DIF I - Tourism Market Report - Final - 1-10-2014

A Report on
Market Data for Private Sector Investments in Nepal
Tourism Sector
Prepared By
With the support of DFID Nepal
In partnership with
Sept, 2014
dif@dolmafund.org
www.dolmafund.org
ACKNOWLEDGEMENTS
This report is an effort of Dolma Development Fund (DDF) to analyse market data and
trends across six sectors in Nepal in order to identify attractive investment opportunities for
private equity and venture capital investors.
We wish to thank all the private enterprises and government agencies who gave us their
time and shared information, giving us a detailed picture of the business and investment
environment in Nepal. We also place on record our sincere thanks to the international
development agencies active in the country for providing us deep sector insights and sharing
their enthusiasm to develop an investment-friendly ecosystem in Nepal.
Our special thanks to Suzanna Abspoel from Advance Consulting for providing insights and
guidance on the sectors reports and the European resources available for Nepal. We would
also like to thank the Intellecap investment banking practice and investment managers from
the Aavishkaar Frontier Fund for sharing their experiences in early stage equity investments.
Finally, our deepest appreciation to Dipika Prasad, Manisha Singh, Saurabh Prakash Sinha,
Nisha Dutt, Raghavendra Badaskar and the entire consulting team at Intellecap for making
this report a success.
Dolma Development Fund Page 2

This assessment was led by Dolma Development Fund team. The
research, data collection and diagnostics were conducted by Intellectual
Capital Advisory Services (Intellecap) on behalf of Dolma Development
Fund.
This assessment was undertaken with funding support from DFID Nepal.
DDF Disclaimer:
“This publication may contain advise, opinions, and statements of

various information providers and content providers. DDF does not
represent or endorse the accuracy or reliability for any advice, opinions,
statements or other information provided by any information provider,
content provider or any user of this publication or other person or entity.”

Contents
1. Executive Summary .................................................................................................................... 11
2. Introduction ................................................................................................................................. 13
2.1 Sector’s Role in Economic Development .......................................................................................... 15
2.2 Overall State of Demand and Supply in Tourism .......................................................................... 17
2.2.1 Analysis of Demand-Side Dynamics ............................................................................. 18
2.2.2 Analysis of Supply-Side Dynamics................................................................................ 22
3. Sector Overview .......................................................................................................................... 24
3.1 Structure of Tourism in Nepal .............................................................................................................. 24
3.1.1 Overview of Types of Facilities ..................................................................................... 24
3.1.2 Overview of Purposes of Tourism ................................................................................. 31
3.2 Current State of Tourism Industry in Nepal.................................................................................... 37
3.3 Market Opportunity .................................................................................................................................. 39
3.4 Growth Drivers of Tourism in Nepal .................................................................................................. 41
3.5 Challenges Facing the Tourism Sector .............................................................................................. 43
4. Regulatory and Policy Landscape in Tourism in Nepal .......................................................... 47
4.1 Licensing Requirements in Tourism .................................................................................................. 48
4.2 Taxation, Royalties and Subsidies framework in Tourism ....................................................... 49
4.3 Impact of Regulations on Enterprise Operations and Value .................................................... 50
5. Foreign Investment Policy and FDI in the Sector .................................................................... 52
6. Investment Opportunities in Tourism ....................................................................................... 54
6.1 Currently-viable investment opportunities .................................................................................... 56
6.1.1 4 and 5-Star Hotels and Resorts ................................................................................... 56
6.2 Emerging investment opportunities .................................................................................................. 61
6.2.1 Chains of Food Service Companies.............................................................................. 61
6.3 Currently Missing but High Potential Opportunities................................................................... 63
6.3.1 Travel-Focused E-Commerce ....................................................................................... 63
6.3.2 Serviced Apartments ..................................................................................................... 65
6.3.3 Branded Budget Hotels ................................................................................................. 67
6.4 Non-Viable Investment Opportunities .............................................................................................. 68
7. Exit Opportunities for Investors in Tourism ............................................................................. 68
7.1 Spectrum of Exit Routes .......................................................................................................................... 69
7.2 Likely Exit Routes for Tourism in Nepal ........................................................................................... 70
7.2.1 Exit Trends Observed in Tourism in India ..................................................................... 71
7.3 Challenges in Exit ....................................................................................................................................... 73
7.4 Enablers Needed for Exit ........................................................................................................................ 74
8. Access to Capital ........................................................................................................................ 76
8.1 Access to finance amongst 4 and 5-star hotels .............................................................................. 76

8.2 Grants and Resources ............................................................................................................................... 77
9. Typical Capital Structure in 4 and 5-Star Hotels and Resorts ................................................ 82
10. Valuation Trends in Tourism...................................................................................................... 84
10.1 Valuation of Listed 5-Star Hotels in Nepal ....................................................................................... 85
10.2 Comparable Valuations in India and SAARC Countries .............................................................. 86
10.3 Estimating Hurdle Rate for Tourism in Nepal ................................................................................ 87
10.4 Non-Financial Metrics used in Valuation ......................................................................................... 88
11. Annexure ...................................................................................................................................... 92
11.1 Demand and Supply Assessment Methodology ............................................................................. 92
11.2 Methodology for Estimating Market Opportunity ........................................................................ 93
11.3 Calculation of Hurdle Rate ...................................................................................................................... 94
11.4 Investment Markets in Nepal and Impact on SME Valuation................................................... 95
11.4.1 Overview of Capital/Investment Market in Nepal .......................................................... 95
11.4.2 Nepal Investment Market Valuation and Key Drivers ................................................... 96
11.5 Miscellaneous .............................................................................................................................................. 98
11.5.1 Legal Structures for Businesses in Nepal ..................................................................... 98
11.5.1 Comparable Valuation Multiples of Hotels from SAARC Countries .............................. 99
11.6 References and Field Research Data ................................................................................................ 102
FIGURES
Figure 1: Distribution of key tourism destinations across Nepal ........................................................... 14

Figure 2: Direct and indirect contribution of tourism industry to Nepal's economy ............................... 15
Figure 3: Contribution of Tourism to Nepal GDP and employment ...................................................... 16
Figure 4: Tourism sector contribution to foreign exchange in Nepal .................................................... 17
Figure 5: Nepalese Tourists going abroad; 2012 .................................................................................. 19
Figure 6: Tourists Arrival in Nepal (Million) ........................................................................................... 20
Figure 7: Number of tourists’ arrival by month (average of 2010-12) ................................................... 20
Figure 8: Country wise split of percentage of tourists and length of stay (days) per tourist from top 5
source countries .................................................................................................................................... 21
Figure 9: Percentage of tourists by purpose of visit (top 5 countries), 2012 ........................................ 22
Figure 10: Room occupancy rate of 5 star hotels in Nepal (2012) ....................................................... 23
Figure 11: Types of tourist facilities in Nepal ........................................................................................ 25
Figure 12: Nepal Map showing density of hotels across Nepal ............................................................ 26
Figure 13: Structure of food services industry in Nepal ........................................................................ 29
Figure 14: Purpose of tourism in Nepal ................................................................................................ 32
Figure 15: Different activities popular amongst leisure tourists ............................................................ 32
Figure 16: Tourists visiting Nepal for pilgrimage, 2012 ......................................................................... 34
Figure 17: Tourists visiting Nepal for Trekking and Mountaineering (2012) ......................................... 35
Figure 18: Market-level competitiveness in the tourism sector in Nepal............................................... 37
Figure 19: Market opportunity for luxury hotels and resorts in Nepal ................................................... 40
Figure 20: Key growth drivers of tourism in Nepal ................................................................................ 41
Figure 21: Challenges of tourism sector in Nepal ................................................................................. 43
Figure 22: Comparison of inflation rate (%) in Nepal with selected SAARC countries ......................... 46
Figure 23: Impact of regulations on enterprise operations and value ................................................... 50

Figure 24: FDI inflows in tourism sector in Nepal ................................................................................. 53
Figure 25: Breakup of FDI in tourism sector in Nepal ........................................................................... 53
Figure 26: Evaluating comparative attractiveness of investment opportunities in the tourism sector in
Nepal ..................................................................................................................................................... 55
Figure 27: Categorisation of investment opportunities in the tourism sector in Nepal.......................... 55
Figure 28: Project cost structure and metrics for a 5-star hotel in India ............................................... 58
Figure 29: Key investment opportunities in 4 and 5-star hotels and resorts in Nepal .......................... 59
Figure 30: Key success factors and challenges in 4 and 5-star hotels in Nepal .................................. 60
Figure 31: Improving internet and mobile penetration in Nepal ............................................................ 64
Figure 32: Broad timeline for private equity exits in 4 and 5-star hotels and resorts segment ............. 70
Figure 33: Distribution of private equity exits in India ........................................................................... 72
Figure 34: Prevalence of different modes of exits in hotels and resorts segment in India (2009-2014)
.............................................................................................................................................................. 72
Figure 35: Typical ecosystem for private equity investments in emerging economies ......................... 75
Figure 36: Typical tourism business promoter preferences in capital structures .................................. 84
Figure 37: ROE and cost of equity analysis of listed 5-star hotels in Nepal ......................................... 86
Figure 38: Formula for calculating WACC ............................................................................................ 94
Figure 39: Formula for calculating cost of equity .................................................................................. 94
Figure 40: Market Capitalisation Ratio (MCR) for SAARC countries .................................................... 97
Figure 41: Total Value Traded Ratio (as % of GDP) in SAARC countries ........................................... 97
Figure 42: Turnover Ratio in SAARC countries .................................................................................... 97
Figure 43: Comparison of capital market development in Nepal with India .......................................... 98
TABLES
Table 1: Accommodation sise in various categories of hotels and resorts in Nepal (2012) ................. 26
Table 2: Statutory instrument governing Nepal tourism services ......................................................... 47
Table 3: Licenses needed by tourism companies ................................................................................. 49
Table 4: Taxation structure for tourism business in Nepal .................................................................... 50
Table 5: Subsidies and incentives available to tourism industry in Nepal ............................................ 51
Table 6: Listed 5-star hotels in Nepal ................................................................................................... 57
Table 7: Financial performance of listed 5-star hotels in Nepal ............................................................ 57
Table 8: Key revenue drivers in 4 and 5-star hotels and resorts .......................................................... 58
Table 9: Operational and financial metrics of food services companies in India .................................. 63
Table 10: Comparison of average length of stay of tourists ................................................................. 66
Table 11: Typical room rentals for serviced apartments in the Indian Subcontinent ............................ 66
Table 12: Selected mid-budget branded hotels in India ....................................................................... 67
Table 13: Private equity tourism exits reported in India between 2009 and 2013 ................................ 73
Table 14: Challenges in exits in Nepal .................................................................................................. 73
Table 15: Typical capital structure of 4 and 5-star hotels and resorts in Nepal .................................... 83
Table 16: Valuations of 5-star hotels listed on NEPSE ......................................................................... 85
Table 17: Median of valuation multiples of some listed hotels and resorts from SAARC countries ..... 86
Table 18: Key assumptions taken to calculate WACC in 4 and 5-star hotels and resorts in Nepal ..... 87
Table 19: Cost of Equity across 4 and 5-star hotels and resorts .......................................................... 88
Table 20: Estimated hurdle rate for 4 and 5-star hotels and resorts in Nepal ...................................... 88
Table 21: Investor sentiment on non-financial valuation drivers in 4 and 5-star hotels and resorts ..... 89
Table 22: Estimating number of high-budget foreign tourists in Nepal ................................................. 93
Table 23: Calculating market opportunity for luxury hotels and resorts in Nepal ................................. 93
Table 24: Primary approval issued by SEBON for the FY 2012/13 ...................................................... 96
Table 25: Legal Structures available to Businesses in Nepal ............................................................... 98
Table 26: Comparable Valuation Multiples of Tourism from SAARC Countries ................................... 99
Table 27: List of primary interviews .................................................................................................... 102

CASES
Case 1: Bhutan’s Success Story ........................................................................................................... 44
ABBREVIATIONS
BOT Build Operate Transfer

CAAN Civil Aviation Authority of Nepal
CAGR Compounded Annual Growth Rate
D/E ratio Debt Equity Ratio
DFID Department for International Development (also UKaid)
F&B Food and Beverages
FDI Foreign Direct Investment
FY Fiscal Year
GDP Gross Domestic Product
GNDI Gross National Disposable Income
GNI Gross National Income
INR Indian Rupee
IPO Initial Public Offering
IRCTC Indian Railway Catering and Tourism Corporation
JV Joint Ventures
Ltd. Public Limited
MCR Market Capitalisation Ratio
MICE Meeting, Incentive, Conference, and Exhibition
MoCTCA Ministry of Culture, Tourism and Civil Aviation
MoU Memorandum of understanding
NAC Nepal Airlines Corporation
NATHM Nepal Academy of Tourism & Hotel Management
NEPSE Nepal Stock Exchange Limited
NHG Nepal Hospitality Group
NPR Nepalese Rupee
NRB Nepal Rastra Bank
NRN Non-Resident Nepalis
OFID OPEC Fund for International Development
OPEC Organisation of the Petroleum Exporting Countries
P.A. Per Annum
PE Price-Earnings Ratio
PLC Public Limited Company
PPP Public Private Partnership
PT Perseroan Terbatas
RoE Return on Equity
SAARC South Asian Association for Regional Cooperation
SME Small and Medium Enterprise
TR Turnover Ratio
TVTR Total Value Traded Ratio

UNWTO United Nations World Tourism Organisation
US$ United States Dollar
USP Unique Selling Proposition
VAT Value Added Tax
VC Venture Capital
WACC Weighted Average Cost of Capital
BACKGROUND OF THE STUDY

The tourism industry creates significant economic impact in Nepal through direct and indirect
activities, including GDP contribution, employment, and foreign exchange earnings, cross-sectorial
nd
synergies and induced spending. It is the 2 largest employer in Nepal after the Agricultural sector,
and the potential to truly drive inclusive growth in the country. The industry has been thriving with the
recent political stability, and is expected to host nearly 1.5 million tourists by 2020. However the
infrastructure-side of tourism is still inadequate – especially for servicing high value tourists. Several
luxury hotels and resorts have come up in response to this market demand; driven by intrepid first
generation entrepreneurs as well as established corporate groups. As elsewhere in the developing
world, access to finance and technical know-how are the biggest constraint faced by hotel and resort
promoters in Nepal. Private sector providers of risk capital such as venture capital funds, private
equity funds, impact investors and venture debt funds can play a pioneering role in addressing the
financing need as well as augment technical know-how with linkages to private tourism firms in
emerging and developed economies. Early successes in investments can unlock further mainstream
and domestic capital; and form the corner-stone of a strong and resilient private sector in Nepal.
One of the biggest challenges investors in Nepal face is a lack of clarity around market landscapes,
business profiles, valuation benchmarks and exit opportunities. Market Data for Private Sector
Investments in Nepal is a first of its kind attempt towards bridging this information divide. It seeks to
act as a guide to foreign and domestic investors by providing insights into the landscape of private
tourism activity in Nepal. These insights include structure and state of the sector, identification of
promising investment opportunities, and evaluating capital flow and valuations in the sector. The
report has been compiled using data from several credible sources, including existing research
literature and industry publications. The secondary data was validated and additional information was
gathered by engaging with key stakeholders in the sectors such as industry players, experts, financial
institutions, policy makers, development finance institutions and sector associations. The report is
constrained by limited consistent availability of data. In absence of hard and consistent data in some
cases, the report relies on data from the field and relevant, triangulated proxy data from secondary
sources.
METHODOLOGY AND APPROACH

The report is based on (a) primary data from interviews and focus group discussions with enterprises,
experts and policy-makers and (b) secondary data from Dolma Impact Fund and relevant government
and policy publications in Nepal. The report draws on data derived from sources such as Nepal
government publications, data from World Bank and Intellecap’s proprietary knowledge base. The
report has been compiled using data from several credible sources, including existing research
literature and industry publications. The secondary data was validated and additional information was
gathered by engaging with key stakeholders in the sectors such as industry players, experts, financial
institutions, policy makers, development finance institutions and sector associations.
The report is constrained by limited consistent availability of data across all sectors. In absence of
hard and consistent data in some sectors, the report relies on data from the field and relevant,

triangulated proxy data from secondary sources. It must also be noted that report does not
extensively cover all the value chain elements in a sector - only promising, potentially high growth
sectors are analysed. Users of this report should be cognisant of these data limitations.
CURRENCY EXCHANGE RATE

1 US$ = 94.19 Nepalese Rupee

1. Executive Summary
The tourism sector is an important contributor to GDP and employment in Nepal; and the
overall outlook remains positive with growth in inbound and domestic tourism
The tourism sector in Nepal creates direct economic impact through GDP contribution, employment,
and foreign exchange earnings; and indirect impact through cross-sectorial synergies and induced
spending. The sector contributes 8.2% to the GDP, which is projected to increase to 11% in the next
1
decade , and is the second largest employer after agriculture. The overall outlook for the sector is
positive with growing inbound as well as domestic tourism, favorable investment climate, and growing
private sector activity.
Significant demand-supply gap exists in tourism infrastructure, particularly in facilities for

high-end tourists; which presents an opportunity for greater private sector engagement
There is a demand-supply gap in the tourism infrastructure in Nepal since the number of in-bound
2
tourists has been increasing at a CAGR of 6.65% since 2007 but facilities to service them are
inadequate in terms of quantity and quality. The demand-supply gap is especially wide in the “high-
value” tourists’ segment that seeks luxury accommodation and tours and travel services. There is a
little focus on this segment given the overall thrust on “low budget tourism” in Nepal; and the sector
would benefit from also bringing in focus on high-value tourists. Currently there are only 40 to 50 4
and 5-star hotels and resorts in Nepal, and most are concentrated in Kathmandu and Pokhara with
3
very little high-end infrastructure outside these cities .
One of the key drivers of poor infrastructure on the supply-side is the low amount of capital
investment in the tourism sector. Nepal reported capital investments worth US$ 0.1 billion in 2012 in
4
this sector against a global average of US$ 4.2 billion ; pointing to a need as well as an opportunity
for public and private sector actors to channel investments into this sector,
The regulatory regime is positive, and is expected to improve further in the near future
The regulatory regime in Nepal has positive impact on enterprise value and operations in the tourism
sector through regulations that require hotels and resorts to meet international standards and
subsidies and incentives for the private sector. However, these could be enhanced by bringing in
more facilitative policies to encourage private sector entry in tourism industry – especially around land
acquisition through public-private partnerships and build-operate-transfer models.
The Ministry of Culture, Tourism and Civil Aviation, is due to bring out a new 10-year National Tourism
Strategy Plan and a 5-year Action Plan to act as a guiding framework for the tourism sector. The
framework is expected to bring in several forward-looking policies for the private sector, especially in
improving the business and investment environment, tourism infrastructure and public-private
collaboration in marketing and branding initiatives. The strategy is expected to be rolled out in phases;
5
with the first phase focusing on “diversification and improvement” from 2014 to 2018 .
1
World Travel and Tourism Council; Travel and Tourism Economic Impact; 2014
2
MoCTCA, Tourism Statistics Nepal, 2012
3
Intellecap analysis, 2014 - based on primary interviews conducted during the course of this study in May
2014; MoCTCA Tourism Industry Division, 2013 and Hotel Association Nepal website, accessed in May 2014.
4
World Travel and Tourism Council, Travel and Tourism Economic Impact 2014
5
UNWTO, Technical Cooperation and Services, National Tourism Strategy Plan for Nepal, 2014

