Will 35% margin be the new normal for Indian Hotels?

Puneet Chhatwal, MD & CEO, IHCL, says “we have invested Rs 2,500 crore in the last five years in upgrading our assets, in upgrading brands to Taj level, 24 of our hotels migrated to Taj, which includes the Fort Aguada and the Holiday Village in Goa or the Fisherman’s Cove in Mahabalipuram. All these have also contributed significantly in the upgradation of not just the brand but in the financials. We continue our focus on the new businesses and the re-imagined businesses. ”

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Puneet Chhatwal: We are very pleased with the performance. The guidance we have been giving on a consistent basis and our strategy will remain the same to be in line with the guidance we give and preferably overachieve that in a little lesser period than that we have guided for.

The quarter gone by is always the peak quarter for IHCL. How was last Q3 different from Q3 of FY23?

Puneet Chhatwal: Actually, Q3 in all metrics was obviously positive but what triggered that positivity is obviously three key initiatives that we have undertaken consistently. One is our “not like for like growth”. We opened 16 hotels last year. So as the hotels keep opening, last year means in the last nine months and we are well poised to do 20 openings by March 31.

Going forward next year will be another two hotels a month. All these hotels on a management fee driven business model are adding to the margin expansion that we are witnessing. Our management fee business has more than doubled in the last three to four years. So we expect that the total management fee income at the end of this financial year should be around Rs 450. Now this was less than Rs 220, three years ago. So that is your not like-for-like growth.

The second important part is effective asset management. We have invested Rs 2,500 crore in the last five years in upgrading our assets, in upgrading brands to Taj level, 24 of our hotels migrated to Taj, which includes the Fort Aguada and the Holiday Village in Goa or the Fisherman’s Cove in Mahabalipuram. All these have also contributed significantly in the upgradation of not just the brand but in the financials.

Finally, we continue our focus on the new businesses and the re-imagined businesses. New is our home stay, our Qmin and the re-imagined Ginger, the re-imagined Chambers is also in the re-imagined Taj sets. That has witnessed a 34% growth over last year. And we have given the statement that we expect these businesses to keep growing at 30%. Our traditional business will also grow at 15 to 17%, but the new businesses coming from a smaller base will grow very fast and become a significant part of our portfolio.

Your stated objective is of a double-digit growth for FY25 but FY25 will start in eight weeks from now. But if one has to look at FY26 and 27, what is the probability and the possibility that the double-digit growth will actually be there for at least the next three years?

Puneet Chhatwal: Growth comes from your existing to open a minimum of two hotels per month going forward. So not like growth, with a pipeline of 85 hotels, we would have opened most of these hotels in the next three and a half years. This does not include any conversion opportunities. This does not include any other inorganic growth opportunities. So with all that put together, I remain confident that our double-digit growth will continue.

Can I assume that 35% margin will be the new normal for Indian Hotels for the foreseeable future?

Puneet Chhatwal: Well, the guidance we have given is 33%. We do believe that 33% is a very healthy number, if we can get more, why not? If we can, like, in this quarter we got 38.5%, we go for 38.5%. But a little above 33% is what we are targeting so that if there was any kind of a downturn coming, if you are positioned at that level and you reduce your margin by even half, you still stay in black and you continue to have profitable growth and a profitable journey.

The hallmark for Indian Hotels has been that you are building up the management fee bucket. And that is the real reason why margins are also expanding. So at what rate is the management fee income likely to grow?

Puneet Chhatwal: We expect the increase in management fee income, anything which is north of 20% per annum. We have given the guidance that by 2025-26, we should be around Rs 550 crore in management fee, which means an increase of over 100, versus the number we are expecting at the end of this financial year. The flow through of management fee business is very high, as you know it is anything north of 60%.

With our pipeline being 74% in fee-based business and a lot of operating leases for Ginger because we do not believe management fee business is the right way for Ginger to operate. Ginger brand has the capacity to do more than 50% margin. So we prefer the operating lease model. And our owned assets are very few. We have just two islands in Lakshadweep, one hotel in Cochin Airport, which is opening, and two in Ekta Nagar that are also under construction. So in the next five years, these are the five owned assets that we know today, which we will be opening. The others will come selective investments in strategic locations and part of the nation building also that we do that will keep happening. We think we have a good amount of gross cash reserve already at Rs 1,800 crore. We have enough internal accrual to do so and do not need to take on any debt.

Are you factoring in an upswing coming in for religious tourism as we look into the future because this is something which now adds a new dimension to your portfolio positioning?

Puneet Chhatwal: I am a firm believer that if we do not take into account the first decade of this century, I think spirituality across the globe, in all parts of the world is gaining in importance, including in leadership styles. I mean, in some place in your mind, to be a holistic leader, you cannot be just driven by profitability without, as you said, at the outset of the conversation, purpose. The purpose has some link to some form of spirituality.

Now, we are very blessed because for several decades, our company has been building spiritual destinations. We are present in more than 50 of those with 60 properties. We will keep adding. The good thing about it is unless there was a lockdown like Covid, these destinations have always done very well for us. So right from the north, let us say from Katra, from Vaishnodevi to down south with Meenakshi temple in Madurai or Tirupati, we are opening our second hotel this month in Tirupati and Ayodhya with three hotels planned.

So we are very, very well positioned. And the Ganga belt, the way we cover from Rishikesh with the Taj and Anand Kashi on the Ganges, and Pilibhit House in Haridwar to Taj Ganges and Taj Nadesar Palace in Banaras. And the new opening that we have planned in Patna later this year is also very symbolic of our Ganga trail, that the way we have built it systematically. Patna would benefit both from being the capital city of Bihar but also being on the Ganges.

Specifically, you just mentioned new businesses and in terms of the new businesses because the base is different, they are growing at about 35%. But as we look into the future, how much percentage of your revenue in FY25 and beyond will come from these new businesses, the new growth frontiers which have incubated?

Puneet Chhatwal: So, new businesses and the newly re-imagined. So, Chambers is in its 50th year, but it was re-imagined five years ago. So Ginger was re-imagined and so was Taj SATS. Ginger itself would be around Rs 600 crore next year. Taj SATS should do Rs 1,000 crore revenue. And Qmin is all set to cross Rs 100 crore in GMV this year itself. Ama should start getting close to 50 plus. So, all these businesses and Chambers is also around Rs 100 crore in fees. It is not the consumption that we talk about. This is membership enrolment and the annual fee that is paid by the members.

These businesses have a very strong flow through. They have very high EBITDA margins. And we remain very confident that especially brands like Ginger have a very big future in a heterogeneous landscape like India. So, Ginger could be in every district capital, every state capital and every commercial capital. And that is like affordable, lean luxury for everyone. I mean, the target market is around 300 to 500 million people on the domestic front.

I think these businesses will grow in perpetuity and they may evolve in different forms. When we started Qmin, it was only home delivery. Today, Qmin is the all-day dining concept of every Ginger hotel. So, it is home delivery plus X, plus the all-day dining restaurant. They match very well together. Both are somehow related to Roots and Ginger sits in the company called Roots Corporation. I think all in all, a very interesting combination of brands, a very interesting future and very strong growth prospects.

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Roy Walsh

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