Rates likely to increase due to low margins: Hotel Leela

Vivek Nair, vice chairman and MD of Hotel Leela Ventures is very disappointed with the new budget proposal of levying a service tax to the extent of 5% on the hotel accommodations having tariff of more than Rs 1,000 per day.

Speaking to CNBC-TV18, Nair said, the move will hamper the India hotel industry as tourist may opt to go for cheaper options. "Foreign tourists are going to Singapore, Malaysia, Indonesia, because they only apply a 3% GST on room charges, whereas with this, in India it will come to almost 18%," he said. Below is the verbatim transcript of Nair's interview with Latha Venkatesh and Sonia Shenoy of CNBC-TV18. Also watch the accompanying videos. Q: Pranab Mukherjee has proposed to widen the scope of service tax in the hotel industry, for all average room rates above Rs 1000 per night, and now this is an additional burden to already the service tax of 10% in the VAT etc that you have to pay. Can you tell us overall what would the implications be on the hotel industry and how would that really impact the demand? A: We are very disappointed about these proposals. Last year, the FM appreciated the role of travel and tourism by extending the benefits of section 35AD which are given to other priority infrastructure sectors like pipelines, coal storages and warehouses. This was done citing that the travel & tourism industry is one of the largest employment generators in the country and that we need to encourage it. After having said that last year, we were hoping that we included in the infrastructure lending list, and therefore we can get the financial assistance to put up hotels. Right now, there are about 80,000 guest rooms short in the country. That is the reason why we have high room rates in the NCR region of Delhi, Bangalore, other places.  We were shocked when we saw this, especially, when the room charges which are levied by various states have a luxury tax ranging upto 12.5%. On the same base, the room charges you cannot apply one more central government tax which is the proposed tax now. Q: For your own hotel for instance, how much do you expect the room demand to come down if at all? Will you be able to pass on this entire increase or will you have to trim it elsewhere in terms of restraining of room rate increases? A: Yes, it will have a cumulative effect. It will be less competitive to our neighboring countries. Foreign tourists are going to Singapore, Malaysia, Indonesia, because they only apply a 3% GST on room charges, whereas with this it will come to almost 18%. So, it is 6 times what guests are charged in those countries and as it is, about 11.5 billion Indians go abroad. Why should they go abroad when we have equally good facilities in India? They are driven to go abroad, because of high airline turbine fuel, which airlines have to pay here causing tickets within India to be so high. The budget has also increased tax on domestic and economy tickets. Q: Because of the relatively price insensitive nature of the service, do you think you can really pass on this particular price hike? How much will the room rates go up and how will you be able to manage because your profitability too has been impacted in the past couple of quarters? A: Yes, in fact the industry is just coming out from the economic impact and the downturn faced in the last two years due to the attack in Mumbai. The rates have to go up because we are working at very low margins and the price increase obviously would not be acceptable to both domestic tourists and foreign tourists. This will leave our product uncompetitive as compared to our competing destinations, the countries which I cited just now. We get only 5.8 million domestic and foreign tourist in the country, compared to 14, 16 and 18 million which Indonesia, Malaysia and Thailand get. Q: If you can just give us some guidance now with the new realities in place unless of course the finance minister chooses to change it, but with the new realities in place. What kind of margin picture do you see in the fourth quarter or more particularly for FY12, as well what kind of increases in revenues? A: For the industry as a whole, the period between mid-October till end of March is a peak period when you get foreign tourists. We are expecting 10-12% increase in FDAs this year which would allow India to cross a 6 million target. Q: You have planned to sell some land in Chennai as well, can you tell us when the sale will take place and when would the money come in? A: Reuters reported rightly, we have a commercial building which is meant to be sold in the next three months. As part of our program to keep the project cost down, in all our developments in Bangalore, Mumbai, along with the hotel we have a Leela Business Park which is either sold or rented out or combination of both, so that brings down the overall project cost. Our 250 sq. feet of commercial space in Chennai, is available for that purpose and that will be done in three months. Having successfully operated our first management contract hotel in Gurgaon, we now look at that model instead of investing huge sums of money in hotels. We have planned to convert our land bank in Pune and Bangalore into apartment homes and we have tied up our contracts for those already. Nearly Rs 300 crore will come from those 2 developments and in Bangalore we have a 2 acre plus area next to our hotel. Q: But why are you changing tag so completely, from hotel business to developing residential accommodation is the hotel business looking to you bleaker and margins being better in the residential home projects business? A: It is pure economics. We have 370 rooms in Bangalore; we are the leader there with a highest average daily rate and occupancy. With the amount of rooms that is coming in the Bangalore market we should have more than 370 rooms at those locations and the 2 acre plot will give us at least Rs 250 crore. Q: Let us just boil it down to one specific number, which is your EBITDA margin performance has slipped quite a bit in the last one year from that average of 40-45% now to about 35% or so. Do you think your EBITDA margins will slip further? A: On the contrary, we are looking at 42% again this year, which is a very large margin. Very few sectors in India have such a high EBITDA margin. India is one of the few countries in the world which has 40 plus EBITDA margins in the hotel industry. We are very confident that with the business picking up, we will have a 40-45% EBITDA margins restored again. One of the reasons why the margins are high or the PAT is high is, we own and operate our own hotels. We don