The government encourages foreign investments in the tourism industry, and allows 100% FDI
in most sub-sectors of tourism
100% Foreign Direct Investment (FDI) is allowed in most tourism sub-sectors except rural tourism,
local catering services, travel agency, trekking agency, water rafting, pony trekking, horse riding and
6
tourist lodging facilities . As a result of the facilitative policy, over US$ 125 million of FDI has been
channelled into the tourism sector by foreign entities from over 30 countries since 2005. Hotels and
restaurants have been key focus sub-sectors for FDI in tourism, cumulatively accounting for 99% of
7
the FDI inflows .
Analysing the structure of tourism industry in Nepal by type of services and purpose of
tourism shows that 4 and 5-star hotels and resorts are the most attractive investment
opportunity
The market opportunity for 4 and 5-star hotels and resorts in Nepal ranges from US$ 80 to 100
8
million, largely driven by inbound high-value tourists . There are only 40 to 50 hotels and resorts in
this category, and a significant demand-supply gap exists pointing to an opportunity for accelerated
growth in this segment.
Other opportunities for private equity investors may also emerge in food service chains,
9
travel-focused e-commerce, serviced apartments , and branded budget hotels
The tourism market in Nepal is growing at a rapid pace and can be expected to shift towards great
modernisation and commercial-scale approaches over the next few years. Given this, investors can
also expect to see interesting opportunities in businesses operating in segments like food service
chains, travel-focused e-commerce, serviced apartments, and branded budget hotels in the near
future. Some of these segments, especially food service chains, already show early traction in Nepal;
while the others have succeed in neighbouring markets like India and are bound to transfer to Nepal
through organic and inorganic routes.
Valuation of 4 and 5-star hotels and resorts in Nepal is challenging due to limited historical
data; however this also gives early entrants in the private equity space an opportunity to buy
stakes at lucrative prices
Valuation of 3 tourism companies listed (and actively traded) on the Nepal Stock Exchange (NEPSE)
show ROE% ranging from 5 to 22%, EV/EBIDTA ranging from 6.72x to 25.91x, and P/E ranging from
10
6.64x to 35.18x . These valuation multiples have been found to be in a wide range due to high
volatility and risks perceived in Nepalese capital markets, as well as limited sample size, and given
these limitations the valuation multiples for listed tourism companies cannot necessarily represent the
industry benchmark in this sector.
The lack of data for valuation of tourism sector companies is primarily due to infancy of the investment
value chain and support infrastructure such as research and ratings. Further, sparse research
coverage of capital markets in Nepal has resulted in limited availability of historical data and limited
access to updated industry benchmarks. However, the investment landscape is witnessing brisk
activity, with 2-3 institutional investment funds setup over the last three years. This status of the
6
Does not include starred-hotels
7
Department of Industries, Industrial Statistics Nepal, 2013
8
Intellecap analysis, 2014. See Sections 3.3 and 11.2 for details
9
Furnished apartment available for hire, alongwith cleaning, cooking and other services as needed. Serviced
apartments are typically used by medium to long stay travellers
10
Calculated from company annual reports

investment landscape presents an opportunity for early private equity entrants to make investments at
lucrative valuations.
In the absence of industry benchmarks for valuation; data from comparable SAARC countries
and hurdle rates may be used as broad guides by investors
Valuation data from comparable SAARC countries like India and Sri Lanka may be used as broad
guides by investors. However, investors should be cognisant that countries like India have much
higher market capitalisation and better investment value chains. Hence, even though some
comparable valuation ratios can be used from other developing SAARC countries, they can at best be
broad guides since the regulatory regimes, banking infrastructure, market capitalisation and other
macro-economic indicators vary widely from country to country.
In the absence of consistent data on valuation ratios in the sector, hurdle rate can serve a good
indicator of minimum expected return from investments in the sector. Based on the data from the
tourism sector in Nepal and comparable proxies, the Cost of Equity for investments in 4 and 5-star
hotels and resorts is estimated to vary from 37% to 42%, and the Weighted Average Cost of Capital is
11
estimated to vary from 17% to 19% for early-stage and growth-stage companies .
Private equity firms investing in 4 and 5-star hotels and resorts in Nepal may need to stay
invested for 8 years or more before finding a lucrative exit
4 and 5-star hotels and resorts in Nepal generally take 5-8 years to breakeven and are expected to
12
have higher trends in profitability thereafter . Private equity investors should be cognisant of the
projected break-even in specific opportunities to estimate lucrative entry and exit times. A successful
exit will depend on the entry points of investments; which is usually the construction and/or expansion
stage for a hotel/resort project. The requirement of capital is highest at this stage and investments can
be made at lucrative valuations.
Promoter buy-back likely to be most popular approach for private equity exits in 4 and 5-star
hotels and resorts segment in Nepal
Re-purchase of private investor’s shared by promoter(s) is likely to be the more prevalent approach
for exits in 4 and 5-star hotels and resorts since the business model enjoys high margins and has a
high market opportunity as well. While promoter ability to buy-back will be one driver; the other will
probably be the prevailing promoter sentiment where existing promoters want to ultimately retain
complete control of the firm. There seems to be a high degree of apprehension about loss of control
13
that could result from diluting management stake .
2. Introduction
14
Tourism is an important industry in Nepal which from a socio-economic standpoint. It is a significant
15
contributor to GDP and second largest provider of employment after agriculture , and is one of the
11
Intellecap analysis 2014; see Section 10.3 for details
12
From primary interviews conducted during the course of this study in May 2014
13
From primary interviews conducted by Intellecap during the course of this study in May 2014
14
Defined as “Tourism is a social, cultural and economic phenomenon which entails the movement of people
to countries or places outside their usual environment for personal or business/professional purposes” by the
United Nations World Tourism Organisation (UNWTO)
15
See Section 2.1 for details

more developed services industries in Nepal. The sector spans urban as well as rural areas, and can
play a crucial role in inclusive development.
“Tourism industry” in the context of this report is a collective term that encompasses providers of
various travel-related services including accommodation, F&B services, shops, entertainment and
16
adventure activity facilities, and other hospitality services available for tourists .
Tourism in Nepal is driven by a variety of “pull-factors” that attract travellers; including natural beauty,
and spiritual and cultural heritage as shown in Figure 1. For instance, the country has 8 of the world’s
17
10 highest peaks, is the birthplace of the Buddha , and has 9 world heritage sites - 2 natural and 7
cultural. The climatic conditions are also favourable with average spring and summer temperatures in
18
the range of 20-24°C in popular tourist destinations like Kathmandu and Pokhara .
Figure 1: Distribution of key tourism destinations across Nepal
Source: Government of Nepal, Nepal Tourism Statistics, 2013
Even though Nepal is rich in natural and cultural heritage, it is one of the least developed nations in
19
the South Asian region . There is an opportunity to leverage this natural and cultural heritage to
building a thriving tourism industry. Several countries in South East Asia like Thailand and Cambodia
with similar contexts have successfully leveraged the tourism-opportunity to drive their economies and
20
create more jobs . Similarly, developing the tourism industry in Nepal can also help the economy
grow, create jobs and improve quality of life of citizens. The public and private sectors can benefit
from working in collaboration to achieve this end. Private sector support in the form of risk capital will
be especially catalytic in building and scaling the tourism industry.
16
Defined as “a person who is travelling away from their home base (city or country) for less than a year for a
main purpose other than employment, and who spends at least 1 night in a private or collective
accommodation in the area visited” by the UNWTO
17
Gautama Buddha, also known as Siddhārtha Gautama, Shakyamuni, or simply the Buddha, was a sage on
whose teachings the religion of Buddhism was founded
18
Meteorological Forecasting Division, Department of Hydrology and Meteorology, Government of Nepal
19
Nepal’s Human Development Index ranking is 157 out of 187 countries; United Nations Development
Programme's Human Development Report, 2013
20
World Bank Development Indicators database, accessed in May 2014

2.1 Sector’s Role in Economic Development
Tourism industry creates significant economic impact in Nepal through direct and indirect
activities
The sector creates direct economic impact through GDP contribution, employment, and foreign
exchange earnings; and indirect impact through cross-sectorial synergies and induced spending as
shown in Figure 2.
Figure 2: Direct and indirect contribution of tourism industry to Nepal's economy
Source: Intellecap analysis, 2014
Tourism contributes 8.2% of Nepal‟s GDP today, which is projected to increase to 11% in the
next decade
Tourism sector is a major component of Nepal’s economy, and contributed US$ 1.6 billion to the GDP
21
(8.2% of GDP) in 2013. This contribution is predicted to increase at 4.5% p.a. to US$ 2.5 billion by
22
2023 (11% of GDP) . Nepal’s economy is more tourism-driven than neighboring SAARC countries.
This is illustrated by the fact that direct contribution from this sector was 3.9% of total GDP which is
significantly higher than neighboring countries. India and Bangladesh’s direct contribution from the
23
sector in 2013 was only 2% and 2.1% respectively .
Tourism employs 8.5% of the workforce, and is the second largest provider of employment
opportunities after agriculture
In 2013, the sector employed 1.35 million people (8.5% of total employment) directly and indirectly;
24
and this is forecasted to increase by 3.4% p.a. to 1.88 million by 2023 . The sector directly employed
21
This figure includes both direct and indirect contribution
22
23
24

25
0.5 million people (3.2% of total employment) in Nepal ; and this makes it the second largest provider
of employment opportunities in Nepal after agriculture. However, the tourism sector in Nepal can also
increase contribution to employment by shifting towards more organised and commercial-scale
activity. For instance, Cambodia and Thailand - comparable South East Asian economies – note 6.6%
and 8.9% direct contribution to employment. In terms of relative contribution in job creation, Nepal
th th th
stands at 96 rank out of 184 countries, while its Cambodia and Thailand hold 25 and 38 rank
26
respectively .
Overall, the tourism sector’s contribution to GDP as well as employment generation have an shown
increase over the past few years as shown in Figure 3. The government is supportive of the sector
has committed to launching special programs and incentives for growth in tourism in the new Vision
2020 roadmap.
Figure 3: Contribution of Tourism to Nepal GDP and employment
8.2 8.5
7.7
5.8
4 4.3 3.9
3.2
2010 2011 2012 2013
Direct % Contribution of Tourism to Nepal's GDP

Total % contribution of tourism to Nepal’s employment
Source: World Travel and Tourism Council; Travel and Tourism Economic Impact; 2014
Tourism is also a significant source of foreign exchange earnings in Nepal; contributing 4.8%
27
of total foreign exchange earnings in 2012
The tourism industry is a significant contributor to foreign exchange earnings as shown in Figure 4.
Tourism is Nepal can make substantial contribution to improve the adverse balance of payments
28
resulting from Nepal’s trade deficit with India and other countries .
25
26
27
Government of Nepal, Nepal Tourism Statistics, 2012
28
Nepal Rastra Bank, “Does Tourism Really Matter for Economic Growth? Evidence from Nepal”, Paudyal 2013

Figure 4: Tourism sector contribution to foreign exchange in Nepal
Source: Government of Nepal; Nepal Tourism Statistics, 2012
Indirect contribution from tourism is nearly as much as direct contribution in low and middle
29
income countries like Nepal
Apart from its direct economic impact on the country through GDP contribution and employment, the
sector also creates high degree of indirect and induced impact through cross-sectorial synergies with
construction, infrastructure, handicrafts and other industries; inducing improvements in infrastructure
like road and air connectivity; and through local economic transactions carried out by tourists as well
as those employed in the tourism industry. In 2012, the indirect GDP contribution of tourism was
30
1.78x of direct contribution .
2.2 Overall State of Demand and Supply in Tourism
There is a demand-supply gap in the tourism infrastructure in Nepal since the number of in-
bound tourists is increasing but facilities to service them are inadequate in terms of quantity
and quality
31
The number of tourist arrivals in Nepal has been growing at CAGR of 6.65% since 2002 . However,
the state of the supply-side in terms of facilities and infrastructure has remained stagnant. The current
infrastructure of Nepal is insufficient to adequately service mid and high budget tourists. While NRB
estimates that Nepal’s existing infrastructure can service While Nepal Rastra Bank (NRB) estimates
32
that Nepal’s existing infrastructure can service 7.44 million tourists as opposed to the current volume
33
of 0.8 million ; this projection was calculated as a function of room nights available and does not take
into account demand as per each tourist segment of budget, mid and high end. Further, most of the
tourist activities are centred around 6-7 places which are preferred by tourism entrepreneurs and
government for infrastructural development, but there is very little focus on diversifying to new
destinations which may cause risk of “overcrowding” in existing tourist places in the short to medium
term.
29
30
31
Government of Nepal; Nepal Tourism Statistics, 2012
32
Nepal Rastra Bank, Economic Activities Study, 2012-13
33

The wide demand-supply gap in tourism across various dimensions presents an opportunity for
private equity investors to support businesses that are creating various types of solutions to address
34
the gap . The inflow of risk capital will not only help these businesses scale, but act as demonstration
of the value in investing in tourism and encourage participation from domestic banks and angel
investors. In the long-run; a thriving tourism sector can drive economic growth with trickle-down
development outcomes in Nepal as already evidenced by contributions to GDP, employment and
foreign exchange earnings.
2.2.1 Analysis of Demand-Side Dynamics
The demand for Nepalese tourism industry is influenced by 4 key trends in the sector – (a)
growing contribution of domestic tourism (b) growing inbound tourism, (c) seasonality of
demand, and (d) differing purposes of travel which dictates demand for different services.
The tourism sector in Nepal is benefiting from growth in domestic tourism
35
Domestic tourism comprises 64.5% of total tourism revenues in Nepal , and includes spending for
both leisure and business purposes. The growth in domestic tourism is a comparatively new
phenomenon observed over the past 3-4 years, with more number of Nepalese citizens traveling
locally to destinations like Pokhara and undertaking trekking and mountaineering activities. Industry
36
practitioners interviewed during the course of this study attribute this trend to three key drivers –
changing demographic trends with more number of young people entering the market as
37 38
consumers , government policies to promote domestic tourism amongst public sector employees ,
and improvement in tourism infrastructure. While limited government data exists on the overall trends,
spending and preferences of domestic tourists; the Western Regional Hotel Association, estimates
that domestic tourists arriving in Pokhara comprise over 35% of total tourists; a significant
improvement from 2% composition a decade back.
On the flipside, the high-end luxury tourism industry currently does not see significant benefit from
39
high-budget domestic tourists and such tourists still prefer to travel abroad for leisure . In 2012,
150,000 Nepalese travelled to India, Thailand, Malaysia and Singapore for tourism purposes as
shown in Figure 5. The tourism industry in Nepal could potentially grow faster by also focusing on
capturing market share amongst these mid and high budget domestic tourists.
34
Please see Section 6 for analysis of specific investment opportunities
35
World Travel and Tourism Council, Travel and Tourism Economic Impact – Nepal, 2014
36
See Annexure for complete list
37
Government of Nepal, Ministry of Youth and Sports estimates that 38.8% Nepalese citizens are between 16
to 40 years in age
38
See Table 5 for details
39

Figure 5: Nepalese Tourists going abroad; 2012
6%
8%
38%
13%
16%
18%
Entertainment Business Conference Medical Tourism Official Pilgrimage
Nepal‟s tourism industry is also driven by foreign tourists, and their number has been growing
due to political stability and demand-generation activities initiated by the government
Foreign visitor spending forms 34.3% of total tourism spending in Nepal, which is quite high compared
40
to 24% for Asia Pacific as a whole . Tourists from India, China, Sri Lanka, USA and UK contribute
over half of US$ 366 million spending in Nepal by foreign visitors.
Close to 800,000 tourists arrived in Nepal in 2013, and these arrivals have been growing at a CAGR
of 6.65% since the cessation of civil conflict in 2006 as shown in Figure 6. The industry did witness a
slowdown in growth from 2002-2007 owing to political and civil turmoil; but Nepal has successfully
recovered; and increased the number of tourist two-folds in the past 6 years as a result of political
stability and active efforts by the government to generate demand. For instance, Nepal government
celebrated 2011 as Nepal Tourism Year and undertook large-scale marketing and promotions around
the brand “Naturally Nepal: Once is Not Enough”, improved infrastructure and sought to diversify to
41
new tourism market segments . These activities led to a significant increase in number of tourists by
42
22% in 2011 and an increase of 9% in 2012 . With increased political stability and increasing
government efforts, the number of in-bound tourists is expected to continue the upward trend.
43
Further, the visa policy liberalisation by India (which contributes 20.6% of total tourists ) and cross-
44
border tourism promotion by public and private sector in China (which contributes 8.9% of total
45
tourists ) are also expected to further drive growth in in-bound tourism.
40
41
Nepal Tourism Year 2011, Official Website
42
43
44
MoCTCA and Chinese government representatives signed an MoU to improve air connectivity between the
two regions in early 2014; as per reports released by Nepal Tourism Board
45

