"I will take a hit on equity but I won’t risk the entire capital"

I was 38-years-old, when two friends of mine and I went for a boys’ weekend to the Sawai Madhopur Lodge. Those days single malt was very expensive and not easily available. Over a Friday to a Sunday, we finished two bottles of single malt and decided that, by the time we are 40, we should all retire. Our target was to have Rs.5 crore in the bank because, in those days, RBI used to offer 10.5% tax-free bonds for five years.

So, Rs.5 crore, 10.5% meant Rs.52.5 lakh tax-free income. In the ’90s, it sounded like wealth beyond belief. My friends had about Rs.2.5 crore of savings whereas I had Rs.70 lakh. But I thought I was smarter than them and knew better than anybody how to deploy capital. They were 36, and had four years to reach Rs.5 crore, so they would have easily made it, I was 38 and had just two years to hit the target. Making matters worse was that I had hubris — an exaggerated belief in my abilities. 

***
I borrowed Rs.30 lakh from my wife and with a kitty of Rs.1 crore started trading on the bourses on margin. Within nine days I was down to Rs.3 lakh. So not only did I not have my Rs.5 crore, I was financially ruined in just nine days. I calculated that my broker had made much more in commission because I was trading so much. My broker returned my Rs.3 lakh via cheque and, as a consolation, gave me a Cartier watch. I was touched by his gesture because here I was down on the ground and expected people to kick my carcass. But instead this guy gave me gratis a Cartier watch. 

I was so touched by his gesture that when his daughter got married three months later and I had only one valuable item that I owned, a Mont Blanc pen, I presented that as a wedding gift. Unfortunately, six months later my watch stopped working and I sent it to Johnson &Co, the authorized dealer of Cartier. They returned it back saying it was a $20 fake. So, my new learning was that never give gifts or advice gratuitously but I had to lose 97% of our combined networth in order to learn that lesson! I have still kept the watch — in memory of my hubris.

The episode also taught me that never ever bet the bank, always have plan B, plan C, and plan D. In fact, the bigger the decision, the more plans I have as options. So, for example, when I buy, build, acquire or lease a hotel, I always take the worst-case scenarios. If I can survive that, I might say, okay, I am investing a hundred crore — Rs.60 crore equity, Rs.40 crore debt. If I find that in the worst-case scenario, the maximum debt I can sustain is Rs.30 crore, then I will only borrow Rs.30 crore. That is, I will take a hit on equity but I won’t risk the entire capital. This is the trade-off that I find people, often, do not make.

Luckily for me, Plan B manifested when I got an opportunity to work with AT Kearney India CEO Arindam Bhattacharya. Interestingly, he was one of the two friends with whom I had had this Rs.5 crore conversation. When I met Bhattacharya, I told him I would work with them for three years and the only question I asked him then was: will I make Rs.5 crore in three years? He told me that if I achieve the set targets and milestones, I could easily hit the number.

We shook hands and I remember that my starting salary net of bonus was Rs.1 crore, which, at that time, happened to be one of the top 10 salaries in India. It was time to tell KK that I was moving on. I had no intention of being an entrepreneur by the way, and this Rs.5 crore target was like a keeda in my mind. I told KK that I want a three-year sabbatical as I would be learning a lot during this period and then I will come back to the Tatas with all that learning. I believe it was the first-time ever that the group gave a sabbatical to an employee to work in another company. Two years into the new job, I had about Rs.4 crore. But, more importantly, I wasn’t enjoying the role of an advisor.

***
When I left AT Kearney, my dad and mom were stunned. My parents went with a vengeance after both my sisters and my wife saying, “What has gotten to him? He has two kids and no job.” I couldn’t afford anything when I started Lemon Tree. I used to pay myself a salary of Rs.10,000. My wife was earning then, and it was her salary that ran the house.

I was still thinking of achieving my financial goal as by then RBI’s interest rates had come down to 8.5%, and I now wanted an inflation hedge. At AT Kearney, among other things, I had done extensive research on the hospitality industry and realised that there was no mid-market hotel in India. So I thought I would build one with my Rs.4 crore and that will be my inflation hedge. Call it circumstances, timing or calling, a friend of mine happened to tell me there was a quarter acre plot available in Udyog Vihar in Gurgaon for Rs.1.25 crore. I went to see it and fell in love with the location.

