Scope of the report

At the backdrop of such a conducive business atmosphere 'Pre-feasibility Report on Five-

star Hotel Industry' attempts to examine such critical factors which will provide vital inputs in

general to the potential investors and estimation of commercial viability of such an

investment.
- It presents the market analysis of Indian hotel industry in terms of structure&
segmentation, market size, major hotels etc.
- It analyses the steps involved in setting up a hotel describing the technical
aspects in

terms of locational details and land requirement.

- It assess the manpower planning and financial estimate involved in setting up a hotel.

- Brings an insight into the procedure for setting up a hotel, type of machinery

& floors space required, requirement of regulatory permissions & clearances.

-Analysis of porter’s five forces and SWOT of the industry.

BACKGROUND OF THE HOTEL INDUSTRY IN ASIA

The Hotel Industry comprises a major part of the Tourism industry. Historically

viewed as an industry providing a luxury service valuable to the economy only as a foreign

exchange earner, the industry today contributes directly to employment (directly employing

around 0.15 million people), and indirectly facilitates tourism and commerce. Prior to the

1980s, the Indian hotel industry was a slow-growing industry, consisting

primarily of relatively static, single-hotel companies.

However, the Asiad, held in New Delhi in 1982, and the subsequent partial

liberalization of the Indian economy generated tourism interest in India, with significant

benefits accruing to the hotel and tourism sector, in terms of improved demand patterns.

Growth in demand for hotels was particularly high during the early 1990s following the

initiatives taken to liberalize the Indian economy in FY1991, as per the recommendations of

the International Monetary Fund (IMF).

 The euphoria of the early 1990s prompted major chains, new entrants and

international chains to chalk out ambitious capacity additions, especially in the metropolitan

cities. However, most of these efforts were directed towards the business travelers and

foreign clientele. In recent years, the hotels sector has grown at a faster rate than GDP. As a

result, the share of hotels & restaurants in GDP at current prices has increased from 1.2per

cent in FY2000 to 1.5per cent in FY2005.

In constant (1999-2000) prices, the GDP from hotels and restaurants has increased

from Rs. 222.65 billion in FY2000 to Rs. 335.49 billion in FY2005. As a result, the share of

hotels and restaurants in total GDP at constant prices has increased

RISKS & CONCERNS OF THE HOTEL INDUSTRY IN INDIA

General economic conditions

Hotel business in general is sensitive to fluctuations in the economy. The hotel sector
may be unfavourably affected by changes in global and domestic economies,
changes in local market conditions, excess hotel room supply, reduced international
or local demand for hotel rooms and associated services, competition in the industry,
government policies and regulations, � uctuations in interest rates and foreign
exchange rates and other natural and social factors. Since demand for hotels is
affected by world economic growth, a global recession could lead to a downturn in
the hotel industry.

Socio-political risks
In addition to economic risks, your Company faces risks from the socio-political
environment, internationally as well
as within the country and is affected by events like political instability, con� ict
between nations, threat of terrorist
activities, occurrence of infectious diseases, extreme weather conditions and natural
calamities etc., which may affect the level of travel and business activity

Competition from International Hotel Chains

The Indian subcontinent, South East Asia and Asia Pacific with high growth rates have
become the focus area of major international chains. Several of these chains have
announced their plans to establish hotels to take advantage of the demand supply
imbalance. These entrants are expected to intensify the competitive environment.
The success of the hotels will be dependent upon their ability to compete in areas
such as room rates, quality of accommodation, brand recognition, service level,
convenience of location and to a lesser extent, the quality and scope of other
amenities, including food and beverage facilities.
 PROFILES OF PLAYERS IN THE INDIAN LUXURY HOTELS INDUSTRY

Taj Group of hotels in India : The most popular name that is almost synonymous to hospitality in
India is that of the Taj Group. Offering the best hotels across various genres like business hotels,
heritage resorts, luxury hotels and even sea resorts, the Taj Group is definitely the best in the field.

The Oberoi Group of Hotels in India : One of the most prominent names among the
hotel chains of India is the Oberoi Group. It also owns several properties in
exotic places like Australia and Mauritius. With its world class facilities and
efficient staff to manage and play the perfect Indian hosts, the Oberoi hotels is
no doubt a great feather on the grand cap of tourism in India.

Table 1: Rivalry among competitors

Attractiveness Remarks
Low High
1 2 3 4 5
Competitors
Industry
growth
Fixed cost
Differentiati
on
Switching
cost
Openness of
terms of
sales
Excess
capacity
Strategic
stakes

The top competitors in hotel industry are having the same services like five
star, spas, boatels and motels, heritage hotels and palaces.