Figure 6: Tourists Arrival in Nepal (Million)
Source: Government of Nepal; Nepal Tourism Statistics, 2012 and World Travel and Tourism Council, Travel and
Tourism Economic Impact –Nepal, 2014
Demand for tourism facilities shows seasonality in Nepal, with peak period in October and
November; and lean period from May to June
The demand for tourism facilities in Nepal shows a degree of seasonality due to the climatic
conditions. October to November; and February to April typically see good climatic conditions for
travellers; while May and early June are hot and the monsoons from mid-June to September affects
46
surface transport and visibility. An analysis of inbound tourism in Nepal shows the highest influx is
observed around October and November when maximum Indian and foreign tourists visit Nepal as
shown in Figure 7. May to June is a lean period for tourist arrivals; although significant numbers of
47
Indian tourists do visit Nepal even in this period . Tourism industry can bring in special off-season
prices and deals to further improve the number of inbound tourists from India during this time.
Figure 7: Number of tourists‟ arrival by month (average of 2010-12)
88
79 78
73
66 68
61
57 58 58
52 50
43 63 47 43 44 44 46
49 29
27 24
35 14
8 11 12 16 15 11 10 12
8 20 9
Non-Indian tourists' arrival by month ('000) Indian tourists' arrival by month ('000)
Total tourists' arrival by month ('000)
46
Defined as activities of non-residents travelling to a given country that is outside their usual environment,
and staying there no longer than 12 consecutive months for leisure, business or other (corresponding)
purpose; Helsinki: Statistics Finland; referred in June 2014
47
This may be driven by the typical summer vacation cycle of May to July seen in schools and colleges in India

One-third of Nepal‟s in-bound tourists travel through India; indicating that the tourism industry
in Nepal is dependent on India to a significant extent
Nepal’s tourism is directly impacted by the Indian tourism sector; as 30% of the foreign tourists visiting
48
Nepal enter the country via India . One of the biggest drivers of this trend is the limited air-
connectivity between Nepal and international markets. Hence as the Indian tourism industry grows, a
spill-over effect may be observed in Nepal as well. In 2012, India received 6.58 million foreign tourists,
49
up 4.3% over the previous year . Indian government’s decision to extend the visa-on-arrival facility to
50
travellers from nearly 180 countries in 2014 is a positive move from Nepal’s perspective .
Five countries contribute to 50% of Nepal‟s in-bound tourists indicating need for improving
branding among foreign tourists
Indian tourists form a major portion of Nepal tourism contributing around 20% to the industry because
of the geographic proximity and low travel restrictions; followed by tourists from China, Sri Lanka,
United States of America (U.S.A) and United Kingdom (U.K.).
In terms of length of stay, tourists from U.S.A. and U.K. spend nearly 22 days as shown in Figure 8,
which is very high compared to Asian counterparts due to their preference towards trekking activities
which demands more time. Such tourists tend to add significantly more value to the sector in terms of
foreign earnings per tourist. Hence, the sector could benefit by focusing its efforts on attracting more
tourists from these countries and regions.
Figure 8: Country wise split of percentage of tourists and length of stay (days) per tourist from top 5
source countries
Source: Government of Nepal; Nepal Tourism

Statistics, 2012
Tourists from different countries have different purposes of visit, with major purposes being
leisure holidays, trekking and pilgrimage
48
49
Ministry of Tourism; India Tourism Statistics; 2012
50
Zee News; via Press Trust of India; 2014

Tourists travel to Nepal for a wide variety of reasons; with 47% tourists seeking leisure holidays, 14%
seeking pilgrimage and 13% seeking trekking. Other reasons for visiting Nepal include business,
official, conference, conventions, exhibitions, study, research, and employment. There is a correlation
between a tourist’s country of origin and purpose of travel as shown in Figure 9.
Most Chinese tourists visit Nepal for leisure holidays. On the other hand, tourists from U.S.A. and
U.K. tend to travel for adventure activities, and tourists from Sri Lanka travel for spiritual and religious
purposes. This trend can be leveraged by the government and private sector by forging “purpose-
specific” partnerships with travel agencies in these countries, and also tailoring branding campaigns
based on the purpose of tourism.
Figure 9: Percentage of tourists by purpose of visit (top 5 countries), 2012
India (165,815) 35.3 2.1 6.7 14.7 10.1 31.1
China (71,861) 73.9 4.4 3.1

1.9
1.3 15.2
Sri Lanka (69,476) 22.7 3.2

0.3 59 0.8 14
U.S.A. (48,985) 54 17.1 2.84.9 3.8 17.5
U.K. (41,294) 46.5 26.5 2.64.12.7 17.6
Holiday/Pleasure Trekking/Mountaineering Business Piligrimage Official Other Purpose
2.2.2 Analysis of Supply-Side Dynamics
The supply-side of Nepalese tourism industry shows 3 key characteristics – (a) high degree of
fragmentation, (b) inadequacy of infrastructure to serve high budget tourists, and (c) low
amount of capital investments
The tourism market in Nepal is highly fragmented; and overcrowding has been observed in
some segments
The tourism sector in Nepal shows a high degree of fragmentation with a number of different small
51
and medium companies offering accommodation, guided tours and other such services . The low-
budget accommodation and guided tours segment shows signs of overcrowding with large number of
52
players offering undifferentiated services . The fragmented nature of activity is a barrier to
commercialisation and improvement in quality of the tourism industry; as too many small players are
difficult for the public sector to regulate and for the private sector to invest in.
Public and private tourism infrastructure in Nepal is inadequate to address demand from high-
budget tourists; the country still has positioning of a “low budget travel destination”
51
Government of Nepal, Ministry of Finance, Economic Policy Network, “Focusing on Regional Tourism
Markets: Prospects and Challenges for Nepal”, 2006
52

The tourism infrastructure in Nepal, especially in terms of accommodation options and travel agencies
is largely geared towards supporting low budget tourists. As a result, there is a shortage of high
quality, branded service providers; specifically in accommodation and travel agency segment that can
cater to the needs of mid to high budget tourists segment. This issue is further compounded by the
underdeveloped state of roads, air travel, and safety/security. In combination, this dearth of high
quality public and private infrastructure result in lower demand for Nepalese tourism amongst mid and
high budget travellers.
Nepal has a shortage in the branded-mid and high budget accommodation segment and such
53
facilities are often completely booked ; indicating that there is a market opportunity for expansion.
For instance, occupancy in 4 and 5-star hotels and resorts was as high as 85% during peak season of
October and November as shown in Figure 10.
Figure 10: Room occupancy rate of 5 star hotels in Nepal (2012)
80 85
69 67 60
57 53 63 51 60
53 50
% room occupancy Rate of 5 star hotels in Nepal (2012)
Further, high budget tourists traveling to Nepal have a wide variety of interests ranging from
54
adventure tourism to spiritual and leisure tourism . However there are hardly any private travel
agencies that can provide end-to-end high quality and dependable services for such diversity in
interests.
Aside from inadequacy in accommodation and travel agencies, basic infrastructural facilities for
tourists such as information centres are inadequate. The low level of development of roads, power
and sanitation infrastructure also have a negative impact on consumer preferences of mid and high
budget tourists.
Supply-side has a “missing middle” in high quality mid to high budget accommodation
The challenge of inadequate high-quality accommodation infrastructure is compounded by the fact

that there is a “missing middle” in the hotels and resorts industry in Nepal where there is considerable
demand for branded and credible 3 to 4 star hotels with per room night rate of US$ 50 to 100, but very
55
little supply . This gap can be addressed through branded domestic and international “no-frills”
budget hotel that assure customers of a certain degree of service. For instance, a similar gap in the
53
From primary interviews conducted during the course of this study in May 2014; and Government of Nepal;
Nepal Tourism Statistics, 2012
54
See Section 3.1.2 for details
55

early to mid-2000s in the Indian market led to entry of chains like Taj Ginger and Lemontree which
56
cater to mid-budget business and leisure travelers at a per room night rate of US$ 45 to 100 .
Nepal lags far behind global and South Asian averages in capital investment in the tourism
sector
th
The country is ranked 126 globally in terms of attracting investment in tourism compared to India
th st rd 57
(4 ), Sri Lanka (71 ) and Bangladesh (83 ) . Capital investments include spending by all the
industries directly involved in the travel sector; and also include spending from other sectors which is
of a “tourism nature” such as new visitor accommodation, transport equipment, restaurant and leisure
facilities. Nepal reported capital investments worth US$ 0.1 billion in 2012 in tourism sector against a
58
global average of US$ 4.2 billion ; pointing to the underdeveloped state of tourism infrastructure.
3. Sector Overview
59
The tourism sector in Nepal is over 60 years old , though organised and commercial scale activity
started emerging only in early to mid-2000s. The industry is largely driven by foreign tourists, and due
to the wide variety of tourist attractions in Nepal, the purpose of travel varies across tourists. Trekking
is most important attraction for tourists and 13% of the tourists visit Nepal specifically for trekking and
related activities. Adventure sports like rafting, paragliding and parasailing also form an important part
of Nepal’s offerings to the tourists. Nepal offers a wide range of accommodation and F&B facilities for
tourists ranging from 5 star hotels, luxury resorts, tourist standard hotels, and restaurants. It also
60
offers homestays in villages where tourists can stay with a local family and experience the rural
Nepalese lifestyle. It is useful to analyse the tourism sector by both type of facility and purpose of
tourism to understand the current state of the sector and identify high-growth areas.
3.1 Structure of Tourism in Nepal
The tourism sector in Nepal can be analysed through 2 lenses – (a) types of facilities offered
and (b) purpose of tourism.
3.1.1 Overview of Types of Facilities
Private sector activity in tourism can be analysed across the various types of facilities available to
tourists. These facilities include accommodation providers, food and beverage (F&B) retailers and
travel agencies as shown in Figure 11.
56
From corporate booking websites of Ginger and Lemontree
57
58
59
Himalayan Journal of Sociology and Anthropology; Volume 5; 2012
60
Type of tourist facility that enables travellers to live with a local family for a specific and pre-determined fee.
Homestays typically include boarding and lodging.

Figure 11: Types of tourist facilities in Nepal
Trend of vertical and horizontal integration has been observed in tourist facility providers
While each type of tourist facility listed in
Figure 11 is distinct and varies from the others; the larger providers of such facilities tend to overlap
showing a trend of vertical and horizontal integration in the industry. For instance, tourist-transport
services such as tourist buses, helicopters and private chartered flights are provided by pure-play
travel companies as well as tour operators. Similarly, many accommodation providers also operate
sister-companies focused on tour and travel operations.
3.1.1.1 Accommodation Providers
Nepal has accommodation options to cater to different budgets, ranging from luxury hotels
and resorts to inexpensive lodges

Nepal provides a variety of accommodation to cater to different budgets, ranging from US$ 10 per day
to US$ 200 per day. Accommodation options also show diversity in (intra-city) locations and facilities.
The accommodation providers can be classified as luxury hotels and resorts (4 and 5-star hotels and
resorts), budget hotels (3-star and below) and others (Homestays, serviced apartments) as shown in
61
Table 1. Industry practitioners interviewed during the course of this study reported high degree of
informality amongst such low-cost accommodation providers; indicating that the actual number of
such providers could be much higher than estimated by government data.
Table 1: Accommodation size in various categories of hotels and resorts in Nepal (2012)
Total Rooms
Five Star Hotels 9 to 11 1500 to 1800
Four Star Hotels 30 to 35 3000 to 3500
Three Star Hotels 80 to 100 4000 to 5000
62
Budget hotels and 1,200 to 20,000 to
homestays 1,500 21,000
Source: Intellecap analysis, 2014 - based on primary interviews conducted

during the course of this study in May 2014; MoCTCA Tourism Industry
Division, 2013 and Hotel Association Nepal website, accessed in May 2014.
Ranges have been used since the number of hotels compiled from different
sources showed variation; as did the categorisation of hotels as 4 and 5 star.
Further, the MoCTCA does not report on hotel distribution aside from
Kathmandu Valley and hence government data is not available.
Most accommodation facilities for tourists are concentrated in 6-7 cities and towns, with little
or no infrastructure outside these locations
Nepal tourism infrastructure is concentrated around Kathmandu valley, Pokhara and Chitwan region
as shown in Figure 12. Lumbini & Sagarmatha base areas also have moderate number of hotels due
63
to high influx of tourists in these areas . While the fact that hotels are concentrated in a few areas
presents a challenge; this challenge is further compounded by the fact that the luxury hotel segment
is largely focused only on Kathmandu and Pokhara. High-budget travellers seeking to visit other
towns and cities lack good quality facilities even though there is a willingness to pay. Given that there
64
are 550-600 places of tourist interest in Nepal, there is a huge opportunity for private sector
participation in developing accommodation infrastructure in these underserved areas.
Figure 12: Nepal Map showing density of hotels across Nepal
61
See Annexure for details
62
Includes small and medium-sized lodges, guesthouses, and low-cost hotel facilities registered with the
Department of Tourism
63
Nepal Tourism Statistics, 2012
64
Nepal Tourism Statistics, 2012; Tripadvisor Nepal; Intellecap analysis, 2014

Source: Intellecap analysis, 2014; based on primary interviews conducted during the course of this
study in May 2014 and Nepal Tourism Statistics, 2012
The 4 and 5-star luxury hotels and resorts segment shows most organised and commercial-
scale activity with several domestic and international brands present in the market
Even though the overall high budget or luxury accommodation segment is inadequate; the few players
working in this segment show most organised and commercial-scale activity amongst
accommodation-providers sub-category. This is mostly due to the high capital costs and entry barriers
in building and running a hotel; which tends to discourage activity by smaller players in the high-
budget luxury segment.
There are approximately 40 to 50 4 and 5 star hotels and resorts in Nepal; of which most are
domestic brands. Some existing international brands include Radisson, Shangri La, Crowne Plaza
and Hyatt Residency. Most of these hotels are located in Kathmandu and Pokhara as shown in Figure
12. According to the Ministry of Culture, Tourism and Civil Aviation (MoCTCA), 8 new star hotels and
deluxe resorts are coming-up in different parts of Nepal shortly including some international brands.
There is a likelihood that more foreign brand luxury hotels will come up in Nepal in the medium to
65
long-term; structured as JVs, franchisee partnerships and management agreements . For instance,
Marriott International is also planning to enter Nepal and has signed an agreement with Nepal
Hospitality Group (NHG). Other international hotel-brands expected to launch in Nepal in the next
year or so include Sheraton and Hyatt.
Non-Resident Nepalis (NRNs) are already investing in hotels in collaboration with major international
66
hotel chains . The key benefits for NRNs include lower tax rate in Nepal, high potential for capital
growth, welcoming regulatory environment, and a clear demand-supply gap in luxury hotels.
Nepal also has high end boutique hotels and resorts with fewer rooms but similar standards
as 5-star properties
Along with 4 and 5-star hotels; Nepal also has some niche boutique hotels and resorts that have
fewer rooms but provide similar or in some cases even higher standards of service. Such boutique
properties are predominantly concentrated in Kathmandu and Pokhara, and their per room night rates
can be higher than branded 4 and 5-star hotels. They typically have a Unique Selling Proposition
65
66
See Section 5 for details

(USP) associated with them, such as unique view, being co-located with an important tourist
attraction; and interiors featuring local art and craft among other USPs.
Some examples of such boutique hotels and resorts include Temple Tree Resort and Spa in Pokhara,
and Dwarika’s Hotel in Kathmandu. Temple Tree is located close to the Fewa Lake with 47 rooms and
an average tariff of US$ 130 per night; while Dwarika’s hotel is a heritage property with 86 rooms and
an average room tariff of US$ 350 per night.
The 3-star and below budget and low-cost accommodation segment is fragmented and shows
a high degree of informality
More than 75% of the hotels in Nepal are low-budget hotels; and this segment is highly fragmented.
The total number of low-budget hotels in Nepal increased by 15.4% to a total of 1,224 in 2013; driven
largely by low entry barriers and high influx of low-budget tourists. Such hotels compete with one
another solely on pricing; and as a result of over-supply their occupancy rates and profit margins are
low. Further, this segment does not offer significant opportunities for foreign investors since regulatory
67
guidelines prohibit Foreign Direct Investment (FDI) in this segment .
Other emerging accommodation segments include homestays and serviced apartments
Homestays essentially entails living with a local family instead of a hotel or a resort. The concept of
homestays is used in several developing countries like India to promote local art and culture, increase
income for local communities and drive development of rural areas. The Nepalese government is also
supportive of homestays and has initiated a program comprising of community homestay and private
68
homestay for tourists . As per official records, Nepal offers more than 100 homestays across the
69
country . However, this segment does not offer opportunities for foreign investors since FDI is not
allowed.
Early traction has also been seen in the serviced apartments segment to cater to unmet demand for
long-stay accommodation. There are relatively few alternatives to hotels and resorts for business or
leisure travellers seeking longer-term accommodation in Nepal. Several industry practitioners
interviewed during the course of this study reported that the serviced apartment segment could
emerge and grow in Nepal as a response to this market demand over the medium-to-long term.
3.1.1.2 Food and Beverage Retailers
There are many F&B providers in Nepal including formal sector and informal sector players;
the segment is driven by domestic demand as well as demand from foreign tourists
70
There are over 16,500 micro and small businesses in the F&B industry in Nepal , structured as
71
shown in Figure 13 and also referred to as food service companies. These are concentrated in
urban hubs like Kathmandu and Pokhara; and the segment shows high degree of fragmentation and
informality.
67
Intellecap Primary Research; 2014
68
United Press International; Homestays in Nepal boost tourism; 2012
69
Financial Express; Market-section; Nepal-gets-infrastructural-boost-for-tourism; 2014
70
Concern for Children and Environment – Nepal estimated that on an average, there are 220 restaurants per
district in Nepal; in their survey titled “National Survey on Child Labour in Restuarants”
71
Includes businesses that retail prepared and/or cooked food through various delivery formats such as “at-
home delivery”, take-aways, sales from restaurants and cafes etc.