I knew that, in India, for a mid-market hotel to succeed, I needed the right location. The public infrastructure would never be enough to support mass transport. Second, Indians love service, so unlike in the west where in the mid-market the cost of service is high, I was particular that the hotel should be full service. So, the only trade-off would be in the design and cost per room. So, I designed the first hotel with 50 rooms and planned to build it in Rs.7 crore, including the land cost. I was wrong. At the eleventh hour, when I fell short, having gone over-budget, a few friends put in money. One thing that still rankles is that, when I started Lemon Tree, a lot of my friends put money into it and made tonnes out of it. But, my parents didn’t put in one buck. My sisters tell me that I should let it go, but I can’t seem to.

***
I was fortunate as two things occurred: one, a bunch of people who had worked with me in the Tatas and Taj jumped ship. I really value it when people give me their time and, more importantly, their belief. They believed in me: I just had a quarter of an acre and a few crore. No big dream and no big idea. But these people took a major career risk. 

The first guy who came to me was the security manager of the Taj Palace, when I was the GM, and I didn’t know him very well. He said, I want to work with you. Another guy was a deputy chief engineer. One after the other, 10 people came. So, three things things fell in place: the model worked, I got a bunch of young and talented people and, third, it was the top of the cycle for the hotel sector.

However, I had only put Rs.3 crore in the project and kept aside Rs.1 crore as risk mitigation. For half a crore, I bought one-third of a little farm in Chhatarpur, with my Sawai Madhopur friends — Sunny, and Arindam — chipping in Rs.50 lakh each. Ten years later, Sunny bought it from us for Rs.20 crore. A lot of people told me it was a brilliant investment and I replied, it is the worst investment I made in my life. If I had put it in my business, it would have made anywhere between Rs.400 crore and Rs.600 crore.

The first hotel did phenomenally well and, in the second year, it gave me 100% return on capital. I had invested Rs.9 crore, it gave me back Rs.8 crore, so it was close to 100%. So, my team egged me on to build a second property. I bought another small plot in Gurgaon, in a public auction, and guess what it fetched me — 80% return on capital in the second year. What began as an exercise in inflation hedging soon turned into an entrepreneurial drive. It was around this time that we raised private equity from Warburg Pincus and later from Kotak Realty, Shinsei Bank and APG. Now, we are publicly listed.

***
As we grew, we faced headwind of bureaucratic corruption. I was clear that I will not pay bribes, instead we will excel in execution. So, normally, a bribe will get you approvals in two months and the hotel gets built in three years. We said we will take six months to get the approval but we will build the hotel in one-and-a-half years. So, with time to market, we will be best in class. Quality will be best in class and cost per square foot will be best in class. Yet I have had to fend off pressure but I overcame it my way! 

It was May of 2004, when the first hotel was inaugurated. There was a small coffee shop in the front, a small garden, and in between I had built a small swimming pool, which cost me Rs.10 lakh. One week after we opened, a jeep with a red beacon entered the compound and out came a guy with crossed bandoliers, and two guns. As it turned out, he was the water inspector, a sinecure given by the government. The water inspector’s job is to approve all water bodies, including swimming pools. How difficult it is to do business in India is evident from the fact that a law introduced in the 1880s by the British after a drought had hit Punjab continues to be in practice even after 120 years! 

The officer was a nephew of a prominent politician and his only job was to go and collect bribes by hook or crook. He told the GM that we had to pay Rs.5,000 a month or we wouldn’t be able to run the hotel. I told the GM, “Ask the guy to come back after a month.” Few days later I went to the property and swam in the pool to my heart’s content. Having done that I told the staff, much to their shock, to drain the water and fill it with mud. When the inspector came after a month he was surprised to see that there was no pool. When he learnt what had happened, he told the GM, “Are you guys mad. You blew up lakhs just like that. If you would have told me, I would have settled for even Rs.1,000.” For me, it was a matter of value and I have faced enough such obstacles over the years.

It took me nine years to get approvals to build my first hotel in Mumbai. I had bought the land for Rs.50 crore in 2006 and got the approval in 2015! Since the carrying cost doubles every five years, the opportunity cost was Rs.150 crore. It would sound foolish but I did not pay a single rupee as bribe. The problem is that corruption in India is institutionalised since the laws are geared towards extortion and not to facilitate. Every law or regulation intersects in a way that, very often, they contradict each other. The only way out is for the law enforcer to say, “Okay, I will look the other way.” It’s a sad reality.