INDIAN HOTELS & HOSPITALITY SECTOR BY: HANY HUSSEIN, CFA

HANYHUSSEIN1973@YAHOO.COM MOBILE: ++ 971559644773

About Hany Hussein

Hany Hussein brings an extensive financial expertise amassed throughout his 18 year career in the field of asset management, research, and capital markets in UK, US, and Middle East. His last role was the Head of Asset Management in Abu Dhabi Islamic Bank. For more than 3 years, his core duties were to establish, manage, and market several investment funds including ADIB Islamic MENA Equity Fund, and ADIB Dividend Income Strategy Fund. Before establishing ADIB Asset Management platform, Hany for more than a year assumed the role of Acting General Manager of ADIB Securities. He turned the company around, improved its ranking from 25th to 6th in terms of volume, and tripled its market share from 1% to more than 3%. Hany joined ADIB from Union National Bank in 2008 where he was serving as the Head of Asset Management managing investment portfolios over USD 500 million for the banks HNW and UHNW clients. Prior to UNB, he assumed the role of Lead Fund Manager with Mashreqbank managing 3 mutual funds with AUMs of over AED 2.5 billion. Makaseb Emirates Equity Fund, Mashreqbanks flagship fund, was named best UAE growth fund in 2005 after achieving an appreciation of 100% in NAV. Hany also played a pivotal role in the success of Injazat Technology Private Equity/VC Fund where he assumed the role of Sr. Investment Advsior. In Injazat Fund, Hany actively closed many successful deals including Ducont.com, Docman, and Raya Holding. He started his career back in 1994 as a financial analyst in London covering Egyptian stock market with Robert Fleming Securities before moving to New York where he served as a buy side analyst with AIG for one year. Hany holds BSc of commerce from Cairo University, Diploma in modern accounting from the American University, CFA designation, and ICFA membership since

Table of Contents

Economic backdrop of India Hotels market in India Recent market trends Market structure & classification The budget hotel concept Supply Growth drivers Demand, supply, occupancy Competition Government policies, taxes, and regulations Critical success factors in hotels business Opportunities & challenges

India 2011 Economic backdrop

Economic liberalization, industrial deregulation, privatization, lower control on trade and investment served to accelerate real GDP growth at average 7% since 1997. In 2010, the economy rebounded from the global financial crisis - in large because of strong domestic demand - and growth exceeded 8%. However, India's economic growth in 2011 is estimated to slow to 7.8% because of high inflation and interest rates of 6.8% and 11.8% respectively. GDP per Capita of US$ 3,700 compared to US$ 3,500 in 2010. Large and growing middle class of 50 million Indians with disposable income of US$ 4,100 to US$20,800 India's diverse economy encompasses modern agriculture (19% of output), industries (23%), and services (54%) out of which (6%) stems from tourism sector. More than 50% of labor force is in agriculture, but services are the major source of economic growth Unemployment is 8.6% High crude oil prices have exacerbated the government's fuel subsidy bill contributing to a higher fiscal deficit of -5% of GDP External debt of US$267bln, foreign exchange & gold reserve of US$ 347bln, and stable exchange rate of 44-55 per dollar Indian economy looks positive due to the rapid real economic growth, robust domestic demand, young English speaking population, healthy saving and investment rates, and integration into global economy. Key challenges are widespread poverty, lack of social and physical infrastructure, limited non agriculture employment opportunities, and accommodating rural to urban migration.

Hotels Market in India

Annual Growth Rate % 40 30 20 10 0 -10 Size of Hotels Market in US billion

Size of the Market: As per the retail consultancy Technopak, the Indian hotels market worth was estimated at around US$ 17 billion by end of 2010 representing less than 1.5 percent of the nominal GDP. Estimated Growth: The industry grew at CAGR of 9% during 2005-08 and is estimated to grow at a CAGR of 15% from 2010 -15. World Travel & Tourism Council (WTTC) expected travel and tourism (T&T) demand in India to grow above 8 per cent annually till 2019, the highest growth, thereby making India second highest tourist destination after China in terms of growth.