Key drivers of growth in the food service segment are domestic demand and demand from foreign
tourists. A new middle class in emerging in Nepal which is driving higher retail consumption; and has
72
also had a positive impact on the F&B market . The Gross National Income (GNI) per capita has
73
increased at a CAGR of 5.5% over past decade and Gross National Disposable Income (GNDI)
74
forms 25% of GNI . The number of inbound tourists has also been growing at a CAGR of 11% as
shown in Figure 6.
Figure 13: Structure of food services industry in Nepal
Amongst organised food service firms, only fine dining restaurants and those attached to
hotels and resorts show a small degree of commercialisation
Amongst the organised food services industry shown in Figure 13; only restaurants show some
degree of commercialisation but this activity is still nascent – with most restaurants having stand-
alone models and structured as sole proprietorships. There are approximately 150 to 200 fine dining
and quick service restaurants in Kathmandu alone; with more than 10 of these fine dining restaurants
75
attached to 4 and 5-star hotels and resorts .
Limited activity has been seen in branded quick service restaurants, but this is expected to
pick up in the next few years
Nepal has a limited number of foreign and domestic branded quick service restaurants (also called
fast food chains). While foreign chains first entered the market in 2009, they have since been forced
to exit due to labour unrest. On the other hand, the domestic quick service segment is still nascent
and only 3-4 popular brands are seen in the market.
76
Foreign quick service restaurants were first brought to Nepal by Devyani International Pvt. Ltd. ;
which opened KFC, Pizza Hut, and Cream Bell chains in 2009. However, labour unrest driven by
72
Asian Development Bank, The Rise of Asia’s Middle Class, 2010
73
World Bank Development Indicators database, accessed in May 2014
74
Department of Economics and Management; A better indicator of standards of living: The Gross National
Disposable Income
75
Hotel Association Nepal; primary interviews conducted during the course of this study in May 2014
76
An associate company of RJ Corp which is a large India-based F&B firm

union activity forced these chains to shut down for a month in 2012. While business activities
resumed after a month, the incident has served to raise the risk profile of foreign investments in the
restaurant segment in Nepal.
On the other hand, domestic quick service restaurant segment is still nascent. Of the few existing
chains, Himalayan Java coffee is one of the largest with 10 cafés spread across Kathmandu, Lalitpur,
Bhaktapur, and Toronto (Canada). Other domestic quick service restaurants include Aangan which is
a Joint Venture (JV) between Pashupati Foods Nepal and Bikanervala Foods India; and Gulab
Sweets Nepal which is a subsidiary of Gulab Sweets in India. While Aangan has 6 outlets across
Kathmandu, Biratnagar and Pokhara; Gulab has only one outlet in Kathmandu.
3.1.1.3 Travel and Tour Operations
Travel and tour operators‟ segment in Nepal is growing despite overcrowding in the market;
with different firms showing low level of business model differentiation
Travel and tour operators in Nepal essentially operate through 3 models – (a) pure-play travel
agencies; (b) tour operators; and (c) blended model with both travel agency and tour operator
services. Pure-play travel agencies essentially act as “middle-men” between tourist facilities providers
and tourists, but do not own any infrastructure. On the other hand, tour operators organise sight-
seeing itineraries and often employ their own guides and own some infrastructure like transport; but
rely on travel agencies for customer acquisition. Most large firms however employ a blended model of
operations where they play dual roles of travel agencies and tour operations in order to make higher
77
margins; with a specific focus on coordinating adventure and pilgrimage tours .
Overall, the travel and tour operations segment essentially includes service providers that help
tourists with booking accommodation, transport, tours, and provides any other specific travel-related
support that tourists may need. This segment acts as a “consolidator” in the tourism industry by
bringing together diverse service providers and tourists.
78
Travel and tour operators segment in Nepal is growing at a CAGR of 10% every year due to low
entry barriers and low setup cost. It requires less than US$ 200 and 15 days to procure the requisite
79
licenses . As a result, there is high degree of price competition and firms face significant margin
80
pressure. There were 2116 travel and tour operators in the country in 2012 , an increase of 9.3%
over previous year.
Such firms primarily operate through two models in Nepal – (a) stand-alone and (b) in partnership with
foreign agencies. Majority of the travel and tour operators work in partnership with international travel
agencies; where the former play the role of local mediators for connections to accommodation, guides
and other services. A small minority of the travel and tour operators are standalone firms that offer
self-designed tour packages and provide use their own networks to provide accommodation,
transportation and other facilities. Industry practitioners interviewed during the course of the study
reported that the profit passed on to domestic travel and tour operators from international agencies
81
has seen a steady decline over the past few years . This is a troubling trend for domestic firms that
already face revenue and margin pressures due to overcrowding in the market.
77
78
Nepal Tourism Statistics 2012
79
Nepal Business License e portal
80
Nepal Tourism Statistics 2012
81

International travel agencies are also focusing on strengthening their services in the Nepalese
market due to increasing inbound tourism
International travel agencies serve customers through easy-to-access websites and smart phone
apps, and are able to offer lucrative packages and discounts due to their widespread networks of
hotels and local travel agencies. They also offer crowd-sourced and expert-curated information on
itineraries including essential sightseeing and activities for the tourists. International travel agencies
are able to offer such value-added services in a profitable manner due to the scale of their operations;
and hence offer tough competition for local players who may not be able to offer similar standards of
service.
Most inbound tourists to Nepal prefer to book their flights and accommodation through international
82
travel agencies like Expedia and Sixt . Both entered Nepal in a substantial way in 2012, and are
expected to drive bookings in the luxury tourism segment. As they create stronger networks in Nepal,
their dependence on local travel agencies is decreasing and hence the profit-share that local travel
83
agencies claim from transactions has also seen a decline .
There are very few large domestic travel and tour operators, and trend in vertical integration
has been observed amongst these large players with several entering into the hotels and
resorts segment
Partnerships between hotels and travel and tour operators are common-place in Nepal in order to
provide end-to-end servicing for customers. However, a recent trend in vertical integration has been
observed where larger travel agencies are also starting their own hotel businesses. With vertical
integration, they are able to retain a higher share of the tourists’ spending, and at the same time
design attractively priced vacation packages with end-to-end servicing. For instance, Thamserku
group, a large trekking holiday service company is working in close alliance with sister companies -
Yeti Mountain Homes, Gokarna Forest resorts, Yeti Airlines and Tara Air to provide a complete set of
84
offerings to tourists .
3.1.1.4 Tourism-related Transport Providers
Tourists in Nepal use both public and private means of transport for intra-country travel; and have
access to road-based and air travel. Aside from intra-destination travel, transport is also often a tourist
activity in itself – such as helicopter rides and ultralight flights for exploring natural beauty of peaks
and mountains. In the private sector, such transport infrastructure is owned and operated by pure-play
transport companies, as well as tours and travel operators. The latter tend to own and operate
transportation that support their itinerary plans for sightseeing or adventure activities such as sky-
diving.
While reliable data on the number of road-based transport is not available, the MoCTCA reports 15
85
domestic airlines, 2 skydiving companies, 3 ultralight companies, and 21 paragliding companies .
3.1.2 Overview of Purposes of Tourism
82
83
84
Intellecap Primary research 2014; Thamserkutrekking website
85

Tourists travel to Nepal for a wide variety of reasons ranging from leisure to pilgrimage as shown in
86
Figure 14. Short-stay tourists typically travel for either generic leisure tourism or pilgrimage
purposes. Together they constitute over 61% of inbound tourists and are a key source of revenue for
tourism facility-providers like hotels, restaurants and travel agencies. On the other hand, long-stay
87
tourists primarily travel for trekking and mountaineering activities and constitute 13% of inbound
tourists.
Analysing the structure of the tourism industry using lens of “purpose of tourism” is useful to
understand the “degree of specialised” tourist services available in the country. Overall, the current
activity in specialised services is still at a nascent stage. However, given strong nature of demand this
can be expected to grow in the medium to long term.
Figure 14: Purpose of tourism in Nepal
3.1.2.1 Generic Leisure Tourism
Nearly half of Nepal‟s inbound tourists travel for generic leisure purposes
Leisure tourism is the most important segment from a “purpose of tourism” point of view with 47% of
88
the tourists visiting Nepal falling under this category . India and China are the most important
sources of inbound tourism in this category, with a combined contribution of 0.12 million tourists out
89
0.38 million tourists . Nepal offers a wide range of leisure activities for leisure tourism, and the
popular activities have been listed in Figure 15.
Figure 15: Different activities popular amongst leisure tourists
86
Short-stay tourists refers to tourists who stay in Nepal for less than or equal to the average length of stay of
a tourist in Nepal, which is 13.1 days according to the Tourism Ministry
87
Short-stay tourists refers to tourists who stay in Nepal for more than the average length of stay of a tourist
in Nepal, which is 13.1 days according to the Tourism Ministry
88
89

Rafting/Kayaking/ Visits to Wildlife
Mountain Flights
Canoing Reserves
Others including
Bungee Jumping City Tours boating, shopping and
events
Source: From primary interviews conducted during the course of this study in May, 2014
Leisure tourism segment is crucial for tourism facility providers; especially hotels and resorts
Various small and large accommodation providers, travel agencies and F&B retailers depend on
leisure tourists since 1 in 2 inbound tourists travels for leisure purposes. Since leisure tourists prefer
to visit more popular destinations like Kathmandu, Pokhara and Chitwan, a large part of the clientele
90
of hotels and resorts also fall under this category . To further encourage the growth of this segment,
the tourism industry would benefit from focusing on improving existing infrastructure to meet global
benchmarks, and providing greater variety of end-to-end customisable tour packages for travellers.
3.1.2.2 Cultural, Religious and Pilgrimage Tourism
Nepal is an important destination for pilgrimage and cultural travel, and has 13 World Heritage
Sites
Currently 14% of inbound tourists visit Nepal primarily for pilgrimage and religious purposes, while at
least 56% visit cultural and religious sites while in the country irrespective of their primary purpose for
91 92
travel . Nepal has 13 World Heritage Sites , including Pashupatinath and Swayambunath temples
in Kathmandu; Lumbini, the birthplace of Buddha; and Janakpur and Manakamana in Gorkha
93
district . These sites are especially important for those interested in Hindu and Buddhist faiths.
One of the more popular pilgrimages that the tourist sector in Nepal benefit from is the annual
pilgrimage to Mount Kailash from May to November. Nepal is a transit point for this pilgrimage which
ends in the Tibetan Autonomous Region. Thousands of pilgrims following Hindu, Jain, Buddhist, and
Bön faiths make this annual journey each year, and industry practitioners interviewed during the
94
course of this study reported a steady rise in their number over the past few years .
Most tourists visiting Nepal for religious and pilgrimage tourism come from Sri Lanka, India
and Thailand as shown in Figure 16
Religious tourism is a lucrative segment for tourism facility providers as it is comparatively predictable
and can be expected to rise during festivals. Further, some religious tourists can be expected in off-
peak seasons also. The lucrativeness of this segment is also evidenced by the fact there was a rise of
90
91
92
As recognised by the United Nations Educational, Scientific and Cultural Organisation (UNESCO)
93
94
See Annexure for complete list of interviewees

72% over 2011 in the number of pilgrims to 0.11 million despite the overall industry increasing just by
9% that year.
Figure 16: Tourists visiting Nepal for pilgrimage, 2012
3%
8%
6%
42%
17%
25%
Sri Lanka India Thailand Myanmar Korea Others
Poor state of infrastructure in religious destinations is a threat for future growth; can be
tackled by collaboration between public and private sectors
While this segment shows promise, its growth could be negatively impacted by the poor state of
infrastructure in many important religious destinations – both within specific monuments, as well as in
the general vicinity. The tourism sector in Nepal can benefit from increased focus on improving the
overall state of religious destinations, particularly through investments in infrastructure like hotels and
roads; and in services like waste management. Since these are capital-intensive undertakings, the
government could explore partnerships with private sector to jointly approach such projects.
For instance, in India, religious destinations like Tirupati (in the South Indian state of Andhra Pradesh)
have seen collaborative state government and private sector projects to improve the state of
infrastructure and develop adequate facilities for pilgrims. Driven by the efforts, Andhra Pradesh
95
became top tourist destination in India recording 206.8 million domestic tourists in 2012 .
Overall, despite challenges like under-developed infrastructure in most of the religious tourist areas,
this segment is growing at a high rate and is expected to continue to grow in future. This growth can
be accelerated by increased public and private sector attention towards solving infrastructure-related
challenges.
3.1.2.3 Trekking and Mountaineering
Inbound tourists who seek trekking and mountaineering related activities spend 40% more
than other tourists on average
Trekking forms an important part of Nepal tourism with 8 out of 14 of the world’s highest peaks
located in Nepal. Out of 0.8 million inbound tourists in 2012, 13.1% visited for trekking and
mountaineering activities, an increase of 21.7% over the previous year. October and April are most
95
Ministry of Tourism; India Tourism Statistics; 2012

suitable months for trekking in Nepal with half the trekkers visiting during these months. Adventure
tourists from North America, Latin America and Europe spend 40% more than other travellers per trip
96
excluding airfare . Mountaineers that seek to climb tough peaks like Everest stay in Nepal for more
97
than 45 days on average, and spend more than US$ 40,000 per head . Hence this segment is
important for the tourism industry in Nepal, both for increased revenue and for increased foreign
exchange.
UK, USA, Germany and France contribute 60% of inbound tourists focused on trekking and
mountaineering as shown in Figure 17
Tourists from UK, USA, Germany and France form a major portion of trekkers in Nepal with nearly
60% trekkers coming from these countries. Public and private tourism promotion efforts in the
European region would benefit from taking this fact into cognisance and focusing on “adventure
travel” oriented messages and packages.
Figure 17: Tourists visiting Nepal for Trekking and Mountaineering (2012)
14.2% 16.4%
5.1%
5.2%
15.5%
5.4%
10.8%
14.9%
12.5%
UK Germany France USA Australia Japan Russia India Others
Regulations and infrastructure to drive safe practices and waste management in

mountaineering and trekking will help towards sustainable growth in this segment
While mountaineering and trekking are inherently risk-prone activities; tourists in Nepal are at a high
risk of injury or even death due to the tough terrain of the Himalayas, frequent avalanches, poor early
warning and rescue infrastructure, and laxity in regulation around safety. The tourism industry will
benefit from self-regulation and public-private investments in improving safety infrastructure. An
additional element to regulation is to also monitor the number of people permitted to climb each peak.
98
In the past 4-5 years, over 2000 mountaineers have scaled Everest ; an alarmingly high number that
96
Adventure travel trade organisation; Adventure tourism market report; 2010
97
Government of Nepal, Ministry of Tourism, Preliminary Statistics for 2013
98
Government of Nepal, Ministry of Tourism, Preliminary Statistics for 2013

the current infrastructure as well as the natural terrain cannot support sustainably. With the
99
government further reducing fee for mountaineering licenses ; this number is also expected to grow.
A second safety-related issue for mountaineering and trekking industry in Nepal is to bring out
stronger and more comprehensive regulations regarding the hiring, payment, and services expected
from professional guides (also called Sherpas). Isolated incidents of tension between guides and tour
operators as well as tourists have reported in the media as well as during primary interviews; and the
industry would benefit from addressing these issues in a fair manner so as to satisfy the guides as
well as tourists and tour operators.
Another threat to the long term growth of this segment is the poor state of waste management
practices, especially around the more popular destinations like Everest Base Camp. Industry
practitioners estimate that over 50 to 75 tonnes of garbage is dumped in and around the Everest Base
100
Camp area, which includes bio-hazards like human waste and dead bodies . A recent government
101
regulation which requires climbers to return from the peak with at least 8 kilograms of waste is a
102
welcome move, but in the absence of monitoring infrastructure the compliance is fairly low . More
public-private collaboration to manage the challenge of waste in Nepalese Himalayan region, coupled
with a stronger regulatory regime can ensure long term sustainable growth in mountaineering and
trekking in the country.
3.1.2.4 Others
Other less common purposes for tourism in Nepal include ecotourism, rural tourism, and MICE
(Meeting, Incentive, Conference, and Exhibition) activities; while these are currently nascent
they have the potential to emerge as lucrative segments in the future
Ecotourism is slowly picking up pace in Nepal; driven by natural beauty, flora and fauna in the
country
The International Ecotourism Society defines ecotourism as “Responsible travel to natural areas that
conserves the environment and improves the well-being of local people”. This segment in Nepal
103
primarily consists of wildlife viewing, wilderness camps, hiking vacations and white-water rafting .
Nepal is blessed is home to 5833 species of gymnosperms and flowering plants with some 315
endemic species of higher plants; 847 bird species; 185 mammal species; 43 amphibian species; 100
104
reptile species; 656 butterfly species and 185 fresh water fish species . This degree of biodiversity is
unusual in a relatively small nation (in terms of land area) like Nepal; and is the key driver of
ecotourism in the country. Many travel agencies in Nepal offer a variety of eco-tours ranging from a
few hours to several days in duration. However, due to limited tourism infrastructure like eco-camps,
this segment currently does not attract a significant number of high-end tourists. The industry can
benefit from investments in eco-tourism infrastructure; as well as in protecting Nepal’s biodiversity and
environmental heritage.
Rural tourism in Nepal is primarily driven by the concept of Homestays; and the segment sees
a fair degree of overlap with purposes like ecotourism and mountaineering
99
Government of Nepal, Ministry of Tourism website, accessed in May 2014
100
101
102
103
104
Nepal Official Website; ecotourism

Rural tourism in Nepal essentially provides tourists with the opportunity of living a typical Nepalese
rural lifestyle with a village-based family, and taking part in activities that they perform. Such tourism
is generally “facilitated” by travel agencies that identify the village, Homestay, and create an itinerary
of engaging activities for tourists including handicraft-making, meditation, treks and involvement in
typical rural household chores. Such travel agencies have strong relationships with the host village
and enter into revenue-sharing agreements with specific households for accommodation as well as
105
rural tourism activities . This segment is currently small-scale, but is being actively encouraged by
public sector and philanthropic organisations for augmenting livelihoods of villagers and thereby
increasing access to better nutrition, healthcare and education. The regulatory regime currently
106
prohibits FDI in rural tourism to protect the local industry . In any case, firms engaged in rural
tourism are not operating at a scale that can allow them to absorb institutional private equity capital.
Nepal can be developed as a world-class MICE (Meeting, Incentive, Conference, and

