Tata to ITC to Add Hotels as Slump Seen Brief: Corporate India

Hotel operators in India are pressing ahead with their expansion plans, undeterred by the worst economic slowdown in a decade that has eroded their earnings and value of their shares.

ITC Ltd., Asia’s second-biggest cigarette maker by market value and a franchisee of the Sheraton brand in the South Asian country, is developing at least 18 projects, Nakul Anand, chief executive of its hospitality business, said in an interview. Sterling Holiday Resorts India Ltd. will double its rooms in the next three years, while Indian Hotels Co., the owner of the Taj brand hotel chain, plans to spend 2 billion rupees ($33 million) in the next 18 months.

“The hotel industry is going through a little rough patch and this is a temporary lull,” said Anand. “As soon as the economy picks up, our business will pick up. In the next one year, it’s going to be tough and the results of the hotel companies show that.”

The hospitality sector in Asia’s third-largest economy is struggling to recover from a slump as average luxury room rates fell 18 percent in the four years through 2012 and a brutal gang rape in New Delhi tarnished India’s reputation and deterred women visitors. Shares of Indian Hotels, which is controlled by Tata Sons Ltd., and EIH Ltd., the owner of the Oberoi brand of hotels, have more than halved in the past three years, while those of Sterling have slid 33 percent.

Challenging Environment

Indian Hotels reported its first annual loss since at least 1997 in the year ended March 31 as sales growth slowed to the least in three years, according to data compiled by Bloomberg. EIH had its smallest profit since 2005, while Sterling has seen group losses in the last four years.

The pace of growth in tourist arrivals into the country slowed to 2.8 percent in the year ended March 31 from 9.9 percent in the previous year, according to data provided by ITC.

Amid such a “challenging” environment caused by a prolonged crisis in Europe and a slump in the U.S., a “positive long-term outlook” for room demand has helped the company sustain investment in hotels, ITC said in its annual report. Three properties are slated for opening in the coming year after the company unveiled its 522-room super-premium ITC Grand Chola in Chennai in 2012.

Cash Reserves

While ITC’s investment is supported by cash flow from its tobacco business, Indian Hotels is adding capacity through management contracts, said Rashesh Shah, an analyst with ICICIdirect.com. ITC’s cash and short-term investments stood at 88 billion rupees as on March 31, compared with 2.3 billion rupees for Indian Hotels, according to data compiled by Bloomberg.

Silki Nanda, a spokeswoman for the Oberoi Group that controls EIH, didn’t respond to an e-mail seeking comments on the slowdown and expansion plans.

Sterling, which started in 1986 to cater to domestic tourists and family vacationers, plans to increase the number of rooms across its resorts nationwide to as many as 3,000 by March 2016, from 1,512, Managing Director Ramesh Ramanathan said in an interview. Billionaire Rakesh Jhunjhunwala owns 3.67 percent of Sterling, according to data compiled by Bloomberg.

“The sentiment in terms of discretionary spending is lower,” Ramanathan said. “We’ve managed to cut costs in several areas. Maybe going ahead in another two quarters things will turn around for us.”

In the past three years, Indian Hotels shares have slumped 57 percent in Mumbai to 42.55 rupees, while EIH slid 58 percent to 46.40 rupees. In the same period, ITC has more than doubled to 339.40 rupees.

Rupee Opportunity

The rupee’s 9 percent depreciation against the dollar this year may discourage Indians from traveling overseas and benefit Sterling’s resorts, said Ramanathan. A weaker currency may also boost the spending power of visitors, making India an attractive destination for foreigners as Europe and the U.S. recover from a slump, said Vikram Dhawan, director at Equentis Capital Pvt. in Mumbai.

“Rupee weakness will help the hotels get more customers,” Dhawan said. “A bulk of the corporate crowd and the well-heeled people who come to India prefer these luxury hotels.”

Need Facilities

Supply in the domestic hospitality sector rose by 24 percent in the year through March, while demand lagged behind by 3 percentage points, Raymond Bickson, managing director of Indian Hotels, said at a press conference on May 30. India has 200,000 rooms versus 5 million in the U.S., which has a smaller population, and 3 million in China, according to him.

“India is outpacing the growth of many other economies,” he told reporters. “We still need a lot of convention facilities, hotels, rooms to keep up with that.” Indian Hotels plans to add 1,590 rooms in the current financial year and 1,098 next year, he said.

The $1.8 trillion economy expanded 5 percent last fiscal year, the slowest pace since 2003, as companies and businesses curtailed travel budgets. Occupancy rate at luxury hotels fell to 59.9 percent in the year through March 2012 from 73.8 percent in 2006, according to data provided by the Federation of Hotel and Restaurant Associations of India. Average room tariffs declined to 9,192 rupees from 11,200 rupees in 2008.

A spate of rape cases in India has also contributed to a drop in tourists. The number of female visitors to India has fallen as much as 35 percent since the December assault on a young medical student in New Delhi, according to the survey of 1,200 tour operators nationwide by Assocham, one of India’s largest business lobbying groups.

The slowdown, which has reduced visitors to historic sites such as the Taj Mahal in Agra and Jaipur’s forts as well as the capital, came during the peak winter season for travel to India.

Rape Cases

In the first six months of 2013, reported rapes in New Delhi soared to 806 from 330 in the same period a year earlier, according to Deepak Mishra, special commissioner of the police force. Molestation cases rose sixfold to 1,780.

“The violence against women we have seen is definitely a negative that is proving to be a dampener for people planning to visit India,” Equentis’s Dhawan said.

An economic recovery in the U.S. and Europe will help India to recover, spurring demand for hotel rooms, M.D. Kapoor, secretary general of FHRAI, said in an e-mailed statement.

With the European Central Bank’s benchmark rate at an all-time low of 0.5 percent, economic reports suggest the currency bloc is starting to emerge from a record-long recession. Euro-area manufacturing unexpectedly expanded in July for the first time in two years, data showed last week, and German business confidence improved for a third month.

“In the coming quarters, there will be a steady improvement in the demand scenario,” said Kapoor. “Occupancy and rates will stabilize first before a rebound.”

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