Average Occupancy & Rate Per Room 2005-2008: The hotels & hospitality industry is cyclical and takes lag time to respond to economic fluctuations. The industry witnessed a real improve from 2005 and peaked in 2008 2009-010: The industry witnessed turbulent times giving the global economic crisis and local terrorist attacks. This was reflected in lower occupancy rates and rate per room. 2010-11: Started to show signs of recovery. Occupancy rate reached 68% & ARR of Rs 6.800
Average Room Rate in Rs Source HVS
10000 75% 70% 65% 60% 55% 50% 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Occupancy Rate % - Source HVS

8000
6000 4000 2000 0

Recent market trends

Although the crisis, Indian hotels enjoyed lucrative margins. The industry witnessed negative growth in revenues and earnings but most players managed to achieve a good margin of more than 30%. Increase use of Technology: Indian hotel industry uses new technology in almost every function to increase efficiency and standardize operations. Technology is used to provide better service and communication with customers. Managing Manpower: The industry is witnessing an influx of international and domestic branded hotels but the biggest challenge is managing the manpower due to lack of well paid and trained hotel employees. Domestic Travelers: The global crisis shed the light on the importance of the domestic travelers/ demand who supported the industry during 20092011. In 2009 alone, India witnessed an inflow of approximately 650 million domestic tourist arrivals, compared to only about 5 million foreign tourist arrivals. The well educated middle class segment is price sensitive, demands value for money, and expects better service and quality standards. Outsourcing: With the rising operating and manpower costs in hotels, several hotel managers and operators started to outsource services such as laundry, housekeeping, and food & beverages outlets. Investment in smaller cities: Rising business and leisure travel to smaller cities such as Udaipur, Thiruvananthapuram, Bhubaneswar, Pune, Kochi and Chandigarh, have increased demand for quality hotel rooms in these cities. Diversification into new segments: Many hospitality chains that were earlier focused only on the luxury segment are now diversifying into new product segments, such as budget hotels and serviced apartments, in order to reduce risks.

Market structure - segmentation

Premium (5 Deluxe, 5*)
Located in business district of metro cities Cater to business travelers and foreign tourists Considered to be the most expensive

Mid Players (4*,3*)

- Cater to: Average foreign and domestic leisure travelers. - Also caters to middle level business travelers - Offers most of the essential services of luxury hotels without the high costs since the tax component of this segment is lower compared with the premium segment

Budget (2*,1*)
Do not offer as many facilities as the other segments but provide inexpensive accommodation to the highly priceconscious segment of the domestic and foreign leisure travelers

Heritage
Certain architecturally distinctive properties such as palaces and Forts, built prior to 1950, have been converted into hotels. The Ministry of Tourism has classified these hotels as heritage hotels

Unclassified
Cheap motels spread out across the country Very cheap and price is the only selling point

The budget concept

A new concept emerged as number of tourists willing to pay a high price for luxurious hotels has decreased while number of inbound tourist who travel has dramatically increased. Comfortable accommodation is not luxury anymore The Americans innovated the Motel concept in the 60 th which was adopted by European in the 70s with the creation of brands such as Ibis and Formula1, and Asia has come up with the budget concept. The new concept offers what the customer is willing to pay for a good night sleep so that everyone is allowed to travel

Drastic reduction in construction time & cost (using Prefab structures)

Elimination of non-profitable touched points (eg: multiple food and beverage outlets)

How to get There?

Streamlining of processes booking, check-in, check-out, limited yet efficient service (using technology)
Limitation of the hardware to what the customer needs during his stay a bed, a TV, a hot shower and a breakfast

Supply
2009 2010 Growth %

Number of hotels
Number of Rooms

1,839
92,784 NUMBER OF HOTELS

2,483
117,815

36%
27% NUMBER OF HOTEL ROOMS
2009 2010 Growth % % of total 47% 53% 18% 52% -79% 27% 44% 41% 9% 3% 3%

2009 Premium Mid Market Budget Heritage Others* Total 207 636 275 88 623 1,829

2010 302 1,026 374 146 635 2,483

Growth 46% 61% 36% 66% 2% 36%

% of Total 12% 41% 15% 6% 26% Premium Mid Market Budget Heritage Others Total

34,935 51,331 31,816 48,644 9,294 2,545 10,983 3,879

14,194 2,978 92,784 117,815

SOURCE: MINSTRY OF TOURISM INDIA

35,000 rooms will be added to the current supply within the next 3 years Premium & Mid Players predominate the market with over 85% of the current supply Although the strong demand for it, Budget concept is untapped with less than 10% of total supply
* As per the ministry of tourism, number of rooms in the unclassified segment declined to 580 rooms in 2010 compared to 12,4 11 in 2009