Exhibition) destination for business as well as entertainment purposes
Nepal is also gradually emerging as a popular meeting destination for business conferences,
exhibitions, and personal events like weddings. Private sector infrastructure includes existing
conference facilities specially meant for MICE activities and several 4 and 5-star hotels in Kathmandu
also provide meeting facilities that are comparable to international standards. There are some
significant bottlenecks to growth of the MICE industry however, including – (a) the lack of “clustering”
of conference, accommodation and entertainment facilities seen in successful MICE destinations like
Dubai; (b) the poor state of air connectivity between Nepal and most other countries aside from India;
and (c) inadequacy of current infrastructure to support very large gatherings of more than 10,000.
Addressing these challenges can help to develop an additional lucrative segment of tourists in Nepal;
especially for high-end hotels and resorts.
3.2 Current State of Tourism Industry in Nepal
The current state of tourism sector differs across sub-sectors, with some like luxury hotels
and resorts showing more organised and private scale activity; as well as high firm-level
competitiveness than others
The current state of the tourism sector can be analysed across 3 factors – (a) level of organised and
commercial scale activity in the private sector, (b) degree of overcrowding, (c) overall firm-level
competitiveness and (c) ability to take in private equity capital as shown in Figure 18. While lenses
(a), (b), and (d) are positive indicators; less (c) is a negative indicator. These 4 lenses have been
identified based on the objective of this market study – which is to present an overview of the
investment landscape in tourism and identify viable investment opportunities.
Figure 18: Market-level competitiveness in the tourism sector in Nepal
105
106
Government of Nepal, Ministry of Tourism

Four and five star hotels and resorts depict high level of organised and commercial scale
activities along with a low degree of competition; present lucrative opportunities for private
equity investors
Four and five star hotels and resorts high enjoy high occupancy levels as there are less than 20 such
branded properties in Nepal. Due to oligopoly and less competition, they are able to realise high profit
margins. Those with foreign brand tie-ups also enjoy a distinct edge over others in attracting
bookings, especially through international travel agencies. As the number of inbound tourists
continues to grow, the occupancy and revenues of these hotels will also see an uptick. Further,
currently available data on number of upcoming projects (discussed in Section 3.1.1.1) indicates that
there is low probability of overcrowding in this segment.
Given the scale of these companies, they are also able to absorb private equity capital as minority
stakes; and hence present lucrative opportunities for private equity investors.
Budget hotels and travel agencies in Nepal are overcrowded and fragmented; not lucrative for
private equity investments
The budget hotel segment is fragmented with significant degree of informal activity. Even though this
107
segment is growing, the government does not allow FDI in hotels below 3 star levels ; and in the
absence of commercial capital and know-how, this segment is not expected to develop and
commercialise in the medium term. A similar trend of overcrowding and fragmentation is seen in travel
agencies as well which are mushrooming in important tourist destinations as a result of low entry
barriers. Both these segments cannot take in private equity capital structured as minority stakes and
are not viable for private equity investments unless a trend of consolidation emerges.
107
Intellecap Primary Research, conducted in May 2014

Stand-alone F&B providers show moderate degree of organised and commercial-scale activity,
as well as firm-level competitiveness; but cannot absorb institutional private equity capital
While stand-alone F&B providers do show some positive indicators of growth; nearly all are still micro
and small-scale businesses structured as sole proprietorships. They have neither the size nor the
managerial wherewithal to absorb private equity capital and deliver returns to investors. Some notable
exceptions to this trend are chains of quick service restaurants emerging across Nepal, especially in
the cafés segment. However such activity is restricted to a handful of firms and does not represent the
general state of this segment. As the tourism and retail sectors in Nepal evolve, and a growing middle
class increases demand for F&B services; it is expected that this segment may grow in the future and
emerge as a high potential segment with lucrative investment opportunities.
Specialised tourism providers such as homestays and serviced apartments are nascent with
unproven market traction and viability; hence these are not lucrative options for private equity
investors at present
As these segments grow and start to show some traction, they may emerge as viable investment
opportunities in the future; but current levels of activity do not warrant entry of private equity investors
in these segments.
Since analysis shows luxury hotels and resorts as the only currently viable opportunity for
private equity investors in the tourism sector in Nepal; this segment will be detailed out further
in Sections 4 to 10 of this report.
3.3 Market Opportunity
4 and 5 star hotels and resorts have a current market size of US$ 80 to 100 million in Nepal
According to insights gleaned from industry practitioners interviewing during the course of this study,
the demand for 4 and 5 star hotels and resorts in Nepal is driven primarily by high budget foreign
inbound tourists. Such high-budget tourists currently comprise 18 to 20% of inbound tourism; and
108
represent a potential market opportunity of US$ 80 to 100 million for 4 and 4 star hotels and resorts
as shown in Figure 19.
108
See Annexure for methodology

Figure 19: Market opportunity for luxury hotels and resorts in Nepal
If the systemic challenges plaguing tourism industry remain unaddressed; then the market
opportunity is likely to show slower growth at a CAGR of less than 6% over the next few years
109
During last six years, the tourism industry has seen a significant growth in inbound tourism which
has also created a positive impact on luxury hotels and resorts. However, the sector faces several
systemic challenges that can drive the market for luxury hotels and resorts to grow slowly – with
neither inbound tourism nor number of high-budget tourists showing significant uptick and continuing
110
to show current trend of 6.65% CAGR in inbound tourism and 18 to 20% component of high budget
111
tourists . In such a scenario, the market opportunity is likely to show growth of less than 6% CAGR
112
over the next few years . These challenges include the poor state of air and road travel
infrastructure; inadequacy of infrastructure to serve demands of high-budget tourists; and macro-level
113
risks like political instability, natural calamities, and environmental degradation .
If public and private sectors make progress in addressing systemic challenges plaguing
tourism, then the market opportunity is likely to show high growth of 13% CAGR in Medium to
long term
An optimistic CAGR is a possibility in Nepal; because the tourism sector has previously shown a high
year-on-year growth of 22% from 2010 to 2011 driven by public and private sector efforts around the
114
“Nepal Tourism Year 2011” campaign . If a similar focused thrust is made towards increasing
inbound tourism on one hand; and driving investments and resources towards improving tourism and
transport infrastructure on the other; then both inbound tourism may see an uptick and grow at 10%
115
CAGR over the next few years. Further, the number of high-budget tourists may also see an uptick
109
See Section 2.2.1 for details
110
Calculated based on data reported by MoCTCA in Tourism Statistics 2012
111
See Section 11.2 for detailed methodology
112
Intellecap analysis, 2014
113
114
115
Triangulated based on industry estimates shared in primary research and Intellecap analysis, 2014

116
and grow to comprise 21 to 25% of all tourists over the next few years. In such a scenario, a high
117
growth rate at 13% or greater CAGR may be expected in medium to long term .
3.4 Growth Drivers of Tourism in Nepal
The key growth drivers of tourism sector businesses are shown in Figure 20.
Figure 20: Key growth drivers of tourism in Nepal
Under-
leveraged
natural and
cultural
heritage
Influx of
Ease of
South Asian
booking and
tourists
information
(India and
access Growth China)
Drivers of
Tourism in
Nepal
Supportive
Increasing regulatory
capital environment
investments coupled with
in tourism political
stability
Nepal‟s inherent natural and cultural heritage still remains under-leveraged; and increased use
of this heritage to design and promote tourism services can be a major growth driver for the
industry
With its rich natural beauty and cultural diversity, Nepal has potential to serve demands for different
types of tourism including leisure, wildlife, adventure, rural, and cultural tourism. The favourable
climactic conditions; especially in peak season of October and November is also facilitative to growth
118
of tourism. Since the international demand for off-beat and exotic locations growing ; these inherent
strengths but under-leveraged strengths can be used by the tourism industry in Nepal to position the
country as an exciting tourist destination.
Growing influx of South Asian tourists; especially from India and China is driving growth in
tourism
The country has seen a steady increase in inbound tourism; especially from India and China. In 2012,
Indian tourism arrivals increased at a CAGR of 21% over past 3 years to reach 165815. In the same
119
year Chinese tourism arrivals figured 71861, up 20% y-o-y over the past 5 years .
116
117
118
Euromonitor International
119

This growth is driven in-part by the geographic proximity and ease of immigration processes in
traveling from India and China to Nepal. This makes it a convenient and comparatively cheaper
“foreign-travel” destination for tourists from both countries. India especially is a key driver since not
only do Indian citizen travel to Nepal; but many foreign travellers first arrive in India and then travel to
Nepal due to lack of air connectivity between Nepal and large parts of the Western hemisphere. Aside
from the air-travel network; road and train travel between India and Nepal is also being developed.
For an instance, IRCTC has launched a train from the South Indian city Chennai; which traverses
through major Indian locations before entering Nepal, and provides connections to Kathmandu,
Manakamana, Pokhara and Kushinagar.
Early indications of a supportive regulatory environment coupled with political stability have
driven an uptick in inbound tourism
MoCTCA, has undertaken a number of progressive initiatives to harness the potential of tourism in
Nepal; such as the “Nepal Tourism Year 2011” campaign which focused on outreach to international
markets as well as improvements in domestic infrastructure, and resulted in a year-on-year growth of
22% in inbound tourism. The government also received private sector support from the hospitality,
travel and airline industries which also supported the scheme through various incentives. A similar
120
large-scale campaign is planned in 2014 ; and the “Naturally Nepal: Once is Not Enough” campaign
has been ongoing since 2005.
Aside from a direct role in tourism promotion, the government has also taken some steps to build an
enabling regulatory environment for the private sector to grow. Foreign Direct Investment (FDI) is
allowed in all construction development projects including construction of hotels and resorts,
recreational facilities and city and regional level infrastructure. A few specific subsidies and incentives
are also available to private sector firms as described in Section 4.3; but these could be improved and
made more strategic in nature. The government has also tied up with foreign airline companies to
improve its air connectivity and safety infrastructure.
In addition to the positive regulatory measures, the relative political stability and peace in the country
over the past few years has also supported growth of tourism.
Capital investment in tourism is gradually increasing, and will catalyse the development of
better infrastructure for tourism
Nepal attracted capital investment of US$ 150 million in 2013 in the travel and tourism sector; and this
121
is expected to increase by 2.7% in 2014 . MoCTCA is executing several strategic infrastructure
projects for upgrading airports, improving heritage sites, building community participation in tourism
sector, and investing in capacity building and project management skills. Alongwith the government,
several multilateral and donor organisations are also driving capital investments to improve the state
of tourism sector in Nepal. The Asian Development Bank and OPEC Fund for International
Development (OFID) have jointly committed US$ 46.5 million to a Nepal Government Fund set up for
122
this purpose.
Aside from public sector interventions; private sector activity in improving state of tourism
infrastructure is also gathering momentum. For instance, Zonta Club Kathmandu has entered into a
partnership with Sulabh Sauchalaya in April 2014 to construct toilet facilities in and around various
temple premises.
120
From primary research done with MoCTCA Nepal, see Annexure for details of interviewees
121
MoCTCA Nepal
122
MoCTCA, Nepal; Nepal Tourism News, May 2013

The tourism sector in Nepal may also benefit from exploring Public Private Partnership (PPP) models
in building tourism infrastructure. For instance, the Indian government frequently enters into PPP
agreements based on “Build, Operate, and Transfer” principle; where the government makes
subsidised land available to private sector players in order to incentivise development of hotels,
conference facilities, airports and other essential tourism infrastructure. Such projects entail a revenue
sharing agreement, and the project remains under private management for a period of 10 to 30 years,
after which complete ownership transfers back to the government.
Growing ease of booking and information access through websites and apps is also bringing
tourists closer to the industry in Nepal
The travel industry has witnessed a high degree of “democratisation” globally; with real-time booking
and information through websites and apps. This has allowed tourists to select the best service
providers at optimal prices for their bookings; and also brought tourisms and service providers closer
to each other. Most such websites and apps also provide a plethora of information about tourism in
Nepal, including popular destinations and advice for tourists. This has “opened up” the tourism market
in Nepal and is driving its growth.
3.5 Challenges Facing the Tourism Sector
The sector faces some major challenges as it seeks to scale and address the demand for tourism as
shown in Figure 21.
Figure 21: Challenges of tourism sector in Nepal
Lack of focus
on attracting
high-budget
tourists
Costs
increasing
Under-
due to
developed
inflation,
infrastructure
import-
reliance
Challenges
of Tourism
sector in
Nepal
Over-
Threat of
crowding
natural
in some
calamities
segments
Poor safety
standards
The sector has an overall lack of focus on attracting high-budget tourists who are the key
drivers of luxury hotels and resorts segment

The tourism sector in Nepal suffers from the disadvantage of being perceived as a “destination for low
to mid budget tourists”. Such a perception can decrease the number of high-budget tourists traveling
to Nepal and hence create a negative impact on the luxury hotels and resorts sector. This poor brand
perception is largely driven by the limited public and private focus on attracting niche market of high
budget travellers. As a result, most of the current industry players are focused on competing for
market share in the low-budget segment. There is intense competition resulting in low priced tour
packages with thin margins which need volumes to see any significant profit. Not only does this have
a negative impact on revenues, but the influx of tourists is also making popular destinations
overcrowded. There may be a long term detrimental impact on the environment as well. Hence, the
sector may benefit from also developing strategies to attract high-budget tourists. For instance, Nepal
can pick up some best practices from Bhutan, another mountainous South Asian country that has
been successful in attracting high-budget tourists as described in Case 1.
Case 1: Bhutan‟s Success Story
Bhutan‟s approach to generate high value tourism
Bhutan, a country with same topography as Nepal, has successfully doubled its tourist
earnings in the past 3 years
Bhutan is a kingdom country in the Himalayas which has the same topography as that of Nepal. In
2009, 23,480 international tourists visited Bhutan for the purpose of holidaying leading to gross
123
earnings of US$ 31.88 million. However, in 2012, the number of international tourists rose to
43,931 leading to a 2x growth in gross earnings which rose to US$ 62.8 million.
Minimum package is required for international tourists to visit Bhutan
To promote “High Value Low Impact” tourism in the country, the Tourism Council of Bhutan requires
124
international visitors pay a minimum daily fee of US$ 200 which includes a royalty fee of US$ 65,
accommodation at a 3 star hotel, all meals, a licensed guide, internal transportation, camping
equipment, and taxes. This package can be upgraded as per tourist requirements. By using a
minimum package requirement, Bhutan is able to secure minimum revenue per tourist which makes
a sizable contribution to GDP and increases the public pool of capital available for infrastructure
development in tourism.
Bhutan government also focuses on promotional schemes to attract customers in lean

season
125
The Bhutan government launched a campaign called “Bhutan-Thailand Friendship Offer ” for
summer months of 2014 providing special discounted schemes on the mandatory package, airlines
and hotels to attract Thai tourists. This has benefited local businessman to generate business
during off-peak months as well rather than depending on particular seasons for tourists; and also
results in staggering tourist arrivals to decrease the environmental burden.
Source: Tourism Council of Bhutan website, accessed in May 2014
Poor state of infrastructure and destination management is creating challenges for long term
sustainable growth of tourism in Nepal
Tourism infrastructure in Nepal is under-developed; especially in terms of air connectivity between

major international destinations and Kathmandu.
123
International tourists exclude tourists from India, Bangladesh and Maldives as they do not require visa and
do not need to pay minimum tariff.
124
Tourism council of Bhutan; Official Website: Travel requirements
125
Tourism council of Bhutan; Official Website: Bhutan Thailand Friendship Offer

The country has only one international airport – the Tribhuvan International Airport – which caters to
126
more than 80% of the tourists entering Nepal by air . Efforts to expand the airport´s infrastructure
have not been successful in meeting demand which has been witnessing high growth in the past ten
years. There is only one runway to handle both domestic and international flights, which currently
handles more than two times the air traffic it was handling in 2000 with no major infrastructural
improvements. This has led to saturated periods during which no new flights can be added but there
is an unmet demand for flights. As a result of the state of air infrastructure, the country has a poor
127
track record of air safety with 3 prominent air crashes reported in the past 5 years . Driven by the
poor state of air travel safety, the European Union has banned all airlines from Nepal to fly into its 28
member nations from December 2013 onwards.
Aside from air connectivity for international arrivals; in-country air and road connectivity is poor as well
which can act as a deterrent to high-budget travellers. The government is taking steps to rectify these
inadequacies, and in February 2014, it signed a MoU with China to establish new flight routes, bring
in latest air safety technology and processes to improve the state of air travel infrastructure.
Further, there are very few regulatory guidelines and compliance checks around “destination
management” which has led to overcrowding, waste management concerns, and rapid deterioration
of existing infrastructure in popular tourist destinations.
Nepal‟s terrain places it at high risk of natural calamities; and the country has little equipment
and technology to predict these and also lacks an emergency medical system for responding
to these
Nepal is at significant risk of earthquakes, especially in the Kathmandu valley area which is located
over a major fault line that could cause earthquakes ranging up to 8 and above on the Richter
128
scale . An earthquake of this intensity could kill over 100,000 and injure another 300,000 in a single
instance. Aside from the Kathmandu Valley, the Himalayan peaks and glaciers also present threat of
natural calamities like severe weather conditions and avalanches. These risks threaten not only the
domestic population, but can also cause serious injuries or even death amongst tourists. The
challenge of natural calamities is further heightened by poor infrastructure to predict these and
manage the aftermath. The sector may benefit from joint public-private programs to address this
challenge; which left unchecked could harm the image of Nepal as a tourist destination in the event of
a large-scale calamity.
Overcrowding and intense competition among small players leads to less profitability in some
segments like budget hotels and travel agencies
Nepal’s tourism industry is currently concentrated around few locations where there are a number of
small players competing against one another especially in the budget hotels and travel agencies
segment. This has created intense competition where players are reducing prices to attract more
customers leading to fall in quality of services as well as reduced tourism earnings for the country.
The government could explore incentivising consolidation or geographic diversification to address this
challenge.
Despite these challenges, the overall outlook for the sector remains positive since the
government has some progressive measures to address these
126
MoCTCA Nepal
127
Flight Safety Foundation; Aviation Safety Network
128
United Nations Office for the Coordination of Humanitarian Affairs, Preparing for an Earthquake in
Kathmandu Valley, 2013

