"Our strategy is not to restrict ourselves to the domestic market..." - Views on News from Equitymaster

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  • Jun 22, 2000 - "Our strategy is not to restrict ourselves to the domestic market..."

"Our strategy is not to restrict ourselves to the domestic market..."

Jun 22, 2000

Mr. Zubin Dubash, Executive Director, Finance and Strategic Planning at Indian Hotels Company Limited is a very busy man. That despite the hotel sector having witnessed a prolonged slump that lasted over four years. Indian Hotels is in the midst of a renewed thrust to dominate the Indian markets and go top of the line in key international destinations. This strategy has been peppered with the recent acquisition of a hotel in Poona and the franchise agreements in Hyderabad. Armed with a degree from the prestigious Sydenham College Commerce and Economics, Mr. Zubin Dubash, who is also a Chartered Accountant, went on to pursue his MBA from The Wharton School.

In an interview with Equitymaster.com, Mr. Dubash went on to elaborate on the strategy being adopted by Indian Hotels to maintain its leadership status in the domestic market. He also spoke about the prospects for Indian Hotels in the coming year.

EQM: What do you feel about the improvement in the economic scenario? Is this benefiting the hotel sector?

Mr. Dubash: The environment is much more positive than it has been for the last few years. Unlike the three earlier years we do not have a looming recession. In fact we are bottoming out and the upward cycle is likely to last for three/four years. We do not have something like an Asian crisis. Most stock markets around the world are holding up. Inflation is raring its head but it still seems under control around the world. So right now the global scenario also looks reasonably good. There are some concerns about the developments in the US but not dramatic at this time. There is also an absence of issues on the domestic front, be it Kargil or the nuclear tests and the positive impact of the information technology sector. All in all it seems reasonably good for India and the region as well. All this will have a positive impact on the hotel industry, including us.

The turnaround I think is more likely to happen in the second half of the year. The hotel sector is very cyclical. The first half is not as profitable as the second half. The first half generates less demand than the second. Another reason for this is that revised rates are negotiated with corporate every September. So today we are living with the old rates. But come September we should see a substantial turnaround. In addition to that we have undertaken renovation in a number of our properties and this is going to have some impact on profitability. It is not easy to raise rates when occupancies are reasonable and at the same time renovation is in progress. However post October there should be a significant change. We hope it will be sustainable for at least a couple of years after that.

EQM: Indian Hotels recently indicated that it would be buying a 200-room hotel in downtown New York and another one in Continental Europe. The strategy seems to be in conflict with the pull out from international markets that was witnessed in recent years when the company sold off most of its international properties.

Mr. Dubash: Our strategy is not to restrict ourselves to the domestic market. In the domestic markets we really wish to dominate, both in terms of geographical presence and product. We will be present in the top end, the mid market and the leisure segment. We may even consider going into budget hotels sometime in future. We are already across the country. Therefore in terms of achieving domination we are more or less there and we will continue that as we did by buying Poona (Blue Diamond Hotel) and Hyderabad (Taj GVK). And now we have just opened a property in Ahmedabad. We are very consistent with our strategy.

On the international front, it is going to be different strategies for different parts of the world. I think in the Middle East, where our franchise is recognised and our food and beverages give us a competitive advantage we are quite capable of going into franchise agreements. And I think we will see some of that in the Middle East.

In Southeast Asia we believe we can use the Taj Exotica brand, which we use in Goa and Sri Lanka. It is a top of the line leisure property. We will be doing that in Maldives with a renovated product. We will capitalize on that and use that in other parts of Asia.

In the international markets our strategy is to go top of the line. We did get out of New York and Chicago earlier but both those properties were 3-star ones. And there was no chance in making them top of the line 5-star properties. The idea was to get out of them and we managed to exit these properties at a time when the markets were high. In fact we did not sell our London property, which was top of the line where, as we did by investing 17 odd million pounds, we were able to upgrade it substantially. The strategy is very consistent.

EQM: With the economic environment in India looking better, how do you see it benefiting Indian Hotels in terms of occupancies and room rates?

Mr. Dubash: Like I said, come October we should witness a hardening in occupancies and room rates. We have already seen occupancies hardening and at an operating level the profits during the first two-quarters could be substantially better than last year's. However this is a very capital-intensive business and what you find is that interest and depreciation costs are zooming up. In our case too debt has increased. The hotel business is like the real estate business. When you buy real estate you are not going to make a profit in initial years. But come the fourth year when you have actually paid down your debt and at the same time your rates are going up with inflation it is a great business. I mean the Taj Mahal Bombay mustn't have made money in 1902, but today it is fantastic. Therefore more importance needs to be paid to the operating profits.

Unlike a steel or automotive company which invest in assets, which have a life span of say 10 years, in a hotel you have a life of hundred years. In a hotel the cost is limited to the first few years. That's the big difference between a hotel business and a normal company.

