Indian Hotels, a Tata Group-controlled company, recently joined hands with GIC, a Singapore-based wealth fund, to invest as much as Rs 4,000 crore over three years to acquire fully operational hotels in India.
Shedding light on the deal and the firm’s plans for raising funds for these acquisitions, Puneet Chhatwal, MD and CEO of Indian Hotels, said it would be through 50 percent debt and 50 percent equity. “We will be investing around Rs 200 crore a year, which would come in from internal resources by monetising assets,” he says.
Excerpts from the interview. Let us talk about this tie-up with GIC. Is there something already shortlisted in terms of buying of hotels and should we hear from you sometime soon in a month or two?
I think it would be prudent to say that you will hear from us in a month or two because we signed up on Friday and we are in the process of putting up a team to analyse possibilities. Also, in our drive to monetise some of our own assets, we have shortlisted some which we will be sharing with GIC very soon.
There is a 30 percent investment in this special purpose vehicle, which would mean Rs 1,200 crore investment from your end. Where do you plan to get the funds from?
I think what you have discounted here is that there will be some leverage in each of the asset acquisitions that will happen. So in an ideal world, we would look at 50 percent debt and 50 percent equity. This platform will be investing over two years and so we are looking at Rs 200 crore investment from Indian Hotels per annum. We do believe that in our monetisation drive, which we achieved last year, we will be achieving at least Rs 200 crore from our internal resources by monetising assets that we already have today, which would directly flow into this platform to acquire more strategic assets and keep building our brands further.
Will your accent be more on acquiring assets and not just gunning for management fee?
Not really, it is a combination of both and that is the beauty of this platform. We would have a simple management contract for each of these assets. So, our income would be derived from two sources, one is the management fee stream that will come along with each of the management contracts as well as the share in the EBITDA, which we will be sharing with GIC. So, it is wearing two hats, one is that of a manager on asset-light model and sharing whatever residual income is left on a 70:30 basis.
So you will be both the EPC guy as well as part owner of the asset. What is the kind of internal rate of return (IRR) you can expect, what is GIC expecting?
I think all companies have their internal requirements, I don’t think it is appropriate for me to share what GIC would be expecting internally, it would be best answered by them. But typically, you are looking at higher double-digit IRR on equity for investments in India or on the Indian subcontinent and there will be no change on that.
Can you give more details about debt? You have mentioned that for this investment you are looking at 50 percent through debt. The last time we checked, your debt figures were down from Rs 2,300 crore to Rs 1,700 crore as on March. Over the next 12-18 months, where will it be?
I have shared that consistently with all of you and the rest of the market that we are on a drive to constantly reduce debt. This debt will be in an SPV, not on Indian Hotels’ balance sheet. Our debt to equity or debt to EBITDA has come down from 6.5 to 2.17 for the full year reported results and I don’t see why this will not be going down further. That is a key strategic initiative the management has taken and we will continue to reduce the debt levels within the Indian Hotels company. But in an SPV for project financing, that is a different story completely.
As you are not going to have a good supply of management fees, would your margins improve considerably?
The guidance we have provided the market is 8 percent margin expansion over a five-year business cycle. Growth is key pillar of this margin expansion. So a part of it will come from operational excellence, significant part will come through new management contracts and monetisation of assets and another part will come through synergising within our group companies as well as special drive on procurement basis. So as growth is a very important pillar, I think it will help us expand margins going forward.
In FY19, you managed to grow 10 percent on top line, but there is a big slowdown underway across all consumption pockets. Are you hoping to scale double-digit growth in FY20 as well on the topline?
I don’t know if that is still realistic but because of our continuous expansion, opening a hotel every month, we do expect a significant boost to our management fee income. The second is visibility that we have. June looks good but it is difficult to say what would in second half of the year. Typically, 65 percent of our EBITDA in hotel business, especially in India, comes in the second half and that is a bit far off. But because demand continues to outpace supply, I don’t see any reason for a significant drop in average room rates or occupancies. On the contrary, we do expect the average rates to increase as the occupancies have increased in the last few years.
Can you give us some guidance for ARR and occupancy because everyone else is talking about a slowdown? Are you reasonably confident that quarters of FY20 will see higher ARR and occupancies than the previous year?
It is very difficult, because I can only say that June is looking good. Every five years, when we have elections, there is slowdown and immediately after elections business tends to pick up. The business on the book in June is quite good but what is important is what happens between October and March. We think Indian Hotels with its brands, with the Taj brand especially, is well positioned to capture a higher market share and take advantage of any tailwinds that we get on the average rate scenario.