The Nepal government has been focused on improving tourism infrastructure through international
branding campaigns, focusing on theme-based tourism, and investing in tourism infrastructure.
Several international brand campaigns have been launched including “Visit Nepal Year 2011” and
th
“Visit Lumbini Year 2012”. In 2013, MoCTCA along with other bodies celebrated 60 anniversary of its
first ascent of Mt Everest and organised events to promote mountain tourism.
The government has further plans to highlight the Nepalese art, culture, and bio-diversity and
stakeholder business internationally through e-marketing. As Nepal is emerging as a prime
destination for cultural tourism, the MoCTCA has accorded top priority for development of theme-
based tourism like religious and eco-tourism. There are plans to set up cable cars in various religious
sites to promote tourism and boost the local economy.
At the infrastructure-level; the Tribhuvan International Airport is undergoing first phase of upgrades
that will reportedly halve the growing traffic pressure. The Government has also initiated call for
129
tenders to build a new Gautam Buddha International Airport in Bhairahawa, Lumbini . Industry
practitioners interviewed during the course of this study reported that this US$ 3 billion airport is
backed by the Chinese Government and is inspired by the air travel infrastructure that supports
pilgrimages to Mecca. Aside from Lumbini, the process for development of international airports in
130
Bara and Pokhara has also been initiated .
When viewed together, these different trends illustrate the government’s focus on supporting the
131
tourism industry; and hence the overall outlook for tourism sector in Nepal is positive .
The prices of tourist services in Nepal are rising at a high rate due to inflation and import-
reliance
Nepal reported an inflation rate of 9.72% in January 2014, and both the current rate of inflation as well
as historic trends compare unfavourably to other SAARC countries as shown in Figure 22. As a result,
prices of essential services, food and fuel are rising at a very high rate in Nepal. This challenge is
further exacerbated in the tourism sector by the high degree of import-reliance especially amongst
hotels and resorts which rely on suppliers in India and China for interiors, fixtures and kitchen
132
machinery . Hence, the price of tourism service in Nepal has been rising rapidly, and the sector
faces the risk of losing potential customers to other South East Asian countries which may be able to
provide comparable experiences at more compelling prices.
Figure 22: Comparison of inflation rate (%) in Nepal with selected SAARC countries
15
10
0
2009 2010 2011 2012
Nepal India Bangladesh Sri Lanka
Source: World Bank Development Indicators database, accessed in March 2014
129
MoCTCA tender issued in January 2014
130
MoCTCA representatives quoted in media reports
131
Ministry of Culture, Tourism and Civil Aviation, Nepal; Nepal Tourism News; May 2013
132

4. Regulatory and Policy Landscape in Tourism in Nepal
The Ministry of Culture Tourism and Civil Aviation (MoCTCA) is responsible for formulating
and implementing tourism policy
MoCTCA was established in 1978 with a number of roles and responsibilities outlined in 1978
Tourism Act. Its portfolio was broadened with addition of civil aviation affairs in 1982 and cultural
affairs in 2000. Present day MoCTCA is involved in monitoring compliance, classifying hotels and
other tourist businesses and sanctioning action against non-compliance through, for example,
suspending standard classification and cancellation of licences.
MoTCA also has oversight of the Civil Aviation Authority of Nepal (CAAN), the Nepal Tourism Board
(NTB), NATHM (the apex body for human resource development) and Nepal Airlines Corporation
(NAC – the national flag carrier).
Tourism services in Nepal are governed by the statutory instruments shown in Table 2.
Table 2: Statutory instrument governing Nepal tourism services
Policies Civil Aviation Policy, 2006; Tourism Policy, 2008
Civil Aviation Act, 1958 ; Nepal Airlines Corporation Act, 1962; Tourism Act,
1978 amended in 1997; Airport Operation Regulation 1981; Aviation Safety
Regulation, 1989; Immigration Act, 1992; Civil Aviation Regulation, 1995; Nepal
Acts Tourism Board Act, 1997; Civil Aviation Authority of Nepal Act, 1996; Nepal
Tourist Board Regulation, 1998; Industrial Entertainments Act, 1992, amended
in 1997; Foreign Investment and Technology Transfer Act, 1992; National Parks
Act, 1973, amended in 1994
Directives and Working Internal Procedural Directive, 2008; Home Stay Working Procedure, 2010
Procedures
Trekking and Rafting Rules, 1985; Hotel, Lodges, Restaurants, Bar and Tourist
Guide Rules, 1981; Travel and Trekking Agency Rules, 1980; Mountaineering
Rules/Regulations Rules, 1979; Mountaineering Expedition Regulation, 2002; Immigration
Regulation, 1994; Rafting Regulation, 2006; Travel and Trekking Agency
Regulation, 2005
Ministry of Culture, Tourism and Civil Aviation, Nepal Government
MoCTCA is due to bring out a new 10-year National Tourism Strategy Plan and a 5-year Action
Plan to act as a guiding framework for the tourism sector
This strategy is being developed in partnership with SNV and UNWTO; and its overall vision to
identify a roadmap for the tourism sector to act as an economic catalyst in Nepal by creating jobs,
bringing in foreign exchange, and having spill-over effects on other sectors. The framework is
expected to bring in several forward-looking policies for the private sector, especially in improving the
business and investment environment, tourism infrastructure and public-private collaboration in
marketing and branding initiatives.
The strategy is expected to be rolled out in phases; with the first phase focusing on “diversification
and improvement” from 2014 to 2018. The next phase is expected to last for 5 years and will focus on
133
“consolidation and expansion” .
133
UNWTO, Technical Cooperation and Services, National Tourism Strategy Plan for Nepal, 2014

MoCTCA is also ushering in a regulatory framework for adventure tourism which is expected
to address several systemic challenges and encourage private sector growth
As a result of increasing government focus on adventure tourism, MoCTCA has presented a new
regulation to scrutinise the increasing number of unregulated firms opening adventure tourism in
Nepal. The regulation requires compulsory registration of all the adventure sports including rafting,
canyoning, caving, bungee jumping, flying, rock climbing, mountaineering and cable car; and
134
proposes legal penalties for firms that fail to comply .
These measures are expected to increase safety and security, and bring in a measure of organised
activity in the adventure tourism segment which is an important contributor of long-stay, high-budget
tourists.
One of the more progressive policies in this sector govern earthquake proofing of hotels and
135
restaurants in Nepal; which is critical given the high risk of seismic activity
The regulatory regime in Nepal requires existing hotels to upgrade to earthquake proof infrastructure,
136
and for new and upcoming hotels to incorporate these features in their building designs . This is a
progressive policy in keeping global best practices.
4.1 Licensing Requirements in Tourism
80 to 90% of the licenses needed by tourism sector companies constitute common licenses
needed by all private industries in Nepal; travel agencies and tour operators require 3 special
licenses and hotels and restaurants require 1 special license
Due to the nascent nature of Nepal’s tourism regulatory system, private tourism companies need only
a few special licenses in addition to those required by any private company as shown in Table 3. The
cost of procuring a license ranges from 10 cents (US$) for VAT registration to over US$ 2000 for
incorporation of a business; and the validity ranges from a year until the license holding entity ceases
to exist. Different licenses need to be procured from different ministries and departments, taking from
1 day to over a year in processing time.
In addition to these generic licenses, travel agencies and tour operators need 3 special licenses to
operate travel agency, trekking agency and guides. Procuring these licenses can take up to 2 days
costing around US$ 1 for guide and US$ 150 each for travel and trekking agencies. On the other
hand, hotels and restaurants need only 1 additional license to operate their hotels, lodges and
restaurants and procuring this license can take up to 15 days. The license fee for hotels varies from
US$ 4 to 50 depending on their type with a validity of 5 years.
134
Travel News Digest; Nepal Tourism announces new regulations and adventure tourism ;2014
135
National Society for Earthquake Technology-Nepal website, accessed in May 2014
136
Ministry of physical planning and works, Nepal National Building Code, 1994

Table 3: Licenses needed by tourism companies
Supporting
Travel
and
Hotels and agencies
Sub-sector/ Licenses auxiliary
Restaurants and tour
transport
operators
activities
1. License to operate Hotels/Lodge/Restaurants 
2. License to operate Rafting Agency 
3. License for Private/Tour/Trekking/River 
Guide
4. License to operate Travel Agency 
5. License to operate Trekking Agency 
6. Agency Registration   
7. Company Registration   
8. Cottage & Small Industry Registration   
9. Design Registration   
10. Industry Registration   
11. Partnership Firm Registration   
12. Patent Registration   
13. Permanent Account Number (PAN)   
Registration
14. Permission for Foreign Investment &   
Technology Transfer
15. Registration of cooperatives   
16. Registration of institutions   
17. Trademark Registration   
18. Value Added Tax (VAT) Registration   
Source: Nepal Business License e-portal
4.2 Taxation, Royalties and Subsidies framework in Tourism
The tourism industry in Nepal has very few tax and subsidy incentives, and given the poor
state of current infrastructure, this can discourage entrepreneurs from entering this segment
Nepal currently does not offer significant regulatory incentives for private sector to enter tourism
market. Other developing countries often have specific incentives for private tourism companies such
as tax breaks for a certain period of time, subsidised land, and relaxation on import duties. For
instance in India, the government provides free or highly subsidised land for 10-30 years to tourism
sector entrepreneurs to set-up facilities like hotels and airports in underserved tourist locations.
Entrepreneurs enter into a “Build-Operate-Transfer” agreement with the governments and can
operate a tourism-sector business on the subsidised land, keeping a lucrative share of the earnings
137
from the property for a specific time period. Regulatory regime in Nepal could consider bringing in
137
RBI website; Public-Private Partnership in Indian Infrastructure Development

similar strategic incentives that support the growth of tourism companies to develop tourism
infrastructure in under-developed areas.
Tourist hotels, restaurants and travel agencies follow a standard corporate tax structure as described
in Table 4, and pay a statutory corporate income tax of 25% in addition to other taxes and duties.
Table 4: Taxation structure for tourism business in Nepal
Element Statutory Tax Rate Comments
Corporate income tax 25% Percentage of taxable profit

Employer – paid social security 10% Percentage of gross salaries
contributions
Taxes on vehicles ~ US$ 260 Fixed rate
Municipal business tax ~ US$ 100 Fixed rate
Tax on interest 15% Percentage of interest income
Property tax Various rates Depends on land value
Capital gains tax 20% Percentage of capital gains
Stamp duty on financial contracts Various rates
Source: World Bank, Doing Business Report, 2013; and Inland Revenue Department, Nepal, 2014
4.3 Impact of Regulations on Enterprise Operations and Value
The regulatory regime in Nepal has some degree of positive impact on enterprise value and
operations; but this could be enhanced by bringing in more facilitative policies to encourage private
sector entry in tourism industry. In addition to tax structure covered in Section 4.2, this impact is also
a function of additional rules and regulations as shown in Figure 23.
Figure 23: Impact of regulations on enterprise operations and value

Operations of hotels and resorts are positively impacted by - (a) government regulations to
meet international standards in facilities and (b) a few subsidies and incentives that result in
cost savings for private players
Nepal government has recently amended hotel regulations to meet international standards
Until 2013, hotels and resorts in Nepal were under the purview of Hotel, Lodge, Restaurant, Bar and
Tourist Guide Regulation 1981. Due to its dated nature, this framework did not include many new
international best practices that have been adopted by the tourism industry around the world. In order
to do away with this challenge, MoCTCA has issued a new regulatory framework to replace the 1981
guidelines. The new framework is has brought in revisions in categorisation of accommodation
providers, necessitates disability-friendly infrastructure, and dictates global benchmarks for
infrastructure and service.
The regulations for luxury hotels and resorts are especially progressive and include detailed
guidelines around room sizes, types of rooms, and the facilities within rooms among others. These
measures will create positive impact by bringing hotels and resorts up to global standards and may
serve to attract greater number of tourists which would ultimately drive up enterprise value. This will
positively impact Nepal tourism in long term by making hotels in Nepal compatible with current tourism
138
environment .
A few subsidies and benefits are available to tourism companies that serve to reduce costs of
operations
The few subsidies and benefits that tourism related companies enjoy are listed in Table 5. In addition
to these, the government could consider bringing in subsidies that influence and incentivise private
sector players to fill need gaps in the tourism market. This would help to decrease the number of
undifferentiated tourism companies in crowded markets like Kathmandu and Pokhara; and instead
redirect entrepreneurial activity to under-developed tourist locations.
Table 5: Subsidies and incentives available to tourism industry in Nepal
S.No Subsidy or Incentive
10% tax rebate to Tourism companies listed with Security Exchange Board
1
Rebate of 50 % custom duty on the import of luxury coach, micro bus and mini bus is allowed
2 for travel agents, trekking agencies, rafting agencies, hotels and resorts on the
recommendation of MoCTCA.
3 Import subsidies on equipment, furniture, and cutlery in year 1 of set up of hotels and resorts
Mandatory provision has been made for the employees of profitable public corporations and
those employees working in 'A' and 'B' class bank and financial institution to be sponsored for
4 internal tourism trips in Nepal by their respective employers. This may serve to drive up
volumes of domestic tourism in Nepal.
Source: Crowe Horwath; Overview of Nepal Financial Budget; 2014, and primary interviews carried out during the
course of this study in May 2014
138
MoCTCA circular (published in Nepal Gazette in October 2013)

Operations and value of hotels and restaurants are negatively impacted by– (a) limited
regulations in food safety standards for tourism services
Due to limited regulations in food safety standards; there is no dependable certification of

food quality amongst hotels, resorts and F&B retailers which could create a negative impact
on tourism
The regulatory regime in food safety standards for hotels, resorts and F&B retailers is weak, and this
has a trickle-down effect of decreased tourism spending. As a result, there is a degree of
apprehension about the quality of food amongst tourists, especially high-budget tourists, which could
negatively impact these facilities.
However, the government is working on bringing in initiatives to strengthen regulation and monitoring
of food safety standards in collaboration with the International Finance Corporation (IFC). This
support being rolled out under a program called the South Asia Enterprise Development Facility which
is managed by IFC in partnership with UKaid and the Norwegian Agency for Development
139
Cooperation .
5. Foreign Investment Policy and FDI in the Sector
The government recognises the need for growth capital in tourism and is supportive of private
sector investments from foreign countries, however has left out some subsectors to safeguard
interests of local industry
100% Foreign Direct Investment (FDI) is allowed in most tourism sub-sectors covered in Section 3.1.
However, the Foreign Investment and Technology Transfer Act 1992 which guides FDI currently
prohibits FDI in rural tourism, local catering services, travel agency, trekking agency, water rafting,
140
pony trekking, horse riding and tourist lodging facilities to foreign investment.
Significant FDI capital has been invested in the tourism sector in Nepal, but the y-o-y inflows
do not follow a predictable trend
Over US$ 125 million of FDI has been channelled into the tourism sector by foreign entities from over
141
30 countries from 2005 to 2013 as shown in Figure 24 . The top 4 source-countries of FDI capital
142
include China, Hong Kong, British Virgin Islands, and India . Practitioners estimate that outside of
143
promoters’ own equity, this is the largest source of private risk capital available in Nepal today .
144
While the FDI inflow has been significant, with tourism accounting for 13% of FDI capital in Nepal ;
most of this capital is invested in a few large projects. Growth in FDI saw significant upticks in 2010
and 2013, partially due to individual large investments being channelled into the tourism industry.
According to reports released by the Department of Industries in Nepal - In 2010, Sarat Industries Ltd.
from Hong Kong invested approximately US$ 21 million in Chautarama Pvt. Ltd. (100% stake) for a
139
International Finance Corporation, IFC Helps Improve Food Safety to Boost Tourism in Nepal, 2013
140
Does not include starred-hotels
141
Department of Industries, Industrial Statistics Reports 2005 - 2013
142
143
From primary interviews conducted during the course of this study by Intellecap in February 2014.
144
South Asia Watch on Trade, Economics and Environment (SAWTEE), Foreign Direct Investment in Nepal ,
2011

restaurant in Kavre; and in 2013, Global Technology and Trademark Ltd. incorporated in the British
145
Virgin Islands invested approximately US$ 20 million in a subsidiary for a hotel in Bhaktapur .
Figure 24: FDI inflows in tourism sector in Nepal
50.8
42.2
12.3 8.6
1.3 1.6 5
0.25 3.41
2005 2006 2007 2008 2009 2010 2011 2012 2013
Total FDI in US$ million
Source: Department of Industries, Industrial Statistics Reports 2005 - 2013
Hotels and restaurants have been key focus sub-sectors for FDI in tourism, cumulatively
accounting for 99% of the FDI inflows since 2005
Cumulative capital flows show that foreign companies as well as individuals have made investments
primarily in hotels and restaurants; with other businesses like travel agencies, trekking companies and
paragliding companies only receiving US$ 0.35 million cumulatively since 2005. Overall, hotels
account for 63% of FDI and restaurants account for 36%; although y-o-y splits have been erratic as
146
shown in Figure 25 .
Figure 25: Breakup of FDI in tourism sector in Nepal
60
50
40
US$
30
million
20
10
0
2005 2006 2007 2008 2009 2010 2011 2012 2013
FDI in Hotels FDI in Restaurants Total FDI
Source: Department of Industries, Industrial Statistics Reports 2005 - 2013
Of the US$ 79.5 million invested in Hotels since 2008, over 40% was channelled from entities
incorporated in British Virgin Islands, China, India and Singapore
The flow of FDI in tourism sector has been erratic with highly varying investments from different
countries every year, driven by the state of global markets as well as conditions of the local economy
from where the FDI originated. China has remained a consistent investor in hotels and it was the
largest investor till 2010. British Virgin Islands, India and Singapore were largest contributors to FDI in
147
hotels during 2013, 2012 and 2011 respectively .
145
146
147

Most FDI investments are structured with majority ownership for the foreign investor
Ownership structures in FDI in tourism subsector typically show majority shareholding for foreign
148
investors . Of the 388 FDI deals reported since 2005; 68% were structured as complete buy-out by
149
foreign investor and another 24% were structured as majority stake for foreign investor . One of the
major reasons for this trend is the low understanding and acceptance of working with external boards
amongst domestic promoters – who prefer to dilute their stake completely rather than enter into a
Joint Venture (JV) with a foreign company which requires them to report to a board of directors with
external representatives. Another reason is the low availability of exit platforms in Nepal, which forces
promoters to take any opportunity they get to realise value from their businesses. Since valuations in
Nepal are still on the lower side, often this means that a promoter has to completely dilute stake to get
150
a significant value out of the enterprise .
More JVs may come up in the medium term between domestic and foreign entities in the
luxury hotel and resort segment
The Nepalese tourism industry is witnessing an emerging trend of foreign entities investing in high-
end, luxury hotels and resorts in partnership with domestic players and major international hotel
151
chains. For instance, MIT Group Holding Nepal has signed a contract with Starwood Hotels and
Resorts Worldwide to construct a 5-star Sheraton Hotel in Kathmandu. The 225-roomed property with
amenities like 4 F&B venues and 16,500 square feet of meeting space is scheduled to be opened in
152
2018 . Similarly, Nepal Hospitality Group has entered into a partnership with Marriott International to
153
open a 4-starred Fairfield by Marriott property in Kathmandu .
Encouraging such Joint Ventures (JVs) between domestic and foreign firms in the hotel
business can create scale by bringing in both financial support and technical assistance
Aside from financial contribution to firms, foreign firms that form JVs with domestic companies are
beneficial in bringing in expertise in the form of technology and processes, management best-
practices, and access to markets by virtue of their international brand recognition and centralised
sales channels.
6. Investment Opportunities in Tourism
Investment opportunities for private equity investors in the tourism sector in Nepal can be categorised
on the basis of currently viable, emerging and non-opportunities as shown in Figure 26. Two lenses
have been considered in categorisation of these opportunities – (a) profitability of typical firms seen in
each segment in Nepal; and (b) scalability of firms, which has been determined as a function of firm-
154
level competitiveness and the businesses’ ability to take in private equity capital and scale.
148
Department of Industries, Industrial Statistics Reports 2005 – 2013; and Intellecap analysis 2014
149
Department of Industries, Industrial Statistics Reports 2005 – 2013; and Intellecap analysis 2014
150
151
Promoted by Shesh Ghale, a prominent Non-Resident Nepali
152
Non-Resident Nepali Association and Centre for Inclusive Growth, Nepal
153
From primary research conducted during the course of this study in May 2014; also validated by news and
media reports
154
Includes including margins, brand value, use of technology and modern approaches, access to markets and
financial health. Competitiveness is also a function of level of external competition that businesses in the sub-
sector face; with overcrowded markets being less competitive.

