24 Good Businesses 2012

The transit shelter

Hyderabad-based Aarusha Homes is doing its bit to provide affordable accommodation 

Serendipity has its own role to play in all walks of life. When V Satyanarayana along with Dyan Belliappa, his batchmate from the Centre for Environmental Planning and Technology, decided to venture into ‘affordable housing’ through Aarusha Homes, little did they know that they would have to deviate from their original plan to achieve their end objective. Their plan to supply residential units in Chennai to companies to house their low-end labour went for a toss when Aarusha’s one and only client backed out post the Lehman Brothers crisis in September 2008. While they had verbal commitments of₹2.5 crore from friends and angel investors, post the credit crunch only ₹1.3 crore materialised.

As they were counting their losses, it dawned on Satya that about 30% of urban India lives in rental housing and that there was a much larger unorganised hostel market in Hyderabad than in Chennai where they were trying to recoup. So, they shifted gears from low-income to middle income and set up their first hostel in Hyderabad at a ₹2,300 price point with three meals a day. Satya, the prime mover who doubles up as chief executive, says, “We tried to stick to our main plan and do the hostels thing as a side business, but after some time the side business became the main business.”

Now, Aarusha’s revised business model would have made sense only if they were able to scale it beyond Hyderabad. That is how the entry into Bengaluru happened. Belliappa, co-founder and director of operations, says, “Start-up costs are higher in Bengaluru. But a fair chunk of the migrant population in the city works in IT companies and have the ability to pay higher rents compared with Hyderabad.” The company’s foray into Bengaluru was also part of de-risking its customer profile. In the Hyderabad market, students (engineering and IAS coaching) and entry-level employees earning in the range of ₹6,500 to ₹15,000 comprised 80% and 20% of Aarusha’s customers. In Bengaluru, the ratio is in favour of employees with a work experience of five to six years and a salary bracket of ₹12,000-28,000. 

 Everyone’s invited

The founders were very particular from the start about certain metrics that would differentiate them from other hostel operators. Beside being an hour’s drive from offices and popular colleges, Aarusha decided that even in the worst case scenario, it will not exceed a customer-to-toilet ratio of eight. Satya elaborates, “Sometimes if a property doesn’t meet that requirement then we either say no or get the landlord to construct additional toilets. The current ratio is 3.8 to 3.9 across the board.” Aarusha has also stayed away from buying plots outright. It enters into a 10-year contract and obtains the right to use the plot and asks the landlord to build rooms according to Aarusha’s specifications. This asset-light model works well for the hostel operator despite having to pay a higher premium to get usage rights in its favour.

 Aarusha usually identifies plots in residential zones to set up its hostels. As the landlord cannot construct a commercial building in that zone, the only option available to him is either to sell the plot or to build and rent it out. Most landlords who like to hold on to their plots also want to sidestep the hassle of following up for rents from different tenants. That is where Aarusha and many of its ilk step in. They are not only a one-stop-shop in terms of payment and maintenance; there is also the guarantee of sustained occupancy with an in-built rental premium, ranging from 5% to 10%. 

 Paying a premium to the landlord does not work in favour of organised players such as Aarusha that run a tight ship. However, it is only by paying a premium that Aarusha can get more properties under its belt. Aarusha is banking on the critical mass and credibility that it creates to ensure negotiating power in the future. Satya says, “Landlords care about getting the rent on time and regular maintenance of the building. We have demonstrated proficiency in both. That gives us leeway to bring down premiums and improve margins.” 

 Occupational hazard

The company also has to deal with non-occupancy risk given the high floating population of students and workers. Belliappa says non-occupancy occurs during the construction stage of a new hostel and also when students go on vacation or employees switch jobs. “Since a new hostel takes time to gather occupants, we cannot pass on that slack to the landlord. Even with students, the girls are much more prompt with payments as they care more about a secure place to stay.” While Satya agrees that girls hostels are easier to run and maintain, Aarusha has desisted from turning into an only-girls hostel operator owing to a scalability issue.

 Besides, the average rent per room too has moved up from ₹2,300 in 2008 to ₹3,000 currently owing to rising cost, mainly that of food. Of the ₹3,000 average rent that Aarusha makes in Hyderabad, about 30% goes to the landlord, food costs eat up 40%, maintenance and other costs account for 25%. The balance is the margin. Satya says Aarusha is aiming to get to a net margin of 8% to 10% but that will only be possible with enough scale. As a step in that direction, Satya is aggressively scouting for hostel operators looking to sell out. An informal hostel market has always existed in Hyderabad for more than a decade now. But with the entry of players such as Aarusha, this fragmented market could soon see consolidation. From 1,900 beds at present, Aarusha wants to double revenue (currently ₹50 lakh) and capacity by March 2013, largely driven by buyouts. 

 Aarusha’s scaling-up drive in its current cities could hit a few stumbling blocks; prime among them are water and power shortage. While power shortage is dealt with inverters and generators, water paucity is a bigger problem. Belliappa says the additional cost Aarusha incurs to buy water tankers upsets the cost structure greatly. “In Bengaluru, it gets particularly worse in summer. And even in Hyderabad one has to shell out about ₹800 for 5,000 litres compared with ₹450 in non-summer days.” Satya adds that for new hostels it is pushing landlords to create tanks for water harvesting.   

 Today, Aarusha’s hostels have become a brand in themselves and 90% of its new business comes from word of mouth. But getting to this stage was not easy. “The period from August 2008 to May 2009 was a nightmare. We were bleeding profusely and had drawn down ₹60 lakh of the ₹1.3 crore that we had raised,” says Satya. Today, Aarusha has come to a stage where 8 of its 12 hostels operate at 95% occupancy. While Nagpur, Pune and Ahmedabad are cities that Aarusha wants to enter in the next two years, its eventual goal is to become the country’s biggest hostel operator. But as a prelude Aarusha is tightening its grip on Hyderabad — after all there are 350,000 hostel beds at play there.