Indian hotel companies are looking at being asset-light in the post-downturn period ? to expand faster without putting much strain on their balance sheets. Traditionally Indian hotel biggies ? The Taj Group, Oberoi, ITC ? and even the relatively smaller one?s such as The Leela Group have grown through ownership of properties. However, with the asset-light approach checking in, the focus is increasingly on management contracts, joint ventures and lease rentals. While hotel honcho PRS Oberoi recently made it clear that his company, East India Hotels, will look at the asset-light model being followed globally, Taj Hotels too has a heavy overseas pipeline, but mostly management contracts.
Meanwhile, Taj Group?s budget brand Ginger also is focused on the asset-light approach. ?Till 2008, the focus of our company was largely to own and operate the hotels, even though some were leased. But now we have moved to a more flexible approach ? leasing of shells meeting our specifications, public-private partnerships (as in the case of Ginger Rail Yatri Niwas in New Delhi) and management contracts ? which allows growth in an asset-light fashion. The new approach clearly enables us to rationalise the money spent for expansion,? says Ginger Hotels CEO Prabhat Pani. At present, there are 24 hotels under the Ginger brand across India, which includes only two management contracts and one a PPP model.
The Leela Group has only one property under its management right now, but it too is looking at expansion on the similar lines. ?We shall certainly be exploring more opportunities for management contracts in the luxury segment. Since hotels are a hugely capital-intensive investment, it is not always possible to grow through ownership only,? says Rajiv Kaul, president, The Leela. The group is looking at Jaipur, Hyderabad, Pune and south Mumbai for expansion and wants international forays too.
And then there are smaller players eyeing faster and lighter expansion. For instance, Bangalore-based Royal Orchid Group is growing through lease rentals and looking at joint ventures and management contracts to grow. Another way of going asset-light is floating a special purpose vehicle (SPV), being done by hotel companies that do not want to leverage their balance sheets too much. For instance, for the re-development of the Sea Rock Hotel, IHCL (owner of the Taj) floated an SPV. IHCL will now hold 20% in the SPV while the remaining will be held by five to six companies, including a few Tata Group entities. IHCL had acquired a majority stake of 85% in ELEL, which owned the Sea Rock hotel in Mumbai, for Rs 680 crore in June 2009.
The reasons behind the inclination towards the asset-light model are galore. To begin with, as global biggies like Intercontinental Hotel Group, Carlson, Accor, Starwood and others expand their footprint in the country, mainly by management contracts and franchises, Indian companies too are in a rush to expand and take the foreign competition head on.
Also, hotel companies took a beating during the downturn and their liquidity dried up, leaving very little room for investment in newer projects. ?While in the pre-recession period most Indian hotel companies announced owned properties, their balance sheets did not allow them to do so once the market slowed down. Their first preference was the ownership model, but now they are going for the asset-light approach as they are cash strapped or because they don?t want to invest heavily,? says Himani Singh, hotel analyst, Elara Capital. Globally, hospitality players thrive on the asset-light model. But expanding without being asset owners has its flip-side too for hotel companies as they get dependent on developers for expanding their footprint.
An analyst points out the case of Hilton, which signed with DLF but could not expand as desired because the developer was cash strapped and did not want to invest in hotels which have long gestation period. A similar fate was met by the Unitech-Marriott alliance. Naturally, there are some companies that do not want to follow suit.
?India is different from the mature markets of the west where the power is with the brand owner. In India, however, the power is with the asset owner. Also, the returns for the asset owner are much higher as compared to a management company and also the valuations are higher. Therefore, right now we want to stick to being asset owners and operators as well,? says Rahul Pandit, vice-president (operations), Lemon Tree, a mid-market hotel chain. As compared to being pure management companies, right now most Indian hotel companies are looking at a mix of owned and managed properties. For instance, Fortune, ITC?s mid-market hotel segment is management contract-driven, but the company is very clear that it wants to own luxury properties. Similarly, Pani of Ginger says going forward the company wants to have a ?judicious mix? of owned or leased properties and management contracts.