EQM: Is the lobbying by the hotel industry to reduce the expenditure and luxury tax rates getting anywhere?

Mr. Dubash: I think this needs to be taken up very strongly with the government. We have not yet been successful. But it affects us in a number of ways. It results in an inefficient pricing and affects demand. On a pre tax basis our rates are very competitive. However when you add 30% tax, our rates are as expensive as those prevailing in major destinations like Hong Kong are. Again this makes a mockery of this business.

Taxes are necessary. But such a lop sided structure is not acceptable. To consider the business as a luxury in a Fabian way is uncalled for because this is a hotel used by businessmen. Hopefully we will be able to convince the government to reduce taxes in coming years.

EQM: What is your view on the prospects of tourism in India?

Mr. Dubash: Personally I think it is the most promising segment that India has. Far more promising than the business segment. India has such a lot of diversity. It is such a diverse place. It is in fact a collection of remarkable states with raw beauty. If you go to Kerala, it is phenomenally beautiful and yet undiscovered. Goa is like a bit of Portugal sitting in the middle of India, a unique proposition. In the east, Assam and Orissa there are very beautiful places. Then you have the palaces et cetera. It is a mix of history, raw beauty and cultural heritage. But the big handicap here is infrastructure. You cannot have a hotel company venturing into road making or ensuring airports are there et cetera. These things are happening, but at a slow pace. The government should realise that attracting 2 million tourists to India is pathetic. Like the software sector it is a major forex earner and unlike it, it requires large capital expenditure. The government has made a good start, the Bombay - Poona road is an example, and seems to be placing emphasis to road building. There is a long long way to go.

EQM: What are Indian Hotels' expansion plans? Where do you see demand growing the maximum?

Mr. Dubash: In our luxury properties our investments are going in renovation. Some of these properties have not been renovated for some time. Within the next three years we aim to upgrade our luxury properties in metro cities to top of the line status. We want to command the highest rates. We currently get close to the best rates in most properties due to our marketing infrastructure and brand. We have been placing emphasis on technology. In Indian Hotels customers get access to Internet via ISDN lines. None of the chains have this facility in India. We have also launched our web site where we take on line bookings. There will be a lot more action on the Internet. We plan to connect to a wide area network and are investing lots of money in technology. We will soon have a central reservation system and a central customer information system. So, the expenditure is in upgrading our physical product and investing in technology. The growth is likely to come mainly in the business segment and in cities jut below the metros, like Poona and Hyderabad.

EQM: How do you see foreign competition affecting the prospects for Indian Hotels?

Mr. Dubash: You see the hotel business is a unique one. It is partly real estate and partly hotel management. In some parts of the world, the two have been separated. Most of these foreign companies are very happy to do a franchise agreement. But very few are willing to put down capital in India. To that extent we are reasonably protected. Foreign companies would need to tap individual hotel entrepreneurs. These entrepreneurs were increasing very dramatically when they saw the boom of 1992 and 1994. Today, when they have seen the slump, nobody wants to invest in a hotel. In fact there will not be many opportunities for franchisees going forward. Also a number of these guys would rather sell out. The Blue Diamond (Poona) is a classic example. The same was the case in Hyderabad. Therefore unless foreign hotel companies are willing to put in equity, it will not work in a substantial way.

EQM: What are the prospects for the company's food and beverages (F&B) and air catering business?

Mr. Dubash: We did very well in the F&B business. When the rooms business were down we did phenomenally well. Contribution margins in rooms are however better. This is mainly due to the raw material costs being higher in the F&B business (in rooms, only toiletries need to be replaced). But rooms are very cyclical whereas F&B is far less so. Even during the Great Depression one of the two businesses that sustained was the restaurant business. It is the same so in India. We are pretty much the leaders in this segment. The combination of rooms and F&B is a very Asian concept. If you see abroad, most hotels are just room dominated and F&B is a very minor part of it. But if you see in Asia F&B is pretty major because people still have to come to 5-stars to have good food and ambience. But our emphasis on rooms is much greater.

Air catering is a very different business. It is a fast growing business mainly because the airline sector is going to grow dramatically incoming years. Strategically we are very well poised because we are the only air catering company, which has manufacturing facilities across the country. Most people are just Bombay - Delhi. We have recently opened a flight kitchen in Madras. We are servicing Calcutta out of our hotel, and we are quite capable of putting up a flight kitchen there itself. I think we are very well placed.

EQM: Which are your favourite books?

Mr. Dubash: Biographies interest me. Mahatma Gandhi's biography interests me a lot. Strangely even Adolph Hitler's biography interests me a lot. It gives an insight into how people think and what drives them. In case of Mahatma Gandhi it was excellence while in Hitler's case it was a disaster. But there was a thought process behind it.

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