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    Pandemic taught hotel industry to live with zero revenues and with fixed costs turning variable: Puneet Chhatwal

    Synopsis

    ‘Business will bounce back 60 to 90 days after the lockdown is over.’

    ETMarkets.com
    (By Nikunj Dalmia)

    Tourism is an important pillar of any economy in general and going forward for India in particular, I see no reason why some form of support will not come, says the MD & CEO, IHCL.


    The last time when we interacted, things were looking down. There was virtually no business for the hospitality/hotel sector. Are things looking up now? Or is this just a start and there is a long road of recovery ahead for Indian Hotels?
    It is a start and we are very happy that the start has happened in some of the key sources of revenue or business for us. The start happened in Mumbai yesterday, in Bangalore a month ago and hopefully a few other key metros will follow next week. I believe that it is not going to be a very long road to recovery. Business for us will bounce back faster. But it would take anything between 60 to 90 days after the lockdown is over. It would be unrealistic to expect that it happens the very next day or the very next week or in the few weeks. It will take time. But it will not take years for it to come back.

    Will it be unfair to assume that Indian Hotels is confident that by the Christmas and the New Year season, things could be almost back to normal? When you are saying specific words like 60 days and 90 days, that is prompting me to assume that you believe there will be a minor dip here or there but your year-end season and New Year season could be back on track?
    I do believe but I do not know. Only time will tell whether this is right or a wrong assumption. But just the very fact that people would like to put 2020 behind them gives me hope that around Christmas and New Year, things will start coming back and people would like to forget this year as if it never came.

    What are the initial feelers you have got from the guests who so far have come back to your hotels in various cities”? Is the fear of going to a hotel or a restaurant getting over?
    Definitely not. We are not yet in that phase. That is what I meant by 60-90 days actually. I will take an example of the state of Karnataka. People drove from Bangalore to our properties in Coorg, in Chikmagalur to our homestays and trails -- for board meetings or for a family stay or just because people needed to get out of homes. In no time Coorg, Chikmagalur started filling up.

    We expect a similar trend in August, especially for places like Goa. However, business travel will take a little more time to bounce back. People driving to a certain destination is definitely something which is going to kickstart our business. Having said that, we are very excited as we also opened in London a few days ago. Hotels were allowed to open and a lot of steps are being taken in the UK to promote hotel business. London is a very important market for us.

    So, some of these green shoots that are coming are giving us a lot of hope, a lot of positivity and motivation. After globally the industry space has been shut down for more than 100, this was the needed motivation at the right time and at the right moment and not too late, I would say.

    Your business broadly comes from Mumbai, 15%r comes from Delhi and NCR, about 10% comes from Bangalore. While business was not operating, a lot of travellers were also using hotel facilities for quarantining. I have been told that hotels were charging anywhere between Rs 5000-8,500 that is in sync with the normal average room rates (ARR) in these cities. How has quarantine helped your business?
    One very important thing is that in such a crisis, a pandemic like this, one important factor is to maintain the security of your associates as well as your guests. So after 100 days, in Mumbai, all our hotels – Taj in Santacruz, the President, the Taj Mahal Palace Tower, the Taj Lands End, the Gingers -- have all been operating and housing the essential services as well as the repatriation flights for the quarantinears. That means they are used to the new safety and security norms and have been adhering to those far earlier than anybody else. So that is one part of the thing.

    The second is of course it helps you to keep things operational because when you shut down and you restart, things do not go the same way. So staying operational in whatever form -- whether you are doing it for the society or as a service or you are doing it to just do a little bit of business is also very helpful as long as you are not out of pocket and you are not paying to open.

    Last not least a restart like we have had in Mumbai since yesterday which is 33% plus essential services, is also very helpful because you do not have to start climbing from zero. You are already at a certain level of business and whatever then comes in is an add on and your staff and your people are really trained, are really used to serving the guests and what we have done also is we have been housing most of our staff in either our hotels or put them in accommodations around the hotel, so that they do not have to travel.

    This assures all our stakeholders that we are fit for start, that we are ready to start and we are dying to welcome guests back in our hotels and our restaurants and very soon we expect that to open up also because at the moment, it is restricted to in-house guests only. Hopefully, in the next few weeks, that will also open up and then we will start getting to the normalisation phase over what I keep saying 90 and 100 days post this opening.

