Hospitable terrain

Private equity investors seem to have found a sweet spot in the hospitality business — mid-market hotels

Over the years, the hospitality segment has seen its fair share of drama — contentious deals, old-school rivalries, talent poaching and even the odd distress sale. But perhaps the most surprising twist in the tale was Leela Hotels’ decision to go in for debt restructuring late last year in an attempt to whittle down its bloated ₹4,300 crore worth of debt.

Few funds seem to be interested in stepping in to bail out an industry that has seen — in recent years — an oversupply of high-priced hotel rooms and low demand for the same. But not all hope is lost for the beleaguered hospitality sector — since 2013, the industry has seen seven cases of private equity (PE) investment, six of which were specifically in the mid-market segment. At a time when the market is crying out for cheaper hotels, this comes as a welcome trend.


Moving in

Barring a few, most PE players have invested substantial sums in mid-range hotels

The most recent investment in the mid-market segment was quite a high-profile buy, with World Bank arm IFC investing in SAMHI Hotels, which has developed three- and four-star properties in the past and which counts the Marriott and Sheraton chains among its clients.

Says Ashish Jakhanwala, MD and CEO, SAMHI Hotels, “While there is very little capital in the mid-market segment, the opportunity to grow is huge. There are at least 10 cities in the country that are growing rapidly but lack good quality, affordable lodging. Also, as the new government is working towards a resurgence in the manufacturing sector, cities with manufacturing capacities will require affordable lodging as well.” To buttress his point, he points out that China’s affordable lodging segment grew 50 times when their manufacturing sector saw a spurt in growth.

What is also working in favour of hotel players is growing domestic travel. Joy Biswas, senior investment officer, manufacturing, agribusiness and services, IFC, says, “With rapidly growing domestic travel, there are now around 400 million budget-minded, quality-conscious travelers, who account for an estimated two-thirds of hotel demand in India.”

Interestingly, PE exits in the mid-market space show a mixed trend. There have been four exits (both partial and complete in the last year alone, with two of the deals being buybacks. Clearwater Capital had invested $10 million (₹47 crore) in 2006 in Sayaji Hotels and further increased its stake through an open offer to take its  total  holding to 32%. 

Last year, it sold its stake back to the promoter. According to VCCircle estimates, Clearwater made a 72% return in rupee terms and around 60% in dollar terms on the $16 million that it got from the sale.

Contrast this with Temasek which had to take a haircut of 50% on its investment when it partially exited its six-year old investment in Graviss Hospitality, which owns InterContinental Marine Drive, at ₹27 a share in 2013 through a buyback against its investment of around ₹57 a share. The Singapore-based fund continues to hold 9.96% in Graviss Hospitality of the shrunk capital base post buyback. 

Still, Jakhanwala believes the potential is too big to ignore. “This business needs capital, competence and financial discipline. It would be far more effective to build more affordable hotels in smaller cities,” he points out. 

Another factor that ensures a brighter future for the segment — the rupee depreciation crippling local industry translates into good news for tourists planning their next India tour. The recent fall of the rupee has coincided with an influx of tourists in hubs such as Goa and Agra, among other smaller centres, pushing the need to expand in the mid-market segment.

With World Travel & Tourism Council estimates projecting $121.4 billion of economic activity in India by 2015, thanks to the tourism industry, and with the hospitality sector potentially earning $24 billion in foreign exchange over the same time period, mid-market seems to be the best parking spot for PE funds, for now.


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