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How Taj Hotels is revamping its age-old business model

Over the last five years Indian Hotels has moved from being largely owner-driven to one that is expanding via management contracts. Add to that newer avenues of income, and there is reason for CEO Puneet Chhatwal to be optimistic

Varsha Meghani
Published: Aug 12, 2022 03:59:11 PM IST
Updated: Aug 12, 2022 06:20:33 PM IST

How Taj Hotels is revamping its age-old business modelPuneet Chhatwal, CEO IHCL Image: Amit Verma

A short walk from Mumbai’s domestic airport, near the iconic, circular-shaped Sahara Star hotel, construction workers toil busily. A 371-room Ginger hotel–from the Taj stable–is being built for a May 2023 opening. The prime piece of land always belonged to Indian Hotels Company Limited (IHCL), the Taj hotels’ parent company, but for the last 25 years, since the flight kitchen that it previously housed shut down, it has been unutilised.
 

IHCL expects to achieve 55 percent EBITDA margins on the property from the first year of operations itself. The entire exercise is part of what IHCL’s CEO Puneet Chhatwal calls “re-imagining Ginger”, a previously budget, functional hotel chain that is now being given an aspirational makeover, while still keeping costs low. “It’s a lean-luxe hotel. It will afford you a comfortable stay at a compelling price and you still have all the luxuries that you need, but the hotel is built in such a lean fashion that it doesn’t cost much to build,” he says. In fact, so bullish is IHCL on the Ginger brand that the company acquired 100 percent of its parent Roots Corporation in October 2021, up from 60 percent earlier. “It’s a brand to watch,” nods Chhatwal.

How Taj Hotels is revamping its age-old business model
Tall and bespectacled, Chhatwal, who led hotel chains in Europe and America before taking over as IHCL’s CEO in 2017, speaks deliberately, carefully weighing every word. “We want to achieve sustainable, profitable growth in everything that we do,” he says. To that end, Ginger isn’t the only big bet he’s making. Over the last five years he’s steadily moved IHCL away from being a largely owner-driven company to one that is swiftly expanding via management contracts. Today, IHCL has a 54-46 percent balance between owned/leased and managed properties in its portfolio. By 2025 it hopes to achieve a 50-50 percent balance between the two.
 
EBITDA margins have improved because of this restructuring: From 19.9 percent pre-Covid in Q1 FY20 to 31.3 percent in Q1 FY23. In fact, this has been IHCL’s strongest quarter in its history so far having posted revenues of Rs 1,293 crore and net profit of Rs 170 crore, up from Rs 1,057 crore and Rs 6 crore respectively in Q1 FY20. Better market conditions, a sharper focus on cost optimisation and foraying into newer businesses has also led to improved margins, says Chhatwal. 

How Taj Hotels is revamping its age-old business modelLessons from the pandemic

After a grim two years of stringent lockdowns, international travel bans and vaccine hesitancy, the demand for travel has finally picked up. There is plenty of pent-up demand and supply will stay constrained which is healthy for the industry, says Sumant Kumar, research analyst at Motilal Oswal. Domestic travel has recovered fast with Mumbai, Bengaluru and Delhi-NCR seeing RevPARs–or Revenue Per Available Room, which assesses a hotel’s ability to fill its available rooms at an average rate–grew 33 percent, 22 percent and 20 percent respectively in Q1 FY23 from Q1FY20 levels. The spread of remote working has also reshaped business travel, blurring the lines between business travel and leisure--or bleisure as it’s been monikered. While IHCL’s leisure hotels, palaces and safaris have not yet seen pre-Covid levels of traction, as inbound foreign travel is yet to pick up, Chhatwal expects this to roll by the end of this calendar year--inflationary pressures notwithstanding. 

“This pandemic gave a historic opportunity to the industry to relook at our business and adjust costs,” muses Chhatwal. “When your revenue suddenly falls to zero, you realise that none of these business schools, focus groups, conferences teach you how to deal with zero.” But the team stuck to its expansion plans even in the depths of the pandemic opening 40 hotels during the time.
 
Costs were rationalised so much so that overall fixed costs have reduced from 46 percent pre-Covid in Q1 FY20 to 35 percent in Q1 FY23. Payroll expenses have fallen from 35 percent to 27 percent during the same time, while corporate overheads dropped by 2.3 percent as a percentage of revenue. This has led to margin improvement. 