In addition to these, investors may also benefit from being cognisant of high potential tourism sector
business models that have been successful in other developing countries of South Asia, but are not
currently present in Nepal. Such models are bound to eventually make their way into Nepal by organic
and inorganic means; and when they do they could become emerging investment opportunities.
Figure 26: Evaluating comparative attractiveness of investment opportunities

in the tourism sector in Nepal
Source: Primary interviews carried out during the course of this study in May 2014, and
Based on the categorisation discussed above, the investment opportunities in the tourism
sector in Nepal can be categorised as shown in Figure 27
Figure 27: Categorisation of investment opportunities in the tourism sector in Nepal
Currently viable investment opportunities for private equity investors exit amongst luxury 4
and 5 star hotels and resorts only
Not only is there significant organised and commercial-scale private sector activity in this segment;
but high firm-level competitiveness and the ability to take in large sums of private equity capital with
preference for minority stake investments can also be seen as discussed in Section 3.2. Moreover
this market is far from saturated especially in upcoming tourist destinations outside Kathmandu as
discussed in Section 3.1.1.1.

Emerging opportunities can be explored in chains of food service companies
The organised F&B service industry in Nepal is growing rapidly due to the emergence of a new middle
155 156
class and increasing disposable income . As a result, the demand for food service companies like
fine dining and quick service restaurants is steadily rising. Currently, most players on the supply-side
are organised as stand-alone entities; but chains of such food service companies can be expected to
emerge in the next few years. Early signs of such a trend are already visible, with companies like
Himalayan Java and Aangan running multiple outlets with standardised processes and offerings.
Given the high margins in F&B business; and the economies of scale that result from operating chains
of such businesses; this segment can emerge as a lucrative investment opportunity for private equity
players in the near future.
Currently missing but high potential business models include travel-focused e-commerce,
serviced apartments, and branded budget hotels
While Nepal currently does not show significant activity in these areas, comparable South and South
East Asian countries like India have shown significant business model innovation in these segments
to address critical market gaps. For instance, travel-focused e-commerce companies in India have
given small and medium tour, hotel and transport operators direct channels for customer acquisition,
and have decreased end prices for customers by removing middle-men. Similarly, market gaps like
absence of long-stay accommodation options and good quality and affordable hotels have led to
emergence of serviced apartments and branded mid-budget hotel chains. Given the success of these
models in countries like India, they are bound to find their way to Nepal through organic or inorganic
means; and when they would they could emerge as high potential investment opportunities for private
equity investors.
Unviable opportunities include local travel and tour operators, stand-alone budget hotels,
stand-alone restaurants, and homestays
Typical businesses seen in travel and tour operations, stand-alone budget hotels, stand-alone
restaurants and homestays are unlikely to present investment opportunities for private equity
investors since they have poor firm level competitiveness and cannot take in large amounts of equity
capitals structured as minority stakes as presented in Figure 18.
6.1 Currently-viable investment opportunities
6.1.1 4 and 5-Star Hotels and Resorts
4 and 5-star hotels in Nepal cater to a growing market opportunity presented by the demand
from high-value tourists on one hand, and limited supply on the other
There are 40 to 50 high-end 4 and 5-star hotels and resorts in Nepal which cumulatively represent
157 158
1500 to 1800 rooms ; and have a potential market opportunity of US$ 80 to 100 million . Most are
155
Asian Development Bank, The Rise of Asia’s Middle Class, 2010
156
See Section 3.1.1.2 for details
157
Intellecap analysis, 2014 - based on primary interviews conducted during the course of this study in May
2014; MoCTCA Tourism Industry Division, 2013 and Hotel Association Nepal website, accessed in May 2014.
Ranges have been used since the number of hotels compiled from different sources showed variation; as did
the categorisation of hotels as 4 and 5 star. Further, the MoCTCA does not report on hotel distribution aside
from Kathmandu Valley and hence government data is not available.

159
structured as private limited companies, although 4 are listed . Of these, the 3 listed companies
160
presented in Table 6 are actively traded while Yak and Yeti is not .
Table 6: Listed 5-star hotels in Nepal
Category and Number of Total paid up Market

Company
Location Rooms value capitalisation
Owns 5-star
Oriental Hotel
Radisson Hotel in 160 ~ US$ 5 million ~ US$ 37 million
Limited
Kathmandu
Owns 5-star
Soaltee Hotel
Crowne Plaza Hotel 283 ~ US$ 3 million ~ US$ 184 million
Limited
in Kathmandu
Taragaon Regency Owns 5-star Hyatt
Hotel Regency Hotel in 280 ~ US$ 17 million ~ US$ 58 million
Kathmandu
Source: Nepal Stock Exchange website, accessed in May 2014
The listed 5-star hotels in Nepal report revenues of US$ 7.5 to 12.9 million as shown in Table 7,
with median EBIDTA margin of 34%, net profit margin of 14% and ROE of 21%
Table 7: Financial performance of listed 5-star hotels in Nepal
FY 2013
Company EBIDTA Margin Net Profit Margin ROE%
Revenue
Oriental Hotel
US$ 7.5 million 37% 16% 22%
Limited
Soaltee Hotel
US$ 12.9 million 27% 14% 21%
Limited
Taragaon Regency
US$ 9.5 million 34% 10% 5%
Hotel
Source: Calculated from publically available annual reports of Oriental Hotel, Soaltee and Taragaon
The typical cost structure of 4 and 5-star hotels and resorts in Nepal essentially comprises of land,
building and machinery, interiors and fittings, F&B supplies, housekeeping supplies, repairs and
maintenance, advertising and sales, administration and general expenses, and staff salaries. Of
these, the highest contribution to cost structure arises from spend on land, building and machinery,
and interiors and fittings.
On the other hand, the key sources of revenue are room rental fee, F&B purchases, MICE and
banqueting fee, and other miscellaneous in-hotel purchases. The key metrics that drive revenues in 4
and 5-star hotels and resorts are listed in Table 8, along with the typical trends observed in Nepal.
158
See Sections 3.3 and 11.2 for details
159
Nepal Stock Exchange website, accessed in May 2014
160
The Yak and Yeti Hotel Company is also currently listed on Nepal Stock Exchange (NEPSE) website but the
company shares have not been actively traded since 2002, and in a 2007 general meeting, the shareholders
decided to delist the company though clear data on the progress of de-listing is not available. In a 2009 press
release, the firm reiterated its decision to de-list and cited a NEPSE regulation – that requires the general
public to hold at least 30% shares of a public limited company – as the key reason. The press note stated that
the company was not willing to divest shares as it had no need for capital.

Table 8: Key revenue drivers in 4 and 5-star hotels and resorts
Metric Trend in Nepal

Number of rooms ~150
Occupancy (%) ~60%
Average room rental ~US$ 150 to 180
Average F&B revenue (as a % of room rental, assuming 2 people per room) ~45 to 50%
Other revenues from MICE, in-hotel purchases (as a % of room rental) ~10 to 15%
Source: Intellecap analysis 2014, based on – primary insights collected during the course of this study in May 2014,
MoCTCA Tourism Statistics 2012, and trends from hospitality industry in India
Comparable project cost structure and revenue metrics for a 5-star hotel built in a Tier 2 city in
India have been shown in Figure 28
While reliable data on project cost structure and revenue metrics for 4 and 5-star hotels in Nepal was
not available; comparable data for a 5-star hotel project built in a Tier-2 city in India is presented here.
Figure 28: Project cost structure and metrics for a 5-star hotel in India
Source: Spark Capital Equity Report, 2008
4 and 5-star resorts in Nepal are typically theme-based and have USPs like heritage buildings,
casinos or golf courses to attract visitors
Typically 4 and 5-star resorts in Nepal tend to be built over larger land area than hotels; and usually
have a theme-based USP to attract customers, such as heritage property, ayurvedic treatments, golf
courses etc. While sufficient reliable data distinguishing hotels and resorts was not available, industry
practitioners interviewed during the course of this study reported that the top resorts in Nepal by
room-size, star-rating and turnover include Gokarna Forest Resort in Kathmandu, and the Fulbari
Resort Casino Golf and Spa in Pokhara.
4 and 5-star hotels are largely concentrated in Kathmandu and Pokhara, with no significant
presence in other tourist destinations

As presented in Figure 12, most of the 4 and 5-star hotels and resorts in Nepal are concentrated in
Kathmandu and Pokhara with no significant presence in other tourist destinations. Given that Nepal
has over 550 to 600 other tourist destinations; there is an opportunity for the high-end luxury
161
accommodation segment to also expand to other places - especially in Eastern Nepal which is
under-penetrated and offers specific opportunities in tea-based tourism activities and tea-garden
themed resorts and hotels.
These hotels primarily operate through three models in Nepal – (a) domestically owned, (b)
domestically owned but operated by foreign chain, and (C) JV between domestic and foreign
firms
The hotels and resorts that are owned and operated by domestic firms generally have domestic
brands - such as Barahi Hotels and Gokarna Forest resort. On the other hand, several large domestic
firms, including 3 listed hotel companies in Nepal own their properties but the day-to-day operations
162
are managed by international hotel companies and there is a revenue-sharing agreement involved .
Finally, in several upcoming hotel projects such as Sheraton Kathmandu, a JV has been created with
co-investments from both domestic and foreign firms.
Key investment opportunities in the 4 and 5-star hotels and resorts category are summarised
in Figure 29
Figure 29: Key investment opportunities in 4 and 5-star hotels and resorts in Nepal
Private equity investors can channel risk capital to support expansion of an existing hotel or
resort company by adding to and upgrading infrastructure of an existing property
The 40-50 currently operational 4 and 5-star properties present an opportunity for private equity
investors to channel investments into adding rooms and facilities; as well as upgrading existing
facilities in order to improve occupancy and revenues. Given that the government is planning a
161
Nepal Tourism Statistics, 2012; Tripadvisor Nepal; Intellecap analysis, 2014
162
While data on revenue shares in Nepal was not available, the typical trend in such cases in India is for the
foreign firm to take 3% of total revenues and 8% of gross operating profits. Unlike JVs, in these types of
management-outsourcing partnerships, the foreign firm takes on low degree of liabilities and the domestic
firms remains accountable to shareholders, creditors etc.

tourism campaign similar to “Visit Nepal Year 2011” that can drive up inbound tourism, and that recent
163
regulations to improve hotel standards have been released ; the next few years are an opportune
time for such investments. In fact, investments in existing and operational properties are likely to have
shorter breakeven and exit time frames since the management teams have experience of running the
property and the capex (capital expenditure) is lower.
Private equity investors can also support expansion of an existing hotel or resort company
which is seeking to build a new property
Given the under-penetrated markets for high end and luxury accommodation outside Kathmandu and
Pokhara; private equity investors may also find lucrative investment opportunities in supporting
expansion of an existing hotel or resort company which is seeking to build a new property in a new
location. Eastern parts of Nepal and popular destinations like Chitwan and Lumbini present good
164
opportunities for such expansion moves .
Green-field ventures that seek to start building 4 and 5-star resort and hotels may also be
evaluated
In such cases strength of management team and tie-ups with international brands can increase
lucrativeness of an opportunity for private equity investors as well as the strategic and operational-
readiness for the hotel firm.
Finally, private equity investors may also channel capital towards vertical or horizontal
consolidation which can help a tourism-sector firm diversify offerings and improve revenues
and profitability
165
A trend of vertical and horizontal consolidation has been observed in the tourism industry in Nepal
where hotel businesses are being started by travel and tour operators that are seeking to diversify
their offerings and retain a higher share of the tourists’ spending. With investments in their own hotel
infrastructure, such travel and tour operators are able to offer end-to-end servicing to tourists at
attractive prices while also improving their profitability. Such companies could also provide lucrative
investment opportunities for private equity investors.
Key success factors and challenges that investors in 4 and 5-star hotels in Nepal should be
cognisant of are summarised in Figure 30.
Figure 30: Key success factors and challenges in 4 and 5-star hotels in Nepal
Key Success Factors Key Challenges
• Location • Delay in expansion initiatives

• Existing land bank for expansion • Rising land prices
• Diversified customer base • Low availability of talent
• Brand recognition • External risks like poor infrastructure and
• Managerial strength political instability
• Partnerships and linkages with other
tourism services firms
163
See Section 4.3 for more details
164
From primary insights garnered during the course of this study in May 2014
165
See Section 3.1.1.3 for details

Some key success factors that investors can use to evaluate the attractiveness of 4 and 5-star
hotels include:
 Right location for a hotel property is a very important success factor: Some salient features of
a good location include (a) good view of natural, cultural and other tourist attractions, (b)
accessibility from an international airport, and (c) proximity to leisure activities targeted at
tourists. At the same time, promoters should display savviness in land acquisition since the
high cost of land in prime tourist destinations can impact overall business viability
 Given the high cost of land acquisition in tourist destinations, hotel and resort companies with
existing land bank that can be leveraged for expansion may offer more lucrative investment
opportunities for private equity investors
 Diversified customer base with healthy split between domestic and foreign tourists is
indicative of scalability of a hotel or resort property. Further, diversification in sourcing
channels for customers, including B2B and direct online channels is key for long term growth
 Tourism-related customer behavior is driven by “aspirational” and “value for money”
sentiments, and hence tourists generally prefer to procure services from well-known and
established brands. As a result, brand recognition for hotels is key to growth in this segment –
both amongst tourists as well as travel influencers like magazines, blogs and other media.
Hotels and resorts that have a tie-up with a foreign hotel chain have a distinct advantage due
to higher brand recognition of international hotel chains
 4-star hotels and resorts are both people-intensive models where the quality of service and
staff-interactions with guests are as important as the quality of infrastructure. Such quality is
generally driven top-down and hence high quality managerial strength on both strategy and
operations-side of a hotel/resort business are critical
 Finally, since tourists are bound to spend a fair degree of their time engaging in tours and
activities outside the hotel or resort property, partnerships with high-quality and dependable
providers of such services can help hotels and resorts provide end-to-end services to their
customers
Some key risks and challenges that investors in 4 and 5-star hotels in Nepal should be
cognisant of include:
 Delays in expansion initiatives; especially those contingent upon land acquisition and building
construction
 Rising land prices, especially in urban centres like Kathmandu and Pokhara which have a
direct impact on project viability
 Low availability of talent, which causes difficulty in hiring and retaining staff
 External risks like poor infrastructure and political instability can have a negative impact on
both foreign and domestic tourists
6.2 Emerging investment opportunities
6.2.1 Chains of Food Service Companies
Chains of restaurants and cafés are growing globally, especially in underpenetrated emerging
markets in Asia, Africa and Latin America
Chains of restaurant and cafes fall under the ambit of the food service industry, which is in-turn part of
the organised F&B industry. The global food service industry is valued at US$ 2.55 trillion with over

166
6.5 million outlets; and 65% of global spending growth has been observed in emerging markets .
The revenues in this market are projected to grow at a CAGR of 5.78% and volumes at CAGR of
167
5.57% over the next 4-5 years . World-over, the food service industry works in 3 major delivery
formats – home delivery; small outlets for take-away with no seating arrangements; and through brick-
and-mortar buildings with seating arrangements. This industry runs the gamut from fine-dining to
quick service fast-food; and cuisines vary from country to country. In the past decade, a growing
middle class in emerging markets of Asia, Africa and Latin America has driven growth of this industry
– with local as well as international companies vying for market share.
The demand for fine dining and fast food in Nepal is increasing with rising disposable income
and tourist inflow, but the food services industry is fragmented
168
Disposable incomes in Nepal are rising with growth in per capita Gross National Income as well as
169 170
remittances . This has resulted in the emergence of a middle class that is shifting consumer
demand patterns in the F&B sector towards “out-of-home consumption” like fine dining and fast food.
In response to this market demand, over 16,500 micro and small food service companies have come
171
up in Nepal that predominantly operate stand-alone outlets, restaurants and cafes . As a result, this
market is highly fragmented and hence currently not lucrative for private equity investors.
Chains of food service companies are in a stronger position to address this demand in a
profitable and scalable manner, early traction has been observed
The profitability and firm-level competitiveness of chains of food service companies is greater than
stand-alone companies, and hence these chains are better able to address market demand in a
scalable manner. Some early traction by chains of food service companies is visible – especially
amongst firms like Himalayan Java and Aangan as discussed in Section 3.1.1.2, and this indicates
that the domestic market in Nepal is gradually growing.
Similar trends were seen in India in mid-1990s when firms like Specialty Restaurants and Jubilant
FoodWorks first launched operations of chains of fine dining and quick service restaurants
respectively. By virtue of being early entrants in the organised food services segment, both firms were
able to capture market early and are publically listed companies today. For instance, Specialty
172
Restaurants listed in 2012, was oversubscribed 2.5 times and gave its private equity investors
Internal Rates of Return (IRR) of 18 and 31%.
While data on operational and financial performance metrics for food service companies is not
available in Nepal; data from listed firms in India can be used for comparison
173
Organised activity in the food services segment in India accounts for 7.24% market share , and this
is projected to continue growing with rising incomes, rapid urbanisation of smaller towns, and
changing demographics. Two specific models that have seen growth in India are chains of fine-dining
restaurants and chains of quick service/fast food restaurants. A snapshot comparing key operational
and financial metrics of both models is presented in Table 9, using publically reported data from
Specialty Restaurants and Jubilant FoodWorks.
166
GLG Research / Johnson Cornell University Emerging Markets Institute, Food Service Industry Trends in
Emerging Markets, 2012
167
Infiniti Research Limited, Global Foodservice Market 2014-2018, 2014
168
World Bank Development Indicators
169
World Bank Development Indicators
170
ADB, Asia’s New Middle Class, 2012
171
Concern for Children and Environment – Nepal estimated that on an average, there are 220 restaurants per
district in Nepal; in their survey titled “National Survey on Child Labour in Restuarants”
172
SAIF partners and Glix Securities, as per data from Venture Intelligence
173
Food Franchising Report, 2009

