A postgraduate from Cornell University’s School of Hotel Administration in New York and with more than 13 years’ experience in hospitality, Vivek Nair wears two hats today. He is vice-chairman & managing director of Hotel LeelaVenture Ltd, which runs The Leela Palaces, Hotels & Resorts, and is honorary secretary, Federation of Hotel & Restaurant Association of India. At The Leela property in Mumbai, Nair spoke with FE’s Shweta Bhanot and MG Arun about the challenges faced by the industry and the The Leela Group’s plans for the future. Excerpts:
Inflation has crossed double digits, there is slowdown in important markets like the US and Europe, and the rupee continues to fluctuate. How have these factors impacted your business?
People had predicted that it would have a negative effect on arrivals. Luckily, in the first quarter of this fiscal, we have seen a 15% growth over the same period last year. Although that’s not like the 20-25% of previous years when things were really buoyant, 15% is good. Interestingly, the feedback that I have got from Dublin where CEOs of the global hotel alliance met is that even in the US, they had the best possible year last year. Hence, the so-called recession in the US has not translated into a real reduction in revenues compared to last year. They are expecting 8-9% growth in revenues in the US, which is good, considering that the economy is growing at only 2-3%.
Further, the perceived devaluation of the dollar against the Indian rupee has led to an industry shift to rupee pricing. Though at present, it is in our favour at Rs 43, in the long term, all hotels in India will start quoting in rupees. Like other hotels, we will also quote in rupees from the October season. From then on, we will quote in rupees and realise in rupees.
Do you think you will maintain this growth rate once the demand-supply mismatch is corrected with additional rooms?
With additional supply coming in most major cities, there will be a correction in the demand-supply mismatch. The extent of the correction will depend on how many hotel rooms actually come on stream. For instance, Bangalore has some seven luxury hotel projects in the five-star and five-star deluxe categories, work on which started five years ago. They were all supposed to come on stream in 2006-07. But, given the progress so far, they will not come on stream for another 15-18 months. Typically, a hotel project takes three to four years.
At present, there is a shortage of 1 lakh rooms in the country. It is often asked why hotels charge $400-500 in cities like Delhi and Mumbai when the perception is that India is a low-cost economy. It is mainly due to the demand-supply mismatch. The project cost has gone up so much that land price itself is up to 60%, when the international norm is no more than 15-20%. Hence, the cost per room has become exorbitant and, in turn, hotels have to charge more. The break-even time is not less than 7-10 years.
What are the reasons behind the delay in such hotel projects?
There are many issues regarding approvals and financing. One of the concerns shown by our hotel federation is that the present credit squeeze has affected new hotel projects. Last July, the Reserve Bank of India (RBI) stopped external commercial borrowings (ECBs) by hotels. Although we are part of the tourism infrastructure, airports are included in the infrastructure list under section 80-IA while hotels are not. We have been asking for inclusion for a long time. Finally, we had to persuade the ministry of finance and RBI, and took the issue to the highest levels. A few weeks ago, the policy was liberalised. Now, we can import equipment worth up to $100 million via ECBs, but that is not good enough.
We are also asking state governments to increase the floor space index (FSI) in a bid to ease the shortage of rooms and eliminate the huge land cost burden. In Mumbai, since 1975, hotels have been allowed 100% more than normal FSI beyond Mahalakshmi. Now, New Delhi has also increased FSI by 50% for the upcoming Commonwealth Games, for both existing and new hotels. The 23 plots auctioned in New Delhi could see 4,000 more rooms. The cost of a room comes down when you build more rooms on the same piece of land.
How much does imports make up of the total project cost?
Typically, 60% of a hotel’s project cost consists of imports, including civil works. For instance, the total cost of a 400-room project in our category comes to Rs 800 crore. In civil works, we import cement from Pakistan, as the landed cost is about 15% cheaper than domestic cement. Steel, marble, flooring, housekeeping equipment, elevators, HD TV sets and electronic safes, among other things, are also imported.
The government has given access to the export promotion capital goods licence, which is now at only 3%. So, we find importing much cheaper than buying locally, apart from the quality and quick delivery that you get from abroad. So, we have a large foreign currency requirement. That’s why we are asking the government to allow us greater access to ECBs. Almost 60% of the Rs 800 crore is for imports.
Hence, it is much more beneficial to avail ECBs to complete projects. It is due to this that the projects announced by real estate developers are finding it very difficult to get rupee financing. A number of those who have announced new projects may not come on stream as scheduled. There are talks of 50,000 guest rooms to be added in four to five years. It has to be seen how many actually materialise.
How do you plan to meet the demand for a skilled workforce?
We have a strong management-training programme, which we are ramping up for future hotels. We would also like to open a management-training institute in Kerala, near our Kovalam property, for which we have plans to tie up with an international university.