The healthy competition among the all players is helping to increase the
industry growth.

Intense in metro cities, slowly picking up in secondary cities

The degrees of internal rivalry consist of competitors in the hotel industry that
differentiates their strengths, cost, product offering, and positioning within the
industry. In the hotel industry there is a lot of competition that takes place
between different providers. Each company finds their strengths and does
everything in their power to be acknowledged by the customer. Once they uncover
how they can serve their consumers better than leading competitors they position
themselves in the industry that better serves the consumers.

•
Some unseasoned timings the hotels are offering discounts and incentives to
reduce the bargaining power of buyers.

The degrees of internal rivalry consist of competitors in the hotel industry that
differentiates their strengths, cost, product offering, and positioning within the
industry. In the hotel industry there is a lot of competition that takes place
between different providers. Each company finds their strengths and does
everything in their power to be acknowledged by the customer. Once they uncover
how they can serve their consumers better than leading competitors they position
themselves in the industry that better serves the consumers.
BARGAINING POWER OF CUSTOMERS
Similarly, the bargaining power of customers determines how much customers
can impose pressure on margins and volumes.
•
The hotel industry is one of the most invested in its fixed assets. So they
are trying to recover their amount quickly.
•
The suppliers are providing better information about them to attract the
customers’ .Here the buyers are highly informed.
•
If the hotel price changes are moderate, the Customers have low margins
and are price-sensitive.
The competition in an industry will be the higher; the easier it is for
other companies to enter this industry. In such a situation, new entrants could
change major determinants of the market environment (e.g. market shares, prices,
customer loyalty) at any time. There is always a latent pressure for reaction and
adjustment for existing players in this industry.
 Table 2: Barriers to exit

Attractiveness Remark
Low High
1 2 3 4 5
Asset
specialization
Cost of exit
Government
Restrictions
 Table 3: Barriers to entry

Attractiveness Remarks
Low High
1 2 3 4 5
Economies of √ • Economies of scale is high
Scale
• The hotel industry enjoys
economies of scale based on the
occupancy rate.
• A large hotel can distribute its fixed
cost across a large number of
rooms (when the occupancy rate is
high).
• Consequently, the cost per room is
low and the potential profit margin is
high. Costs like maintenance will
remain same what ever the
occupancy.
Service √ • Service differentiation is high. The
differentiation
service offered by the luxury hotels
is top of the line – some of them
even include shopping arcades
• Thus, the threat to new entrants to
enter the market is high as the
current players have a distinct
position in the market
Brand identity
√ • Brand identity as also loyalty of
customers for towards the luxury
hotels is high because of their high
end service and long standing
position in the market.
Switching • The occupancy rates for Substitutes
cost include fully furnished service
business apartments
Access to
channels of
distribution
Capital
requirement
Access to
technology
Access to raw
materials
Government
policies

THREAT OF NEW ENTRANTS

Switching cost :
Comparison of occupancy rates

Access to channels of distribution :

Access to raw materials and Distribution channels are controlled by Existing players like TAJ,
ITC, and LEELA PALACE.

Capital requirement :
Capital requirements are very high due to the increasing cost of land as well as the initial
expenditure for start up and maintainance. The cost of land in India is high at 50% of total project
cost. This acts as a major deterrent for new entrants. The foreign hotel chains are tied up with
Indian hotels to reduce the initial cost and using the latter’s brand name.

Access to raw materials

The cost of obtaining the raw materials for a new entrant would be high as the existing brands
would have an advantage in getting a better deal from the suppliers.

Government policies
In India the expenditure tax, luxury tax and sales tax inflate the hotel
bill by over 30%.
 Table 4: Threat from substitutes

Attractiveness Remarks
Low Hig
h
1 2 3 4 5
Availability √ • Availability of substitutes is
of Moderate
substitutes • Substitutes include : Service
Apartments and Customer Guest
Houses as well as other leisure
accommodations.
• The threat is low. Therefore
attractiveness is high

Switching √ • Switching costs are Low

cost • Substitutes include fully furnished
service business apartments
offering lower daily rates.
Substitute’s √ • Substitute’s price value is
price-value Moderate
• The fully furnished service
apartments offer lower daily rates
that could probably attract a
significant proportion of market
volume
• Customers who do not wish to
stay for a longer time period
would go to this kind of guest
house. This poses a threat for the
luxury hotels
• However, the Luxury hotels enjoy
a high customer loyalty due to its
brand value and hence the
customer may perceive the value
to be higher

