Planning to open 2000 rooms in 5 years: Brigade Enterprises

Brigade Enterprises' hospitality division plans to open 1,200 hotel rooms in South India. Speaking to CNBC-TV18, Suresh Kris, CFO of the company says its capital expenditure (Capex) commitment for the projects is Rs 300 crore of which Rs 150 crore has already been spent. The company is funding majority of this amount through internal accruals, he says.With the Holiday Inn Express' tie-up and construction plans for three-star hotels in Kochi, Mysuru and in Bengaluru, the company expects around 2,000 keys operational over five years, he says."As far as the gross operating profit (GOP) is concerned, we are able to achieve from 42-44 percent from present occupancy rate of about 80 percent from both the hotels; and we now expect minimum of 40 percent from the new operational hotels going forward," he adds.Below is the edited transcript of Suresh Kris’ interview with Mangalam Maloo and Reema Tendulkar on CNBC-TV18.Mangalam: You plan to open about 1,200 hotel rooms, so how do you plan to get that funded? Because, the company does have about Rs 1,281 crore of debt on its balance sheet, so, will you fund it via internal accruals or are you planning to take on more debt for that?A: Presently we have about two operating hotels and which is having about 356 keys presently and about three hotels which are under construction so that our total rooms will be close to around 700 keys.The existing capital expenditure (Capex) commitment for this is around Rs 300 crore out of which Rs 150 crore has been already incurred and balance Rs 150 crore are there.Presently this funding is done only by internal accrual and for only one hotel we got a sanction from bank and for other two hotels we have gone for any bank funding so far.Going forward, we may do the three-star hotels in Kochi and one in Mysuru and another in old Madras road in Bengaluru. And further also we have a tie-up with the Holiday Inn Express and we may go ahead to do a three star hotel and maybe over a period of about five years, we may be having around 2,000 keys operational. In around 2-3 years, our total keys could be close to around 1,000.Reema: In 2-3 years when you do hit 1,000 operational rooms or keys, what could be the estimated revenue run-rate and in no point of time for you to hit that 2,000 mark in terms of rooms will you need any kind of outside funding?A: Most probably we will do that with our internal accrual as well as some kind of leverage over the existing revenue itself because this will be under the credit card receivable loan. Presently, we are now able to leverage from existing two hotels on the receivables even though there is no project funding. On occasions, we do not want to go on leverage for the construction loan into those under construction project. In the same way once these three hotels are operational, again those three hotels will go for receivables loan so that it can easily fund for other new hotels. This is the model which we want to operate. As far as the Capex commitment is concerned, we will go with around Rs 30-35 lakh for the construction of these three-star hotels. So, we can go and minimise the cost for land either we can go and take it on lease period, long-lease period, like that or on joint venture (JV) basis, so that the hotel cost is reduced. And again construction, I would say construction cost also will be able to manage between these ranges so that the return on equities (ROE) to these three-star hotels will be very high for us.Mangalam: Land has not been acquired is what you are saying?A: No, land normally we used to take in on long-lease basis, so that the land cost is minimum.Mangalam: So, give me a sense of what your margins will be like because we have seen almost a doubling of your margins as far as your hospitality segment is concerned from about 7-15 percent. So, with all the new rooms coming is, new keys coming in, do you see 15 percent as the new normal for margins or do you see them as a room for further improvement as well or 15 percent is an aberration, it will go back to 10 percent?A: As far as the gross operating profit (GOP) is concerned, we are able to achieve from 42-44 percent from present occupancy rate of about 80 percent from both the hotels. And we now expect minimum of 40 percent from the new operational hotels going forward.Reema: Q1 was a very solid quarter for you. How has Q2 panned out? Which are the projects which have come in for revenue recognition and what could be the expected revenue run rate?A: Presently we have about more than 35 projects which are now going on and we now expect around one or two projects may come in for revenue recognition during Q2. Apart from the cosmopolis, we also expect another subsidy for revenue recognition during this quarter, which we have developed with another joint venture, where we have now already launched some of the projects like C and D block apart from the park side block we launched. We now expect any of these to come in for revenue recognition this quarter.