Shift towards budget hotels

By Ramnath Subbu

MUMBAI, JUNE 23. The Indian luxury hotel sector continues to bear the brunt of the economic slowdown. By its very nature and being linked to spending pattern, the sector is possibly the last to emerge from an economic slowdown.

It is particularly the case with luxury hotels as this segment derives more than 60 per cent of its income from foreign guest check-ins and business travellers. Further compounding the woes of the industry has been the inability to hike tariff rates. While a depreciating rupee has been off-setting costs, a tariff hike of any significance has not been effected by the industry for three years.

A survey by Pannell Kerr Foster (PKF) last year said the pressure on room rates had continued abated, with Mumbai, Delhi, Chennai and Bangalore witnessing a decline in average achieved room rates. They saw average rates decline by 6.35 per cent, 12.8 per cent, 3.6 per cent and 9.1 per cent respectively last year. These are likely to go down further.

Normally, hotels pass on the increased costs to customers but increasing competition and a real supply overhang, especially in major metros, has put paid to these possibilities.

Many international hotel chains had announced ambitious plans for India over the last few years - Marriott, Le Meridien, Radisson, Renaissance, Hyatt and Rafael being the major ones.

But the luxury segment's loss has meant a gain for the budget hotels which even business travellers seem to have preferred. The Tatas owned Indian Hotels Company (IHCL) made a foray into this segment with its `Gateway' Resorts while EIH of the Oberoi chain of hotels has ventured into this area through its `Trident' brand.

While occupancy levels in these hotels have remained stable, it is the average room rates that have reacted. The explanation for this could be that hotels are offering discounts to keep rooms occupied.

There is new supply of rooms that entered the market in 2000-01, particularly in Mumbai and Delhi. The room additions have been among the highest in Mumbai and this is likely to continue.

Two years ago, the Regent in Bandra opened with 100 rooms. But the project has run into rough weather. The Rs. 521-crore Regent Hotel project has seen the promoter group Lokhandvala Constructions, defaulting on loans amounting to Rs. 238 crores, which include foreign currency advances. Repayment of principal has already been rescheduled to start in June 2003 as the project is expected to be completed in March 2002.

The Hiranandani group has also ventured into hotels with the launch of the 36-room, five star business hotel Rodas in Powai. Rodas also claims to be only the second hotel in India (after the Orchid) to be accorded the Ecotel certification. Le Meridien has announced big plans for India and has to date six hotels here; the latest being a 150 room hotel and convention centre at Kochi. The company has indicated that it plans to have a portfolio of 20 properties in the Indian sub-continent representing some 5,000 rooms by 2004.

In Mumbai, the 179 room Marriott Executive Apartments opened in May 2000. ITC's Grand Maratha with 394 rooms opened end-2000. This year, Hyatt will open with a 453 room hotel and the Inter- Continental with a 380 room hotel.

Over the next couple of years, Radisson is to open its 149 room hotel in Goregaon (a western suburb), JW Marriott its 250 room hotel in Juhu and ITC Hotels' 200 room hotel at Parel while Renaissance Hotel will open its 288 room hotel and convention centre. Indian Hotels will also open its 160 room Taj Wellington Mews in South Mumbai.

In Delhi, the Metropolitan Nikko was opened in May 2000 with 200 rooms. The 350 room Grand Hyatt also started operating last year. The Welcomgroup has also completed its 80 room extension at the Maurya Sheraton and is to set up another 220 room hotel in South Delhi.

In Bangalore, two new projects are scheduled for 2001 - the 254 room Leela Palace, to have originally been a Four Seasons property and the Krishna Continental, a 3-star hotel which is being upgraded to open as a 168-bedroom Holiday Inn.

Chennai's 323 room Magunata Oberoi was inaugurated last year. Recent entrants include the 101 room Radisson and the 243 room Le Royal Meridien. The Le Meridien which was to have originally had the Hilton flag, is only the seventh Royal Meridien in the world and India's first.

Indian Hotels has ended the 2000-01 fiscal with a 3 per cent rise in its profit after tax at Rs. 116.79 crores. Sales and other operating income stood at Rs. 687.50 crores, up from Rs. 603.47 crores.

For 2000-01, EIH registered a net profit of Rs. 72.47 crores (Rs. 96.40 crores) on net sales of Rs. 421.10 crores (Rs. 440.51 crores).

Earlier this year, the rating agency, Credit Rating and Information Services of India (Crisil) had said that given the rising preference for budget segment hotels over luxury segment hotels, which may put pressure on room revenues for exclusively luxury players, chains (like EIH, IHCL and ITC Hotels) having presence in both 5-star deluxe and 5-star / 4-star categories would be better placed to address the shift in consumer taste, according to Crisil.

Further, over the next 2-3 years, the business prospects and thus the credit quality for established domestic players would be supported by the expected increase in demand resulting from the surge in level of economic activity. But the expected pressures on average room rates (ARRs) resulting from significant room additions would limit any major increase in revenues per room.

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