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Increasing room supply - more talk, less action

Apr 28, 2000

The entry of foreign hotel chains into the country, especially in the five star metro hotels will have an impact on the future room supply scenario, however not in the medium term. Five star room supply has grown by only 3% in the last three years. This slow growth in room supply has benefited the existing hotel companies. The metro cities of Mumbai and Delhi account for a major chunk of revenues and profits (varying from 70% to 100%) of these hotel companies. Hence majority of foreign hotel chains are keen to take advantage of the business opportunities in these cities and hence plan to set up shop here. The number of hotel rooms to be set up these chains seems tremendous at this point from plans announced by them. Majority of these international hotel chains are entering into only marketing and management tie-ups with land developers or real estate companies to have huge land banks at their disposal.

In Mumbai around 100% capacity additions are planned over the next five years as 3,294 new rooms are planned, with this the capacity is expected to go up to 6,249 rooms from the current 2,955 rooms. In Delhi the capacity is likely to go up by 1,370 rooms in the next four to five years an increase of 35%-40% from the current level of 3,960 rooms.

Bombay
Existing capacity Rooms New expansions Rooms Scheduled
Opening
Taj Mahal 583 Taj, Wellington Mews 250 2003-2004
Taj President 310 Taj, Airport Hotel 350 2001
Oberoi 337 Intercontinental 400 2002
Oberoi Towers 575 Regent expansion 400 2000
Orchid 245 Marriott 400 NA
Leela Kempinski 423 Rennaisance 450 NA
Ambassador 123 Marriott Executive Residence 250 NA
Holiday Inn 191 Sheraton Hotel 394 2002
Regent 100 Hyatt 400 2002
Marine Plaza 68      
Total 2,955 Total 3,294  

Delhi
Existing capacity Rooms New expansions Rooms Scheduled
Opening
Hyatt Regency 518 Grand Hyatt 450 2000
Imperial 204 Maurya Sheraton
expansion
100 2001
Inter-Continental 444 Nikko Hotel 200 2000
Le Meridien 355 ITC-Ansal Hotel 220 2001
The Park 224 Trident Hotel 400 2004
Park Royal 214      
Oberoi 287      
Taj Mahal 300      
Taj Palace 422      
Vasant Continental 134      
Maurya Sheraton
Hotels & Towers
440      
Claridges 162      
Radisson 256      
Total 3,960 Total 1,370  

From the point of view of existing hotel companies these are long term concerns as many of these hotel projects are in early stages of inception, or stand delayed. A primary reason for the delays is the current downturn in the Indian hotel industry forcing many companies to go slow on expansions. For instance, the recently opened Regent hotel in Mumbai expansion stands delayed due to cost escalations and funding problems. Also another problem is that these tie-ups do not always work out as the owners and the operators may not agree on many of the issues pertaining to running of a hotel. As per press reports the Hilton group had entered into tie-up with Bharat Hotels (a Delhi based Hotel company), but this fell through because of differences between the two groups. Bharat Hotels earlier had a tie-up with Holiday Inn, then Hilton and now Intercontinental. This affects the operations and smooth running of a hotel property.

As many of the projects stand delayed new room supply should not be an issue for existing hotel chains atleast for the next three to four years. On the demand side occupancy rates in the metro cities is expected to pick up in the next year with the improvement in the overall economic and business scenario. Hence the prospects for existing hotel companies does look bright over the next three years.

On valuations terms, Indian Hotels Company Ltd is trading at price to earnings multiple of 9.3x and EIH Ltd is trading at 6.7x (both on FY99 earnings). This is low as compared to multiples of 20x-25x they commanded a few years ago.

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