Why is Royal Orchid confident of healthy revenues from new hotel?

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Royal Orchid Hotels has announced the launch of it's new hotel, Royal Orchid Central Shimoga, at Shimoga. The above hotel has 108 guest rooms in addition to bar, specialty restaurants, conference hall and other facilities. With the opening of this hotel, the company will have 15 hotels across eight cities in India.

In an interview with CNBC-TV18, Keshav Baljee, president of Royal Orchids said, "We expect the hotel to generate healthy revenues. But, in terms of this quarter or next, we don't expect it to add significantly to the topline. We will be quite successful about typically four- six months down the line."

"It is a pure management contract. We have been paid some fees to help set up the hotel. We are also going to be paid close to 6% of the topline of the hotel," he added. 

Below is the verbatim transcript of Baljee's interview with Latha Venkatesh and Gautam Broker of CNBC-TV18. Also watch the accompanying video.

Q: Can you tell us when is the Royal Orchids Central in Shimoga going to be launched? What kind of revenues it will add to your quarterly run-rate in the coming quarters?

A: The hotel actually has launched over this weekend. It is 108 room four star property in Shimoga. It's probably the only branded hotel in the entire region there. It is under our management contract, so our investment has been minimal in this project, which is some admin overhead.

We expect the hotel to generate healthy revenues. But, in terms of this quarter or next, we don't expect it to add significantly to the topline. But, may be two quarters down the line, once the property is well established.

Given that it's a brand new and a virgin market, we are actually creating the demand there. We find that we will be quite successful about typically four- six months down the line.

Q: Exactly how is the deal structured with the owners of the hotel? Is it profit sharing? What typically would be the margins when you only do the management?

A: It is a pure management contract. What happens here is, we have been paid some fees to help set up the hotel. We are also going to be paid somewhere close to 6% of the topline of the hotel. This would be basically, to manage the hotel on a on going basis.

This is a long term contract upwards of 10 years. We would be operating the hotel under our brand. So, 6% is something which does not include our cost of travel, etc. All of that gets reimbursed by the owners to us. So, the 6% actually does technically flow down to our bottom line.

Q: What's the focus area going forward, do you plan to take more such revenue sharing management contracts or do you plan to invest because we learn that you had an investment plan of about Rs 200 crore for this year?

A: This is actually the biggest year for Royal Orchid, we are opening nearly 8 hotels by December and more than doubling our inventory. Two of our larger hotels are in Jaipur and Hyderabad. Jaipur is a 135 room five star hotel, in fact the soft launch for that hotel is happening at the end of this month. We have invested close to Rs 110 crore in that hotel.

Another big investment is a 233 room five star hotel in Hyderabad which also will be soft launching shortly. The investment there is to the tune of Rs 180 crore so these are tow large ticket investments. We are also starting to invest in our 291 room four star hotel in Powai in Mumbai. So, in terms of investments these are some of the larger ticket investments.

We are launching hotels in Surat and Baroda. We have just launched one in Mussoorie and this one in Shimoga. There are several other properties which we are launching this year which are under the management basis.

Q: How you expect the revenue trajectory and the profit trail? What would you do by way of revenues in FY11 over FY10 and more importantly FY12 over FY11 since you say that most of the big ticket launches are underway? You did Rs 77-78 crore in revenues last year.

A: I will talk on a consolidated basis that would be more indicative of the growth of the business. We are approximately around Rs 150 crore for FY11. We expect that to go up by about 25% or so. But, the true impact comes in the year after that where we anticipate that we will be significantly higher. So, we expect to be significantly upwards of Rs 200 crore or so in FY13.

Q: More importantly, how will earnings grow?

A: The earnings have grown for two reasons, one is that we have found pricing power coming back in lot of our cities with the exception of Pune. We are expecting healthy increases in October and we have already affected certain rate increases.

Q: Can tell us how was average occupancy in FY11 over FY10 as well how were average room rents in FY11 over FY10?

A: The average occupancy for FY11 is actually just shy of 70%. That dropped down a little bit because we had recently opened a 134 room in Hospet which is still picking up. In the previous year we were closer to early 60% so there has been a 7-8% increase. But, in this month and in the next month we are already closer to the mid 70%.

Q: Would your revenue room rents also show any northward movement?

A: Room rents in most cities have gone up by 5-7% already, so we expect about another 5-10% towards October.