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"The bulk of our guests are businessmen who will choose to stay near their place of work/ meetings.” - Views on News from Equitymaster
 
 
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  • Mar 9, 2002

    "The bulk of our guests are businessmen who will choose to stay near their place of work/ meetings.”

    Mr. Jamwal is Director - Strategic Planning at Indian Hotels Company Ltd. Holding a graduation degree in Petroleum Engineering, Mr. Jamwal is not a conventional hotelier. He has completed his postgraduate business studies from I.I.M Ahemdabad and was a gold medallist.

    In an interview with Equitymaster, Mr. Jamwal highlighted some of the concerns dogging the Indian tourism industry. He goes on to speak of the expansion plans at Indian Hotels, both at home and abroad.

    EQTM: Tourist arrivals in India, over the past few years, have stagnated at 2-2.5 m per annum. What steps do you believe are required to break the ceiling?

    Dr. Jamwal: Key policy issues, that can positively impact the hotel industry, are:

    A Comprehensive review of taxation policies and incentives to the hotel and tourism industry – taxation on tourism products in India, especially hotel rooms, has taken a simplistic view that hotels and tourism, especially in the “high end” category, are a luxury and those who can afford to use such products are tax indifferent. This view has been proven wrong in countless instances, resulting in most countries/ states that encourage tourism lowering taxes to the lowest level possible. This policy is followed by, among many others, Singapore (total tax on hotel spend varies from 11% to 14%) to New York (total tax on hotel spend is approximately 11%) and is considered pragmatic for the following reasons:

    • In the tourism industry, while the products are fixed, consumers are mobile. The consumer’s choice between competing destinations is clearly and directly linked to price payable for the visit. The incidence of high taxes at multiple stages serves to reduce tourism income.

    • A sensible level of taxation (as opposed to excessively high taxation) will increase tax collections from the hotel and tourism industry while simultaneously increasing foreign exchange inflows/ earnings by the country.

    • A flourishing travel and tourism industry directly and indirectly employs large numbers of people.

    • Liberal airline landing rights policy to increase air capacity into the country and with the volumes generated thereof to reduce the cost of air travel into India from tourism generating markets of Europe, the U.S. and Asia.

    • Privatisation of the key International Airports (beginning with Delhi & Bombay) to improve quality of airport experience of the international traveller and to reduce dwell time.

    • Review of CRZ provisions, to improve location of resorts on the coastline subject to Environment Impact Assessment and mitigation measures.

    • Encourage import of aircraft with fiscal concessions if they operate flights other than between metro cities.

    • Orient the railways to become more tourism oriented.

    EQTM: India seems to have only 'five star' or 'no star' hotels. There is a lack of high quality budget hotels. What do you believe are the reasons for such an industry structure? Does the concerned segment offer good business opportunities?

    Dr. Jamwal: Many SE Asian “tiger” economies have seen development of the hotel sector similar to the pattern observed in India. In effect what happens is that the hotel sector sees a lot of development/ investment in upmarket and luxury hotels because of foreign business and leisure travel into the country being skewed towards the upmarket end, which is partly due to the fact that for the leisure traveller all these countries (including India) are long-haul destinations from the largest leisure tourism generating markets (Europe, North America) and partly because most international business travellers are upmarket hotel users.

    There is expected to develop a large market for budget hotels over a period of time. As an economy grows and becomes more developed the volume are higher in the budget segment. The budget segment therefore offers good business opportunities and is being closely evaluated by the Taj.

    EQTM: With international and domestic majors moving ahead on expansion in India, what is the current room demand-supply scenario? And how is it likely to move in the next three years?

    Dr. Jamwal: In North Mumbai and Calcutta, to a lesser extent in Chennai, the supply of rooms is likely to outpace increases in demand, hence room revenues will continue to be under pressure. However in Delhi, Hyderabad and Bangalore we see demand growth combined with very limited additions to supply and in these cities we expect to see growth in room revenues.

    The North Mumbai excess capacity affects us only marginally. The bulk of our guests, who also bring in 75 per cent of our forex earnings, are businessmen who will choose to stay near their place of work/ meetings hence the airport versus South Bombay or Central Bombay are not comparable. Most businessmen fly in for two or three days, their schedule is packed and the last thing they want is to waste time commuting. Where we may be affected, although marginally, is with aircrew traffic and some group and conference business clients.

    EQTM: To stimulate the hospitality industry what measures do you wish for in the forthcoming budget?

    Dr. Jamwal: Key recommendations for the budget are presented in the table below:

    Sr No Taxes Current Position Recommended Position
    1) Expenditure Tax 10% levy Repeal the Act or reduce tax
    2) Income-Tax – Section 72A Mergers/Amalgamation Hotel sector not included in the definition of Industrial Undertaking Hotel sector to be included in the definition of Industrial Undertaking
    3) Income-Tax – Sec 80HHD Phase out over five year period
  • Reserve Utilisation to be extended,
  • Rationalise in sync with Sec.80HHC phase out,
  • Administrative clarification (Tour/Travel Operator compliance)
  • 4) Customs duties especially on imported wines and spirits Over 300% for wine & beer and over 500% for whiskey Reduce to a maximum of 50%
    5) Income-Tax – Sec 115JB Sec 80HHD deduction denied from book profit To rationalise the provision and permit deduction

    EQTM: Could you give us an update on the expansion plans for Indian Hotels' international business?

    Dr. Jamwal:While we cannot specify the destinations currently, we are targetting key cities/ destinations in the US and UK as well as in SE Asia and the Middle East.

    In an overall sense the current situation may turn out to be a blessing in disguise for our acquisition plans. With the global hotel industry suffering a downturn, a lot of companies will be coming to the market to sell property. That's because many companies that expanded recently have done so with substantial borrowings and now with the slump, will find themselves unable to service those borrowings. Particularly abroad, the banks will force them to sell property. They will be interested in recovering their loans, and not holding out for the best possible price. It will make the acquisition price cheaper.

    The property should have the potential of enhancing revenues and profitability through its strategic location and should accrue to our brand value, which will enhance our image in the global market. Financially, all our acquisitions should yield us a WACC plus a premium return. We could consider relaxing the amount of premium over WACC in case the property’s brand adds significant value to us. We would also consider replacement cost as one of the parameter.

    EQTM: Could you give us an update on the company's property renovation initiatives? Which cities is this initiative going to cover?

    Dr. Jamwal:In the current year we propose to complete renovations at the Rambagh Palace and the Lake Palace, and also continue renovations at the Taj Mahal Hotel in Bombay and the Taj Mahal Hotel in Delhi. Renovations are also planned at West End, Bangalore and Taj Holiday Village in Goa.

    EQTM: With the food & beverage business showing more resilience in the downturn. Could there be a case for Indian Hotels creating a pure restaurant brand, maybe across India?

    Dr. Jamwal:While the F&B business has shown a greater resilience in the downturn we do not at present plan on any major expansion into stand-alone restaurants. Also, all our restaurants are branded with some like the Golden Dragon present in more than one city.

     

     

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