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The Taj - is <i>she</i> regaining her lost glory? - Views on News from Equitymaster
 
 
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  • Dec 19, 1999

    The Taj - is she regaining her lost glory?

    India's premier hotels chain, The Indian Hotels Company, has grabbed headlines frequently in the past couple of years. Boardroom battles, mega expansion cum renovation plans, exiting from its US operations have received high profile media attention. Managing director R K Krishna Kumar claims that the 'churning period' is over, it's time for growth. But is it?


    First the background.
    Indian Hotels Company Limited (IHCL), the hospitality arm of the Tata Group, is the largest hotel chain in India (room capacity: 2,574 rooms) with presence across all segments of the hotel industry. The company has built up sizeable brands in each of the segments it operates in. Taj luxury hotels, Taj residency hotels, Gateway residency hotels, Palace hotels, Beach resorts, garden retreats and wildlife lodges are just some of varieties it offers. Besides hotels, it also runs the largest flight catering service in India. Its units in Bombay, Delhi, Calcutta, Chennai and Goa service all domestic and international flights.

    The company derives much of its competitive advantage from the location of its properties (estimated to be worth US$ 490 million), as also the strength of its brand name - Taj, which has become synonymous with the hotel business. The Taj, Bombay for example, is situated near the historic Gateway of India. The Lake Palace in Udaipur, The Faluknama Palace in Hyderabad, The Bombay Brassiere restaurant in London just outside Buckingham Palace and palace hotels in Rajasthan are some of its other unique hotel properties. These locations, being difficult to replicate, serve as natural entry barriers to any entrant in the business.

    Following a much publicized board boom battle, the Tata group chairman, Ratan Tata aided by the new managing director Krishna Kumar set in motion a restructuring plan. The company got a chance to have a re-look at its business profile and evaluate its business potential in the long term. At the time Indian Hotels was facing serious problems. Room occupancies and rentals were down, properties in US were a drain on its resources and management was a unilateral decision making body, and so on.

    Cut to Financial Year 1999.
    The company made a conscious effort to get out of businesses, which generated less than 20% returns. It decided to let go of the proposed hotel at the Bandra-Kurla complex and recently sold of its USA properties (Lexington and Executive Plaza) under this plan. It has earmarked Rs 8 billion for an ambitious expansion-cum-renovation plan over the next four years. It recently bought over the Blue Diamond Hotel in Pune in line with this strategy. The company is extending its base (especially the 'Taj' brand) to smaller cities. Its flagship 'The Taj' Bombay is set to undergo a massive Rs 1.8 billion renovation exercise in a bid to make it a truly world class operation.

    Room for Gloom?
    (Rs m) 2QFY2000 2QFY1999 Change
    Income from operations 1,209 1,263 -4.2%
    Other Income 101 62 62.9%
    Expenditure 990 966 2.5%
    Interest 31 6 396.8%
    Depreciation 98 78 25.4%
    Profit before Tax 191 274 -30.3%
    Tax 13 24 -45.5%
    Profit after Tax 178 250 -28.8%
    Net profit margin 14.7% 19.8%  

    In a bid to curb its dependence on room revenues, focus is on non-room businesses like restaurants and food outlets. Plans are afoot to refurbish restaurants in a bid to increase revenues from the food and beverage (F&B) section.

    A fillip to its catering business through a foray into marketing of branded food and beverages at the retail level is on the cards. It is also looking to generate more revenues from institutional sales. It has set itself a target of doubling revenues from the catering division (Rs 900 million currently) over the next three years.

    All the above capital and revenue expenditure has raised a few eyebrows and questions. India receives less than 1 percent of global foreign travelers; the hotel industry has been hit by falling occupancies in recent times, with no sight of an uptrend for the next couple of years. So why is the No. 1 hotel chain in India, whose already got a fantastic presence all across India, looking to invest even more in an industry, which is in a not so healthy state? Why is its outlook so bullish on the industry's prospects?

    The reasons lie in the company's vision that looks beyond 2 years. For one, the economy is slowly picking up, with average incomes slowly on the rise. Secondly, India's status as a strong consumer market is attracting investments and hence more opportunities for its people.

    More significantly, as per the World Travel & Tourism Council and World Economic Forum, travel and tourism is the largest industry and generates 10 percent of global GDP and employment. In South Asia, the forecast is that by 2010, tourism and hospitality will be around 12 percent of GDP and 10.5 percent of total employment. India will definitely be a major contributor to this growth.

    Before that happens, Indian Hotels wants to rebuild itself as a truly world class hotel chain, which dominates all segments of the hospitality business (premium as well as budget segments), including retail food and beverage segment. For this the company is not only looking to attract global travellers but also looking at domestic consumers. The strategy is impressive, but one will have to wait and watch to see how it unfolds.

     

     

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