    In the UK, Rishi Sunakhas tweeted: “To support restaurants and the people who work there, we are saying eat out and help out and for the month of August we will give up to a 50% reduction with up to 10 pounds per head on sitdown meals.’’ The hospitality industry which generates maximum employment in the country, so far has got nothing from the government. Do you sense something is coming or is it disheartening to see that nothing has come so far?
    That also gives us hope that something will come eventually because as you said, direct and indirect jobs have been created by the hospitality and tourism industry in this country. It is an important sector going forward in terms of earnings, foreign exchange in terms of contribution to the GDP of the country. There is also the feel-good factor. It does not have to be luxury hotels, it could be mid market, it could be the lower-end of the market, but there is always a feel-good factor, which psychologically is also important for any economy.

    It is also enabling our domestic business which is going to be the key after this pandemic in every country of the world to kickstart the business. Tourism is an important pillar of any economy in general and going forward for India in particular, I see no reason why some form of support will not come.

    In my other role as the President to the Hotel Association of India, we have been making continuous representations, qualifying the current situation as a survival phase and how to revive and eventually thrive. So, survival, revival, thrival have been the key themes. Those discussions are ongoing and I see no reason whether now or in a few months something will not come.

    I am glad you took the example of Rishi Sunak in the UK. I do not believe we can cut, copy and paste what others are doing, but somehow we can take inspiration or certain key learnings. What is the need for a country like the UK to incentivise people to go out and eat in restaurants and the government would subsidise those meal! They have also reduced the VAT till January from 20% to 5%, if I remember the numbers correctly. It all shows the importance the UK is giving to this industry. We also have given a lot of importance to a lot of industries in the last few months. I am quite optimistic and quite sure that going forward, something will come along our way for all the sectors that come under the umbrella of tourism.


    I really hope so because this is one industry where the dynamics have really got smashed out of the shape. So let us talk about specifics here. I will take the clock back to pre-Covid days. At that time your guidance was that you would open one hotel a month. Is this crisis forcing you to relook at your ambitious plan of opening one hotel a month?
    No, the plans might have changed because the narrative in the market has changed. We did not plan on opening a hotel a month just because we wanted to have so many rooms and so many hotels operating. There was a science behind it and the science was coming from the background of ownership of assets.

    Being an owner operator, we wanted to have a 50-50 mix of owned and operated and fee based business. We almost achieved that because we got to a portfolio coming from 67-70% owned operated to less than 60% and 40% became fee based business. As you rightly said, last year, we did open 13 hotels and so if we take April, May, June, in 15 months, we opened 13 and we have almost 40 or more hotels in our pipeline.

    A pandemic, a crisis like this will bring along with it, a lot of conversion opportunities. There will be normal M&A activity, there will be consolidation post this crisis in the industry and we are very well positioned to take advantage of that and continue on our growth strategy of fee based business so that we can mix our asset light in the last few years and now with the asset heavy from the past.

    Then we have a very hedged portfolio that will also not change for a reason. If you have a pipeline of signed contracts of more than 40 properties, at some point they will open. There may be a delay of a few months here or there because there are no workers on site and there was a lockdown or there was a bad weather in Delhi. Then there was a Supreme Court judgement to not have construction but the delay does not mean, it is not going to happen. We were supposed to open The Connaught, which we have taken on a long term licence from the NDMC in open bidding. It was supposed to open by the end of March. Now, it will open in September. So, I think we are well on track and growth is a very important pillar of our strategy. There is no way we are going to compromise on it.

    However, we will not focus on signing 20 more contracts now for hotels which may open in three-four years from now. It is important to help hotels in pipeline to open and help do effective asset management which is a part of our new reset initiative and that will help our partners and owners to get through this crisis and make use of certain opportunities which every crisis brings, to restructure and re-imagine our portfolio.

    Where would be that comfort level for you, beyond which your operating leverage would start kicking in?
    This is no one-size-fits-all answer, but I will try to simplify and answer it. One of that fixed cost leverage is by brand. The second is by geography and the third is by contract type. The last one is by contract type. In a management contract business where you are operating a third party’s asset, it is only a question of management fees being higher or lower. There is no direct fixed cost that you have, other than the corporate office cost. Since it is a support office, it is supporting all those management contracts but all other costs are the cost of the owner of the asset.

