All initiatives will add to Indian Hotels top line, margins & benefit as demand outpaces supply: Puneet Chhatwal
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Last quarter, we used the term impressive to describe your numbers. Before that, they were charged up. How would you describe in your own terminology, numbers for the quarter gone by? Let me first hear your assessment and then I will come up with a follow-up question.
The first important factor to keep in mind is that Q1 and Q2 and traditionally the first half of the year has always been weak for the sector but that is changing. In the last five or six quarters, one can see that India on a macro basis is becoming a more 365-day destination versus being a destination dependent on only foreign arrivals and a destination which works very well between October to March or the second half of the year.
Having said that, October to March, that is Q3 and Q4, still remain the strongest quarters because of the way the marriage calendar works, Diwali, Christmas, New Year and all the festivities. Traditionally Q3 has been the strongest quarter for the sector and will continue to be so for Indian Hotels. What is interesting for us is to have gone beyond Rs 1,500 crore in top line, posting a 17% increase on consolidated level as most of our growth is based on asset-light, fee-based business.
If we were to take it at an enterprise level which means a system-wide revenue, then we go even north of 20%. All in all, that is very heartening and we have been able to invest in the last quarter and also will be doing this quarter in our new businesses, on marketing initiatives for Qmin, for Ama, putting a better structure in place because these were just born during the pandemic and were based on incremental revenue and incremental cash flow model. Now the time has come to invest some amount of money in what we have been doing and I am very excited to see the performance and contribution from these new businesses, including a very good story around traditional business like Taj SATS or the turnaround in Ginger in terms of profitability.
We all know that Taj was, is and will remain the crown jewel, not just of Indian Hotels, but of India. It will continue to contribute in a significant way, but if all these businesses start contributing, then the sum of the parts you will start seeing in the profit after tax which also in this quarter went up by 30%. All in all, as management, we are pleased with the result.
Let us understand the big picture. First, the demand versus supply equation, what it means for the industry and within that, the positioning of the Taj brand and revenue per night. The industry average is Rs 4,200, you are commanding Rs 6,500. So, are you bullish on growth and are you confident of being able to command this premium irrespective the industry rates?
One thing is definitely clear that demand is going to outpace supply, especially in the near term because the supply will remain constrained. Not much went under construction during Covid or during the pandemic and whatever goes into construction takes a long time including our own projects.
As I have said before, our flagship Ginger should have opened by now, but now it is opening in October or latest by November, depending on the monsoons in Santa Cruz. That will give higher occupancy and the ability to charge increases and so the average rate should increase. When you say Rs 6,500, it is a blend of the rates of all the brands. Obviously, Taj has the ability to charge much more and the average of the industry which we have taken, is also average across all brands. So, all in all having a rev power premium of almost 50% is there to stay especially in some of the asset management initiatives that we have undertaken. Now, our renovation is 95% complete for the Taj Mahal Hotel in Delhi, popularly known as Taj Mansingh. Very soon, we will be re-launching Taj Usha Kiran Palace. Ginger, Santa Cruz, I already mentioned to you. The renovations in West End with the newly designed and planned chambers which are going to come up, including our new restaurant concept, Loya, will be opening in a few weeks. So, there is a lot of activity around asset management initiatives on our iconic assets.
We opened five hotels. Another 15 are supposed to open in the next three quarters. And we opened 13 last year too. All these initiatives slowly will keep adding to both the top line, margin expansion and also benefit in times like this where demand outpaces supply in terms of the operating leverage of the owned assets.
The second half is always better than the first half, something which you have alluded to and has been the normal trend. But the exception this year is that you got the Cricket World Cup and you got the Miss World pageant. On top of that, there is going to be G20. These would be unusually large events which will add to the hotel demand. What could be the impact of these three factors in the second half of this year for Indian Hotels?
Not just Indian Hotels, I think for the sector, for everyone, it should help increase the demand and with the supply remaining constrained, the second half should be an exceptional second half going forward. Obviously, we know what cricket does in India, even if it is just IPL and World Cup cricket is something very special; Miss World anyways and we are already seeing the impact of G20.
It is not just the G20, it is also the B20 and within various verticals all the meetings that are happening and as we have the largest footprint in India, the kickoff meeting started at one of our properties in Havelock and the second one was in Udaipur and the third one was at the Taj Mahal Palace and Tower in Mumbai in Colaba. We are very well positioned to get the direct benefit. But more importantly, the infrastructure investment that the government is doing, what was open two days ago in Pragati Maidan, the launch of Jio in Mumbai, the opening of the convention centre in Dwarka all these additions to the infrastructure have a direct correlation in terms of demand in the sector.
I remain very optimistic that the demand will continue to increase because of the investment in the infrastructure, in terms of convention centres, railway networks and so many new airports coming under the Project Udaan. All in all, it is good timing and a very good correlation for hospitality to be an indirect beneficiary of the key strategic moves that the government has made on infrastructure investment.
Will I be off the mark when I say that in the second half of this year, the ARR, the rates, will see an uptick of 14-15% at least?
You can say that. I cannot make that forward-looking statement. But I will happily accept if it is that number that you are saying or even higher, then it is very good for the sector but I would not be able to make that comment.
Your margins for the quarter gone by were down. Was this a function of more brand expense, more expenditure towards marketing and capex?
It is marketing and capex. For example, we had taken a strategic decision to rebrand all the all-day dining of Ginger properties – there was food and beverage – into Qmin. We have got 20 of those done now. Obviously, last year in the Q1, we were just coming out of the third wave of Omicron and there was an adjustment in the cost base.
It would be fair to look at Q1 and Q2 together this year versus just the Q1 versus Q1. It is a good healthy comparison and some of the costs have gone up because the inflation level is higher and some money is needed to be spent on the new businesses which we have also guided during the capital market day. All in all, getting close to 30% EBITDA margin is a very healthy number and our guidance under Ahvaan has been 33%. With the Q3 and Q4 yet to come, we are very much in line with the guidance that we have provided.
Your peers in the hotel industry – other CEOs – are also quite excited about the demand-supply scenario for the next two or three years. My only fear is that if everyone is excited, next year will be good but beyond that, could we be staring at a glut?
That is a view which I would not like to share. I do not think my colleagues from the hotel sector would share that. Because of all the things that I just mentioned, the investment in infrastructure is changing. The landscape on how demand was generated in the past versus how it is today and what it will be in times ahead.
So, if you did not have the ability to host a convention for 2000 people, then it was not possible. But in the next two to three years in India, we will be having conventions of those sizes, like they happened in the other parts of the world. We cannot become number five, number three aspirational economy in the world and not have other businesses which lead to consumption, hospitality, food and beverage and stay in isolation from that.
So, it is a move on infrastructure development that makes me extremely optimistic and the role that increasingly India is playing on the global front is making India a more attractive destination going forward. As for foreign tourist arrival, we still have not reached the pre-Covid international arrivals in India. Once we get to all that, there are very healthy demand generation possibilities which we have not seen at this level in the past.
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