The threat of substitutes is thus assessed as high overall

 Table 5: Bargaining power of buyers

Attractiveness Remarks
Lo High
w
1 2 3 4 5
Number of • Rising income levels.
buyers √
Availability
of substitutes √
Switching • Premium segment buyers
cost √ less sensitive to price.
• They are more sensitive
to quality offered.
• Tie-up of business houses
with hotels thus providing
facilities at more
affordable rates.
Buyer’s
threat of √
backward
integration
Industry’s • Upgrade in services
threat of √ offered by spas, boatels
forward and motels, heritage
integration hotels and palaces.
• Ecotels and floatels.

Contribution
to quality
Contribution
to cost
Buyer’s
profitability
 Table 6: Bargaining power of suppliers

Attractiveness Remark

Low High

1 2 3 4 5

Number of √ Large number of

suppliers suppliers

Availability of Due to the large presence

substitutes √ of suppliers, substitutes
are readily available.

Switching cost It is very easy to switch

√ from one supplier to the
other. Thus the switching
cost for a hotel is very
low.
Industry’s For a supplier, the hotel
importance to √ industry is an extremely
supplier attractive buyer and
hence is of utmost
importance to them.
 Table 8: Overall assessment

Attractiveness Remark
Low High
1 2 3 4 5
Barriers to entry
Rivalry among competitors
Barriers to exit
Power of buyers √
Power of suppliers √
Threat of substitutes √ Threat from substitutes is relatively
high so the attractiveness is low
Overall attractiveness

CONCLUSION:
The hotel industry in India having a tremendous
opportunity in the future because of increasing trends in the tourism industry and
government promoting the “Incredible India” campaign and other tourism promotion
measures. The hotel industry in India is mix of many brand internationally
established hotels having the scope to attract shares in the brand hotels which
will help to expand the industry and the innovations in the industry is helping
the hotels to retain the customers with them. Though the industry is having
opportunities in future it is suffering with the cost of land which is costing 50%
of the total cost and the taxes are main drawbacks for the industry. Industry is
opening gates for the foreign investment which is a good sign for the industry and
industry is working toward the fulfillment of the demand and supply gap.

TAJ Hotels Resorts and Palaces

Annual Report 2009-2010 Analysis

INCOME
 • The total income for the year ended March 31, 2010 at Rs.1566.35 crores
was lower than that of the previous year by 8.2%.
• Room Income was lower than the previous year by 17%. The Average Room
Rate (ARR) decreased by 16% over the previous year.
• Food & Beverage (F&B) income was 5% higher than the previous year.
Banquets income grew
by 12% over the previous year.

PROFITS

Profit before Tax at Rs. 218.25 crores was lower than the previous year by 40%. Profit
after Tax at Rs. 153.10 crores was also lower by 35% over the previous year. This is
as the global economic crisis resulting in depressed occupancies, Room rates and
therefore turnover and profitability.

CAPITAL EXPENDITURE

During the year under review, the Company incurred Rs. 276.75 crores towards
capital expenditure. Major expenditure was incurred on the Company’s projects at
Falaknuma Palace Hyderabad, Dwarka New Delhi, Yeshwantpur Bangalore and the
restoration of Taj Mahal Palace and Tower, Mumbai.

FINANCIAL RESULTS

The consolidated turnover of the Company for the year ended March 31, 2010
aggregated to Rs. 2606.18 crores as against Rs. 2756.63 crores for the previous year.
The Loss after Tax for the year aggregated to Rs. 136.88 crores against a Profi t after
Tax of Rs.12.46 crores for the previous year.

The consolidated results for the year were adversely impacted on account of the
challenging environment not just in the domestic tourism market but also across the
key international markets across which the company owns / operates its portfolio of
hotels. The global financial meltdown in the early part of the year impacted the
sector adversely, which reduced margins and profitability across the hotels of the
Company, its joint ventures and associates as well as reduced the management fees
from hotels under operation. Closure of the heritage wing rooms of Taj Mumbai which
is under restoration post the terror attack and the non-availability of the “Loss of
Pro� t” cover beyond the insurance indemnity period further impacted profitability
during the fourth quarter.

The aftermath of the terror attack on the city of Mumbai in November, 2008 saw a
challenging and difficult 2009-10 for the tourism and hospitality industry. The
slowdown in the tourism sector has had a cascading effect in the tourism industry
with a decrease in the occupancy and Average Room Rates.