    When it comes to geography, the leverage part also changes and this crisis has shown us that. We just took the example of the UK or US where a lot of the labour cost is being compensated by the government itself. So it is not hitting your P&L so that if in a normal business operation, that fixed cost level and the breakeven point was 45%, suddenly this could drop to 35% because of the support that you are getting from the government.

    That is the reason why it changes by geography and finally by brand. Certain brands like our mainstream brand, our backbone, our the pride of the nation the Taj is at a higher fixed cost level than let us say a Ginger or a Vivanta or somebody being part of selections Also, our other businesses like the flight kitchen business, which has come to a complete halt, because there is no international flights and on domestic flights, food supply has been stopped. So there is a different level of fixed cost structure by brands, by geography and the business type that we are operating on the contract type.

    Generally speaking, what this crisis has taught the industry is that even fixed costs after a certain point become variable. I do not think any of us knew how to live with life when the revenues dropped to almost zero and how a fixed cost could also turn variable.

    Some of those things have changed, some of the states have been very helpful like Maharashtra in helping us with the utilities. They also helped us change with the order yesterday in terms of hosting essential services by compensating us with a much higher number than what we were getting for the first 100 days of the lockdown.

    So the numbers keep changing and evolving, especially in one-off situations that we have witnessed in our lifetime.

    Markets got nervous about your cash flows and the stock plunged from Rs 110 levels to sub-70 levels. The shareholder wants to know what support you will get from Tata Sons if you need more cash and what will happen to your cash flows because in the last couple of years, you were generating cash. You did all the right measures and became a cash flow positive company. What happens to that and would you be leaning on Tata Sons for support?
    It is good to have the backing of a group that is our majority shareholder. Having said that, you said we did a lot of things and I would say we are still doing and we will continue to do and the year has just started. It is the weak part of the year. The H1 is traditionally a time when we have always had to have breakeven. Of course, we have used a lot of cash in the Q1 and may do so partially going forward in Q2.

    But I, together with my management team have always been optimists and we see no reason why in the second half -- which is the most important half from October to March -- we will not bounce back and generate cash ourselves and not lean on anyone. If needed, yes we have the psychological security but I believe in the team, in our business model and also in the infrastructure help that we will get from various state governments and central governments. The people in this country who love some of our brands, will come and enjoy and create the cash flow that is needed for the revival of our industry.

    Couple of days ago, customers of Indian Hotels got an SMS saying that they can order food from home. Tell us about your initiative. How will it work?
    We do not take decisions based on just pleasing one or the other stakeholder. Ultimately everything has to make business sense. So, here is the logic behind several initiatives that we have planned. We have launched two initiatives from the 7th or 10 th. One is called the 4D initiative and that is how you dream, drive, discover and delight yourself. It was launched in Karnataka, then in Rajasthan and now slowly coming to people who would want to get to Goa as a destination. That is because drive occasions became important. But how do you sweat your large kitchens? The staff is there and doing something different. So how do we bring the food of Golden Dragon to people’s homes and give them a digital experience -- whether through music, décor, through the food brought to their doorstep and everything done in a very efficient way.

    We have launched a brand called Qmin or with the three Qs which means Qurated, Quality, and Quisine also spelt with a Q and it has been like 10-12 days that we have launched it. A Qmin app will follow on the 25th of July which will make all this ordering much easier and we wanted to have a digital innovation in our system. Digital will play an important role going forward.

    The Qmin app will help us to launch in the 10 key metros of India. The second and the third cities that will follow on the 17th of July are Delhi and Bengaluru and after that in August, we will be opening Qmin gourmet shops. These will be for grab on the run when you just stop and take some fancy foods of your choice, just put it in the microwave at home and it is ready to eat. There could be some fancy international breads, muffins, Danish pastry or Baguettes or Swiss rolls etc. These Qmin shops will be in areas where there is large residential footfall.

    We would have one at the President because it has a catchment area of Cuffe Parade next to you or in Delhi at the Taj Ambassador area because Golf Links, Pandara Road, Khan Market area is next to it. This is a new area of business, a new source of revenue that we have started. We never focussed on it because all our hotels and restaurants were full, we were busy with that and when the need arises when you try to look for new areas of revenues this was one of the feedbacks we got from our customers.

    Another idea we got was can we have like some kind of a calories defined meal, so that we know exactly how much calories we are eating. Someone came up with the protein food. So, some of that will follow but it is a start and we are very proud of it and would encourage all of you to try too.
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