With the economy pick-up in slow start mode and tourist arrivals into India falling month after month, it is little wonder that occupancies at the Taj Group - India's premium hotel chain have declined by as much as 3% to about 51% in the first four months of the current financial year.
The news was revealed by chairman, Ratan Tata at the 98th Annual General Meeting of The Indian Hotels Company - the owners of the Taj chain. The fall in occupancies coupled with depressed room rentals took their toll on the bottom line of the company. Turnover for the first four months of FY2000 declined 4% to Rs 1,780 m as compared to Rs 1,852 m in the corresponding period last year.
Management sources have cited the slowdown in the economy and issues such as Pokhran and Kargil as the primary reasons for the poor performance of the company. The decline in occupancies has been more pronounced the company's Bombay and Delhi properties - both of which are substantial contributors to IHCL's bottom line. With new hotel chains setting shop in these metros, the demand-supply gap, which was once very wide has narrowed down. In Bombay itself, there at least 4 new hotels are coming up thus putting pressure on room rentals. Poor occupancy levels have only added to the woes with most hotel chains fighting for the same market.
The management expects these market conditions to prevail for some time. It has therefore begun scouting for alternate sources of revenue generation. At the AGM, Mr Tata commented that, 'To improve margins, the company will lay thrust on non-room businesses like restaurants and food outlets'. Over the past few weeks, the company has already announced plans to invest in hotel ancillary services like restaurants, shopping malls, and health clubs.
Indian Hotels is also extending its premium 'Taj' brand of hotels to smaller cities. The company plans to set up at least 10 properties in smaller cities under the Taj brand name. The brand has so far been used only for premium hotels in the major cities in India. IHCL plans to invest Rs 8 bn to fund all these activities during the next three years. With corporate travel declining, and trends indicating consumer preference for less expensive hotels, this strategy may well pay off for the company.
Sector overview: Over the past 3 years, while room occupancies and rentals have been on the decline, contributions from food and beverage sales are rising. With elections just a month away and given the recent tensions on the Indo-Pak border, the ARRs are likely to remain stagnant resulting in larger percentage contributions from the food and beverage segment in FY2000. So the 'non-room' thrust of the company may well help it tide over this bad industry phase. The table below shows food & beverage contributions to Indian Hotels and its main competitor, the Oberoi-owned EIH over the last 3 years.
With the economy slowly turning around, almost all hotel chains are going in the restructuring mode and are gearing to expand capacity. But the mood is cautious. Rooms are being added, but not in the already overcrowded metros, but in smaller cities. Also, there is growing inclination to increase three star hotels or budget hotels. Money, this time around, is being pumped in to improve the marketing set up abroad, and providing ancillary services like shopping malls, health clubs and theme restaurants.
The IHCL stock after a long period has made it to the "BUY" list of analysts and fund managers. This change in rating is largely based on the signs of improving economy and the management's committed restructuring moves. In the recent rally, the IHCL stock has moved up by 40-45% from Rs 280 levels to the current Rs 380 plus levels.
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