was put on the landscape of Indian hotel industry by its patriarch - Rai Bahadur Oberoi who has been in the hotel business for over five decades now. The Oberoi group owns or manages over 20 hotels spanning 6 countries.

Over the years, EIH has positioned itself as India's leading business hotel chain, which explains why the company's revenues are skewed towards the metros - Delhi, Bombay, Calcutta and Bangalore, which account for 95 percent of revenues. Bombay (about 60 percent of revenues) and Delhi (22 percent) together account for over 80 percent of revenues and play a critical role in the company's growth plan.

A high level of dependence on business travel makes the company's room occupancies sensitive to business traffic both within and incoming to India. A dip in business travel has a direct impact on the company's revenue growth. Another negative to the reliance on business travel has been that the company has not been able to exploit growth in the leisure segment, which will take off in a big way in future given India's potential in tourism. As the room supply in the metros - Delhi, Bangalore, Chennai, Calcutta reaches saturation point, the company has drawn out ambitious plans to set up hotels in smaller cities and tourist locations.

EIH is in the process of implementing three projects within the country - the Trident in Pune, Trident in Bandra-Kurla and the Udaivilas in Udaipur. These hotels will enhance room capacity by over 700 rooms and will involve an estimated investment of around Rs 6 billion. But these ventures are likely to saddle the company with increased interest and depreciation burden and will be drag on profitability.

EIH's revenues are skewed towards the upper-end of business travellers and the company will be a direct beneficiary of a turnaround in the fortunes of the hotel industry.

(Rs m) 3QFY2000 3QFY1999 Change
Net Sales 1,108.7 1,177.6 -5.9%
Other income 123.5 70.3 75.7%
Expenditure 955.5 893.5 6.9%
Interest 31.5 53.4 -41.0%
Depreciation 59.0 50.5 16.8%
Profit before Tax 186.2 250.5 -25.7%
Tax 22.3 27.6 -19.2%
Profit after Tax/(Loss) 163.9 222.9 -26.5%
Net profit margin (%) 14.8% 18.9%  

Unfortunately for EIH, the Oberoi brand has had to play second fiddle to the Taj in the domestic hotel segment, and even fund managers have placed Indian Hotels higher than EIH in their portfolios. The reasons are obvious. Indian Hotels has always catered to a broader market comprising the business and leisure segments. When tourism in the country takes off in a big way, Indian Hotels will be the bigger beneficiary with sustainable long-term growth. It has also expanded faster, with investments across more subsidiaries than EIH. Moreover, the Taj brand is owned by Indian Hotels, while the Oberoi brand is owned by one of the Oberoi family’s companies.

But EIH has been guilty of shifting focus away from its core competence. It has made investments in some unrelated areas. A chicken poultry feed project for one, and a hospital project. The latter failed to take off and was shelved later. The poultry feed project is not strictly a diversification given the fact that EIH has a flourishing food/beverages business, which complements its core hotel business. But some analysts opine that a premier hotel company like EIH is better off investing in its core hotel business.

The company has taken some positive steps to control costs. It plans to cut employee per room by 25 percent through a mix of a voluntary retirement programme and redeployment of existing resources to the new properties. It will have to enhance its presence in the country and address the leisure travel segment more aggressively, else it will find the chasm between itself and the Taj widening ominously.

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Sep 29, 2020 03:37 PM