How Taj Hotels is revamping its age-old business modelShift in business model

But the biggest driver of margins has been the change in business model. Over the last five years IHCL has been looking at a “brandscape” that extends beyond the Taj, says Chhatwal. Through Vivanta–of which it has 37 hotels at present–it is catering to the upscale segment and through Ginger–of which it has 88 hotels–it is catering to the mid-scale segment. There’s also SeleQtions, a collection of 28 unique properties. All this in addition to its 87 Taj properties associated with high-end luxury, making a total of 240 hotels, including those under various stages of development, as of June 2022.
 
Importantly, there’s the balance between owned/leased properties and management contracts that IHCL has achieved. Currently, 54 percent of its properties are owned/leased versus 46 percent in management contracts, up from 61-39 percent pre-Covid. Management fees, as a result, have grown by 72 percent from pre-Covid levels to Rs 81 crore. Going forward, for every owned/leased investment, IHCL will add four to five management contracts so as to maintain the mix.
 
“There is a little bit of an art and a science in how we develop this model,” says Chhatwal. Ginger properties, for example, will largely remain operating leases, he explains, their topline is small in absolute terms. A management fee would therefore give IHCL a small amount in terms of absolute fees. “So here it makes more sense for us to look at structuring our contracts in the form of operating leases so we own the overall P&L,” he says. While management contracts would work better for the other brands like Taj or Vivanta or SeleQtions.

How Taj Hotels is revamping its age-old business modelThis asset-light strategy might be new for IHCL but it has, in fact, been in vogue globally for the past two decades. Big hotel chains have steadily offloaded their hotel buildings to focus on managing properties for other investors or ensuring that franchisees who own and operate the hotels comply with brand standards on service and staffing. In the US, for example, just five percent of hotels are owned or directly managed by chains, while 53 percent are franchises, up from 47 percent a decade ago, according to hospitality data provider STR.

ICICI Securities’ Adhidev Chattopadhyay is so bullish about the company’s change in strategy, he says, “While the company has given guidance towards achieving 33 percent consolidated EBITDA margins by FY25-26E, we expect the company to deliver this in FY23E itself [from 31 percent in Q1 FY23].” 

Newer avenues

Then there IHCL’s other businesses that were shaped by the pandemic. QMin, for example, took birth in June 2020 after guests indicated that they wanted to eat their favourite Taj restaurant meals from the safety of their homes. IHCL responded by using its then under-utilised kitchens and capabilities to deliver food to their customers’ doorsteps. Since the initial experiment–Chhatwal says it has been profitable from Day 1–Qmin has expanded into 20 cities in four different formats: A food delivery app, a food truck, a Qmin shop in select hotels and a Qmin QSR chain. They plan to take the relevant format to 25 cities. But as IHCL does so, will profitability be compromised given that kitchens and staff are back to pre-Covid levels of utilisation and work? “The whole idea of Qmin was to sweat the existing infrastructure we have,” says Deepika Rao, executive vice president, IHCL, who previously steered Roots Corporation–Ginger’s parent–as MD and CEO. “We will continue to keep profitability at the core of Qmin. We’re not looking at too much capex investment. Before we reach a point where supply is a constraint on the kitchen side, we have large kitchen capacities under Taj SATS in at least four to five key cities.”

How Taj Hotels is revamping its age-old business modelSimilarly, Ama, a homestays business, took off after guests indicated their desire for exclusivity in the depths of the pandemic. The Tata group’s private holiday homes for employees nestled amidst coffee plantations and hill stations were offered to premium customers on a short stay basis. The business has since morphed to include not just Tata properties but also third party-owned properties. “It’s all about the trust. If you are an owner of a villa which costs Rs 5 crore would you give it to the Tatas to manage or would you give it to someone else to manage?” says Giridhar Sanjeevi, chief financial officer, IHCL. The trust factor has led to IHCL signing on 100 properties so far; it plans to take it to 500. “We see very high potential with Ama. The beauty of this model is that it is asset light. We are not investing monies, we just collect a fee.”
 
Together with Ginger, Chhatwal believes that these new businesses should contribute 35 percent in EBITDA margins and represent 30 percent of total revenues. “So we are not always relying on revenue from the Taj. We are better hedged as a company,” he says.
 
Chhatwal ponders for a moment and adds: “I’m usually an optimistic person but at this point of time I’m more optimistic than ever.”

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