Growth drivers
Strong monetary & fiscal policies, and the quick economic recovery- all result in strong performance in tourism sector in 2010. Robust economic growth added millions annually to the emerging middle-class, a group that driving the domestic tourism growth, rose their purchasing power and increased their awareness to ensure the growth of tourism over the foreseeable future. Disposable income in India has grown by 10.11% annually from 2001-2006, and much of that is being spent on travel. The Ministry of Tourisms efforts to increase the influx of tourists to the country is likely to see positive results in the coming years. Its campaigns such as Safe and Honorable Tourism & Incredible India increase the image of India as a safe destination, and thereby increase consumer confidence in choosing India for a holiday. The booming IT and outsourcing industry. The growing number of business trips made by foreigners to India, who often add a weekend break or longer holiday to their trip. Foreign tourists spend more in India than almost any other country worldwide. Over the past decade, number of foreign tourists arrivals has

Number of Domestic Tourist Visits 800 600 400 200 0

CAGR of 12.1%

Foreign Tourists Arrivals (FTAs) in millions 8 6 4 2 0

CAGR of 7.3%

SOURCE: MINSTRY OF TOURISM INDIA

Demand, supply, occupancy

Budget segment (1star & 2 stars) is in high demand due to its limited availability only a supply of 11,000 as of 2010. Accordingly, the segment enjoys high occupancy ratio. Most of oversupply falls in in the premium and to lesser extent in the mid segment - 85% of total market supply falls into these two segments. As per Knight Frank, out of 35,000 new rooms added by 2013, only 3.000 will fall in the budget segment while the remaining will be added to premium and mid market. Occupancy in Premium segment Knight Frank

Upcoming supply (2010-2013) Knight Frank

12000 10000 8000 Premium 6000 4000 2000 0 2010 2011 2012 2013 Mid Market Budget

Demand vs. Supply in Premium Segment Knight Frank Demand Supply

100000 80000 60000 40000 20000 0

80% 70% 60% 50% 40% 30% 20% 10% 0%

2010e 2011e 2012e 2013e

2010e

2011e

2012e

2013e

Competition

The Indian hotel industry is highly fragmented with a large number of small and unorganized players. The booming industry has attracted many international players as well. A number of global players are already well established in India. These include Hilton, Shangri-La, Radisson, Marriott, Meridian, Sheraton, Hyatt, Holiday Inn, InterContinental and Crown Plaza. New brands such as manda, Satinwoods, Banana Tree, Hampton Inns, Scandium by Hilt and Mandarin Oriental are planning to enter the Indian hospitality industry in joint ventures with domestic hotel majors.

Service Mediu m Budge t

Premium

Others

Competition

Government policies, taxes, regulations

Tourism & hotels are heavily regulated by both central and state governments including but not limited to approvals, licenses, sanctions,

100% FDI is permissible in the tourism sector

Liberalizing the aviation sector, adopting open sky policy, and allowing low cost carriers Tourist friendly visa regime; introducing medical visas Procedural changes making land available for hotel construction ( India identified 32 villages to become touristic hubs) Adopting an aggressive foreign trade policy for investors in hospitability sector Upgrading the infrastructure of the sector Adopting aggressive marketing campaigns such as Incredible India Promotion of rural tourism by the Ministry of Tourism in collaboration with the United Nations Development Program

Five-year income tax holidays for 2-4 star hotels established in specified districts

Critical success factors

Site & Location: The most factor as significant portion of the IRR
stem from selling the property/land. Site also should be close to business districts in metro cities Positioning: Equally important, hotels should be well positioned towards the needs of the target guest segment foreign / domestic or business / leisure Financial Flexibility: Developing hotels is very capital intensive business. Accordingly financial flexibility is very important especially for new hotels that usually have high breakeven points

Equity Brand: branded hotels that are part of a brand or a chain benefit
from the equity value of that brand especially in the advertisement / marketing effort of that brand.

Opportunities & challenges

Challenges Opportunities

Conclusion
Conclusion
India, with a population over 1.2 billion people and a rapidly growing economy at real GDP of 8%, is allowing the hotel market to prosper as hotel brands continue to expand their portfolio in the main cities and in the regions. The Indian hospitality sector is posed to grow at a CAGR of 15% until 2015 as number of foreign tourist arrivals FTAs is rapidly increasing at a CAGR of 7.3%, well educated middle class continues driving the domestic demand, Indian government is showing serious political well to support the growing US$ 17 billion sector, and revival of global economy and hosting sports and important events is taking place. Having said that, the sector is also facing serious challenges including lack of infrastructure, lack of trained manpower, socio political conditions, and fierce competition in the premium and middle market segments which will cause pressure on occupancy and average rate per room. Unlike premium hotels, budget hotels as a new innovative concept is emerging as untapped segment with limited availability but positive prospect. Recommendation I am bullish on the country, industry, and sector. I also like the concept of the budget hotel especially with the current high demand for it coupled with its limited availability. Hany Hussein, CFA hanyhussein1973@yahoo.com ++971559644773