Operating expenses:
The operating expenses were at the same levels as the previous year. This was
enabled by reduction in variable
operating costs linked to revenue, cost containment measures undertaken by the
Management and deferment of
advertising expenditures considering the business scenario.
Consolidated Profit before Interest and Tax:
Profit before Interest and Tax declined by 38% from Rs. 417.97 crores to Rs. 260.24
crores, consequent to reduction in turnover a largely fixed cost base of the Group.

The summary of total income :

Room Income 699.6

3
Food & Beverage Income 536.3
4
Non-Operating Income 93.06
Other Operating Income 237.3
2
Total Income 1566.
35

 Average Room Rate (Rupees) : 8792 as compared to last years 10504

 Occupancy (%) : 64% as compared to last year 66%
 Income from Room sales declined mainly due to a decrease in Average Room
rates and occupancies due to the recession.

HOTEL LEELAVENTURE LIMITED

The total income stood at Rs. 463.02 crores compared to Rs. 582.16
crores in the previous year.

Room and rental revenues decreased by 16.4%, from Rs. Rs.299.12

crores in 2008-09 to Rs.249.85 crores in 2009-10.

The Average Room Rate (ARR) decreased by 20 %, from Rs.11,595/- in

2008-09 to Rs. 9,301/- in 2009-10. The Average Room Rates in the city
of Bangalore decreased by 32% and in Mumbai by 25% during the
year. Overall ARR of the
company for 2009-10, decreased by 20% as compared to 2008-09.
However, as in the past, this year also, the Company
maintained its market dominance in terms of revenue, ARR and
Occupancy in Bangalore, Goa and Kovalam.

The Food and Beverage revenue increased by 7 %, from Rs.117.54

crores in 2008-09 to Rs. 125.62 crores in 2009-10.

The operating expenses increased by 3 % from Rs.296.12 crores in

2008-09 to Rs. 305.58 crores in 2009-10.
Out of total expenditure of Rs. 305.58 crores, Rs.30.58 crores were for
food and beverages consumed
Rs. 95.42 crores were for manpower cost and Rs. 88.43 crores were for
Administrative and other costs.

The Profit before Tax decreased from Rs.193.45 crores to Rs.64.64

crores. Profit before Tax for the year 2008-09 included
Rs. 64.63 crores as profit from Buyback of Foreign Currency
Convertible Bonds. PBT of 2008-09 without considering this
buyback profit comes to Rs. 128.82 crores, against which the current
years PBT shows a decline of 49.82%.

Profit after Tax:

The Profit after Tax decreased to Rs 41.02 crores in 2009-10, from
Rs.144.98 crores in 2008-09. The Profit after Tax in 2008-
09 included a one time profit of Rs. 64.63 crores from Buyback of
FCCBs.

Balance Sheet:
(i) Share Capital:
There was no change in the Share Capital of the Company, which stood
at Rs.75.56 crores, same as of the previous year.
(ii) Secured Loans:
Secured loans of the Company have increased to Rs.2,353.48 crores,
from Rs.1,819.66 cores on account of borrowing for
various ongoing projects and foreign currency loan availed for re-
purchase of outstanding Foreign Currency Convertible
Bonds.
(iii) Unsecured Loans:
Unsecured loans have decreased to Rs.525.18 crores, from Rs.630.88
crores, on account of buy back of outstanding Foreign Currency Bonds.

(iv) Fixed Assets:

The gross fixed assets of the Company have increased by Rs.598.73
crores in 2009-10 due to capital expenditure for the on going projects
and capitalization of exchange fluctuation on foreign currency term
loans.

Major Projects during the fiscal year

April 2009-Business operation of Gurgaon Hotel commenced.

The Leela Palace Udaipur started operations during the fiscal year

The Company commissioned its Trophy hotel at Chanakyapuri, New

Delhi.
The Company's Chennai hotel with 332 guest-rooms and suites facing
the Bay of Bengal is also being implemented and is expected to be
ready for operations in FY 2011-12.
The Company has already acquired land in Agra, Hyderabad and Pune.
These projects will be taken up in a phased manner after completion of
the New Delhi and Chennai projects.
With the completion of the projects at New Delhi and Chennai, the
Group will have eight properties, with 2,230 guest-rooms in the luxury
category.

APPENDIX
TAJ RESORTS and PALACES
Exhibit 1 :
(Annual Report 2009-2010)
Exhibit 2 : HOTEL LEELAVENTURE LIMITED
(Annual Report 2009-2010)