Suddenly, Indian Hotels Co. Ltd that owns the famous Taj chain of hotels is in the news. Its belligerent bids to grab long-term lease contracts for mid-sized hotels in the premium market of New Delhi has surprised analysts.
Indian Hotels’s victory among two other bidders for the four-star hotel property—The Connaught—comes at a steep price. The deal to manage 85 rooms for a period of 33 years comes with an agreement that the company would share 31.8% of the revenue with New Delhi Municipal Council (NDMC). Further, Thursday’s bid for another hotel in a premium location in the city offered an equally huge chunk of revenue to NDMC.
According to a person close to the development, Indian Hotels lost the second bid to another firm, which bagged the deal at an even higher revenue-sharing agreement.
These bizarre bids have raised many questions.
Why this frenzied bidding by Indian Hotels for Delhi properties?
One reason could be that the city’s demand growth for hotel rooms at 6.8% has outpaced the supply growth of 2.8% (FY18 data). Also, it beats the all-India demand growth of 5%. Analysts say the region is among the best bets in an upcycle given its neat mix of foreign tourist arrivals, and business and leisure travellers. After a prolonged downtrend for a decade when the hotel industry was reeling with oversupply, things are looking up now.
That apart, the prized 290-plus-room Taj Mahal property, which has been run by Indian Hotels for several decades, will come up for e-auction on 18 July. NDMC failed twice in its auction attempts as there were no takers. However, the tweaked terms open the door for other large luxury hotel competitors such as EIH Ltd and ITC Hotels in the forthcoming round.
If it loses the bid, perhaps the Connaught hotel ensures that Indian Hotels has a sizeable presence in the premium Delhi market. Analysts estimate a minimum of Rs 100 crore to be spent on renovation.
Of course, it would be a double bonanza if the firm retains Taj Mahal’s management. Going by the earlier terms, the hotel will have to share 17.25% of revenues and a minimum guarantee fee of Rs 2.97 crore per month with a clause for escalation, with NDMC. Renovation expenses could be met through accruals given its healthier cash flows and balance sheet compared to a year ago.
Nevertheless, the revenue sacrifice at 31.8% disappointed investors. More so, given that NDMC kept a minimum guarantee fee of Rs 5.86 crore or 17.3% of the gross turnover, whichever is higher. Further, even during the peak cycle, hotels churn out an Ebitda (earnings before interest, tax, depreciation and amortization) margin of around 40%. This implies that in deals such as the Connaught, Indian Hotels may incur a loss in the near term. This could irk investors who have seen the firm recovering from its prolonged margin squeeze that weighed the stock down.
According to Sarthak Mukherjee, an analyst at Stewart and Mackertich Research, such a hefty premium is justified only by the growing demand for hotel rooms in Delhi. A loss in the near term would perhaps be made good through operating efficiencies later.
This also raises another worrisome question. Will Indian Hotels bid aggressively for Taj Mahal to retain its hold over the Delhi market? Until this question is answered and the contours of the financial terms are clearer, the stock is likely to be under pressure.