Table 9: Operational and financial metrics of food services companies in India
Fine Dining Chain Quick Service/Fast Food

Metrics
(Specialty Restaurants) Chain (Jubilant FoodWorks)
Number of outlets 96 602
20% in Tier I cities, 80% in Tier II
Geographic focus Tier I and II cities
and III cities
EBIT Margin 13.65% 13.2%
PAT Margin 10.32% 9.3%
ROE% 14.22% 31%
Brand Own brand Franchised brand (Dominos)
60% owned, 23% franchisees,
Outlet ownership Owned
also have 14 confectionary outlets
Source: Company websites and annual reports; Right Horizons Equity Report on Jubilant FoodWorks, 2014;
Growth in chains of food service companies like restaurant and café-chains is expected in the
near future; with entry of existing domestic firms, foreign firms and establishment of new firms
likely
Given the early traction in Nepal, as well as demonstrated success of chains of food service
companies in India, it is likely that this segment will emerge as a lucrative opportunity for private
equity investors in the near future. Promoters of such food service companies in Nepal may include
existing domestic business groups in allied segments like hotels, first generation entrepreneurs from
Nepal, and foreign firms that are seeking to expand to Nepal. Bikanerwala and Gulab sweets are
good examples of foreign food service firms that have already expanded in the Nepal market, and an
expansion move could also be expected from Jubilant FoodWorks which is the master franchisee for
174
Dominos’ pizza in Nepal .
6.3 Currently Missing but High Potential Opportunities
6.3.1 Travel-Focused E-Commerce
The tourism accommodation and tours and travels sector is fragmented in Nepal, making it
difficult for consumers to reach businesses directly
There are over 2100 micro and small tour and travel operators in Nepal, and over small 1600 tourist
175
accommodation providers ; leading to a fragmented market with high degree of information
asymmetry between buyers and sellers. As a result, tourists have to rely on middle men or travel
agents to access services; and tourism-facility providers similarly rely on these middle-men for
customer acquisition. This causes higher prices for the former and reduction in profit margins for the
latter; and makes for an inefficient market.
174
Moneycontrol Equity Reports
175
MoCTCA, Tourist Statistics Nepal, 2012

Travel-focused e-commerce companies could bring buyers and sellers closer, and the
improving IT and Telecom infrastructure in Nepal makes it an opportune time for such models
to enter the market
Given the information asymmetry between buyers and sellers in the tourism market in Nepal, there is
a need for an easily accessible and scalable marketplace that connects both sides; and this presents
an opportunity for travel-focused e-commerce firms to enter the market. The improving IT and
telecommunications infrastructure in Nepal as shown in Figure 31 could also play a supporting role for
such firms.
Figure 31: Improving internet and mobile penetration in Nepal
60
49
34
21
7.9 9 11.1
2
2009 2010 2011 2012
Internet Users (per 100 people) Mobile Subscriptions (per 100 people)
Source: World Bank Development Indicators database, accessed in May 2014
Global market in travel-focused e-commerce is growing, and some early activity by

international travel e-commerce firms in Nepal has been seen
This segment is growing globally at 8.4%, and is it estimated that 25% of all tourism related
176
purchases (worth US$ 524 billion) are made digitally via e-commerce platforms . While no
significant activity has been observed in this segment by domestic firms in Nepal thus far,
international travel e-commerce companies like TripAdvisor have started retailing tourism services
with a primary focus on foreign tourists. Domestic firms may have an edge over international e-
commerce firms by forging close partnerships with tourism facility providers for better rates and
discounts, and using local knowledge to help buyers navigate to the best choices of service providers.
India presents a comparable example, where travel-focused ecommerce occupies significant

share of digital sales and is showing steady growth
Since there is a lack of domestic activity in travel- focused e-commerce; it is useful to evaluate trends
from the neighbouring tourism market in India to understand the potential for travel-focused e-
commerce. The Indian travel-focused e-commerce market is worth over US$ 6.44 billion currently,
and dominates the e-commerce industry with over 75% of all digital purchases in India comprising
177
purchase of tourism services such as hotel bookings, airline and train tickets, and tour packages .
Leading companies in this segment by volume of traffic include makemytrip.com, yatra.com,
ibibo.com and cleartrip.com. 80 to 90% of the revenues of these firms come from travel ticketing
178
transactions; followed by hotel booking and tour packages . However, the margins in hotel and tour
179
sales are higher at 10 to 25% than air and train travel which are in the range of 7 to 10% . Given the
176
World Travel Market, Global Trends, 2013
177
Internet and Mobile Association of India, and Indian Market Research Bureau International; 2012
178
Ernst and Young, Rebirth of e-commerce in India, 2012
179
Avendus, 2012

growing demand for domestic and inbound business and leisure travel in India; travel-focused e-
180
commerce is expected to show steady growth over the next few years .
Travel-focused e-commerce firms may emerge in Nepal in the future; likely promoters include
large tour and travel operators and IT/ITES firms
Driven by the on-ground market need for bringing buyers and sellers in tourism industry closer; as
well as the growing global market in online travel sales; it is expected that travel-focused e-commerce
forms may emerge in Nepal in the near future. These are likely to be promoted by large tour and
travel operators seeking to diversify operations; as well as by local IT/ITES companies seeking to
make a product-play.
6.3.2 Serviced Apartments
Serviced apartments segment is rapidly emerging as an alternate to hotel accommodation for

long-stay-travelers and tourists
Serviced apartments are a type of tourist/traveler-accommodation designed for long-stay guests as an

181
alternate to hotel accommodation . They typically tend to be larger than hotel rooms, and often
include additional facilities like kitchen appliance and sit-outs. Such apartments typically retail at 25 to
182 183
30% lower rates than pure-play hotel rooms and services are often customised for guests . The
global market for serviced apartments in developed markets is largely driven by business travelers;
though in places of tourist importance with longer average “durations of stay”, they also cater to
leisure tourists. There are close to 700,000 serviced apartments units globally, which together
account for more than 7% market share of temporary accommodation units sold.
There is a market opportunity for high-end serviced apartments in Nepal given low supply of 4
and 5-star hotels and resorts; and comparatively long average durations of stay
The supply-side of luxury accommodation in Nepal is inadequate with only 40-50 4 and 5-star
184
hotels . There are also a handful of serviced apartments (such as Mandala, Retreat, 9 Rooms, and
Park Village Apartments) that are specifically targeted at long-stay travelers.
On the demand-side however, Nepal does seem to attract tourists and international travellers that
may form an attractive customer segment for high-end serviced apartments. Aside from long-stay
leisure travellers, these include business and official travellers who often visit for several months at a
time, as well as expatriates who work with international and local businesses and development sector
organisations on short term contracts. Since the average duration of tourist stay in Nepal (12.16
185
days ) is much higher than average stay in several South Asian and South East Asian countries as
shown in Table 10; this presents an opportunity for the serviced apartment industry to grow in Nepal.
180
emarketer, 2014
181
The Apartment Service Worldwide, The Global Serviced Apartments Industry Report, 2013-14
182
IBEF, Serviced Apartments – Home Away from Home
183
The Apartment Service Worldwide, The Global Serviced Apartments Industry Report, 2013-14
184
185

Table 10: Comparison of average length of stay of tourists
Average Length of Stay of

Country
Tourists*
Nepal 12.16
Thailand 9.19
Cambodia 6.5
Bhutan 8.7
Sri Lanka 10
Source: Nepal data from MoCTCA Tourism Statistics Report 2012;

other countries from UNCTAD Handbook of Statistics, 2007
* Statistic covers overall length of stay of tourist in a country from

time of entry to time of departure.
India presents a comparable example, where serviced apartment market has been growing
rapidly with activity from both domestic and foreign firms
The market for long-stay accommodation in India took off in early 2000s largely due to growing
demand from business travelers. Along with Indian operators like Taj Group, and Brigade Group;
many international serviced apartment operators like Oakwood, Bridgestreeet, and Ascott; and hotel
operators like Hyatt, Marriott, Carlson and Four Seasons have also entered the market. While the
concept of serviced apartments took off due to demand from business travelers, the demand from
leisure tourists has also seen an upswing over the past few years. The market is estimated to
186
currently service 20 to 30% of the overall demand for accommodation ; however given the
challenges in defining a “serviced apartment”, clear market segmentation is difficult to arrive at. The
typical room rentals charged by serviced apartments in the Indian Subcontinent are shown in Table
11.
Table 11: Typical room rentals for serviced apartments in the Indian Subcontinent
Rental for Studio Rental for 1 Bedroom Rental for 2 Bedroom

Length of Stay
Apartment (US$) Apartment (US$) Apartment (US$)
1 week or more
44 to 88 51 to 142 68 to 244
(tariff/per night)
1 month or more
962 to 1,388 1,101 to 2,165 1,100 to 2,091
(tariff/month)
Source: The Apartment Service Worldwide, The Global Serviced Apartments Industry Report, 2013-14
186
The Apartment Service Worldwide, The Global Serviced Apartments Industry Report, 2013-14; and primary
research done by Intellecap in May 2014

Organised activity in serviced apartments may emerge in Nepal in near future; likely promoters
include existing hotel operators, real estate players and foreign firms
Driven by the on-ground market need for accommodation for long-stay travelers in Nepal, as well as
the inadequacy of 4 and 5-star hotel and resort infrastructure, it is expected that serviced apartment
segment may emerge in Nepal in the near future. These are likely to be promoted by existing hotel
firms seeking to diversify to an “extended-stay segment”; as well as real estate firms focused on the
housing and apartments market in Nepal. Foreign firms are also likely to evaluate the opportunity
given the recent traction in this segment in the neighboring country of India.
6.3.3 Branded Budget Hotels
The hotels segment in Nepal has a “missing middle” of mid-budget branded hotels
187
While the number of 4 and 5-star hotels in Nepal that retail at US$ 120 or more per night is in the
range of 40-50, and there are thousands of unbranded, stand-alone economy hotels; the market has
188
a missing middle of mid-budget branded hotels that retail at a tariff of US$ 50 to 100 per night . This
category is a well-defined segment in many developing countries like India and Indonesia, and differs
from 4 and 5-star hotels on one hand, and economy hotels on the other by virtue of having similar
standards of service as 4 and 5-star hotels but with fewer amenities like banqueting, spa, multiple
189
restaurants and deluxe room fittings that tend to add overheads to hotel promoters and thereby
increase prices for travellers. For instance in India, the cost of construction of a branded mid-budget
190
hotel room is US$ 60,000 to 90,000 and it tends to retail at US$ 40 to 60 . On the other hand, the
cost of construction of a branded 4 to 5-star hotel room is US$ 150,000 to 200,000 and it tends to
191
retail at US$ 250 to 300 .
India presents a comparable example, where the mid-budget hotel market has been growing
rapidly with activity from both domestic and foreign firms
192
Mid-budget rooms constitute 29% of total hotel rooms in India , and activity by branded hotel chains
in this segment has witnessed an upswing in the past 5 to 7 years. Several established domestic and
foreign hotel operators have entered this segment as shown in Table 12. The total number of units of
such hotel rooms is set to witness a significant increase over the next few years as over 50 to 60% of
193
the construction-stage rooms supply is estimated to belong to this category . This market has seen
a specific impetus on growth in Tier II and III cities, for both business and leisure travelers.
Table 12: Selected mid-budget branded hotels in India
Typical
Brand Promoter Company Number of Hotels Geographic Focus
Tariff
Indian Hotels Primarily Tier I, Tier II
US$ 30
Ginger Company (also own 30 hotels and III cities, business
to 40
the Taj Hotels) and leisure destinations
187
From company websites and e-booking portals
188
189
HVS Hospitality Reports
190
HVS Hospitality Reports
191
Spark Capital Equity Report, 2008
192
Hotelier India, Citrus Hotels
193
HVS, Hotels in India - Trends and Opportunities, 2011

Typical
Brand Promoter Company Number of Hotels Geographic Focus
Tariff
JV between
Holiday Inn 1 operational hotel, 1 Tier II cities, primarily US$ 50
InterContinental and
Express opening soon business destinations to 65
Duet Hotels
Tier I, II and III cities,
Sarovar Hotels and 6 operational hotels, 1 US$ 45
Hometel primarily business
Resorts opening soon to 100
destinations
Primarily Tier I and II
7 operational hotels, 2 US$ 30
Ibis Accor Hospitality cities, business
opening soon to 95
destinations
6 hotels, 1 serviced
apartments and 3 US$ 35
Keys Berggruen Hotels business and leisure
resorts operational, 21 to 75
destinations
opening soon
US$ 35
Peppermint Peppermint Hospitality 4 hotels in India primarily leisure
to 50
destinations
Tier I and II cities,
Lemon Tree Hotel US$ 40
Redfox 4 hotels primarily business
Company to 50
destinations
Source: Company websites accessed in May 2014
Mid-budget branded hotels may emerge in Nepal in the near future; likely promoters include
existing hotel operators, travel and tour operators, and foreign firms
Driven by the on-ground market need for affordable yet high quality accommodation in the range of
US$ 50 to 100, and the absence of this segment on the supply-side, it is expected that branded mid-
budget hotels may emerge in Nepal in the near future. These are likely to be promoted by existing
hotel firms seeking to diversify to a “price and quality conscious” clientele; as well as tour and travel
operators seeking to diversify their offerings to their existing clientele.
6.4 Non-Viable Investment Opportunities
Unviable opportunities include local travel and tour operators, stand-alone budget hotels,
stand-alone restaurants, and homestays
Typical businesses seen in travel and tour operations, stand-alone budget hotels, stand-alone
restaurants and homestays are unlikely to present investment opportunities for private equity
investors since they have poor firm level competitiveness and cannot take in large amounts of equity
capitals structured as minority stakes as presented in Figure 18.
7. Exit Opportunities for Investors in Tourism

The flow of private equity investments into 4 and 5-star hotels and resorts in Nepal is a comparatively
new phenomenon. The few investments made so far have largely involved domestic promoter equity
or FDI capital as shown in Section 5. Further, the only recorded exits thus far have been restricted to
public listing of firms on NEPSE as presented in Table 6.
As a result, this creates a challenge in predicting exit trends as there is a lack of historical data as well
as financial industry infrastructure to facilitate exits.
7.1 Spectrum of Exit Routes
A key role that private equity firms are expected to play in the 4 and 5-star hotels and resorts segment
in Nepal is to help businesses expand the infrastructure for serving high value tourists, and thereby
attract a greater number of such tourists to Nepal which in-turn has a positive impact on the
194
economy .
With these investments; companies that operate 4 and 5-star hotels and resorts are likely to grow
faster, increasing their revenues and profitability and thereby increasing firm value. This in-turn results
in making such businesses attractive to other investors – ranging from investment funds to foreign
hotel chains - that can buy-out stake of first investor at a higher valuation. It is also possible that
enough value is created for the promoter or the management team to buy-out investors’ stake. A
broad overview of the various possibilities in exits are discussed here, followed by a hypothesis on
which are likely to be popular exit routes in Nepal.
Generally speaking, the process of an equity investor selling stake to another investor at a higher
valuation is termed an “exit”, and the spectrum of possible exit opportunities includes – (a)
Management / Promoter buyout, (b) Secondary Sale, (c) Trade Sale, (d) Initial Public Offering
195
(IPO) .
 Management / Promoter buyout: Management / Promoter buyout involves the repurchase

of the private equity investors’ shares by the company and/or its management. The
management buyout method is popular amongst hotel and resort-promoters in Nepal given
that profit margins and liquidity are on the higher side. In such situations, promoters may
utilise the cash earnings for buying back the stake of private equity investor.
 Secondary Sale: Secondary sale is the purchase of the private equity investors’ or others’
shareholdings by another investment institution. Private equity investment activity in Nepal is
still an emerging phenomenon; however development financial intuitions such as IFC have
been active in making risk capital investments in Nepal in recent past. Secondary sale would
be an attractive method to exit in Nepal once the investment eco-system develops and
matures.
 Trade Sale: A trade sale involves selling the company’s shares to another company
(structured as a merger or an acquisition) usually in the same industry sector when the
196
acquirer needs the company to supplement its business areas . The numbers of publicly
197
available Merger and Acquisition (M&A) transactions in Nepal are on the lower side , but the
activity is picking up in recent years after the political stability in the country. Many companies
in Nepal have started to realise the benefits of economies of scale and scope, increased
revenue and market share, cost reduction through consolidated operations.
194
195
Intellecap primary research
196
A trade sale is similar to ‘strategic’ sale
197
Excluding Banking, Financial Services and Insurance sector

 IPO: IPO is used to publicly share the equity offering that is followed by the listing of shares
on stock exchange. The capital markets in Nepal are in nascent stage and are dominated by
banks and financial institutions where presence of real sector on the capital markets is very
198
low (excluding the hydropower sector) . IPO route could also a potentially popular exit route
for investments in the hotel sector, but only in firms where promoters are willing to open up
their firms and operations to the level of scrutiny and accountability demand from public
limited companies in Nepal
7.2 Likely Exit Routes for Tourism in Nepal
Private equity firms investing in 4 and 5-star hotels and resorts in Nepal may need to stay
invested for 8 years or more before finding a lucrative exit
4 and 5-star hotels and resorts in Nepal generally take 5-8 years to breakeven and are expected to
199
have higher trends in profitability thereafter . Private equity investors should be cognisant of the
projected break-even in specific opportunities to estimate lucrative entry and exit times. A successful
exit will depend on the entry points of investments; which is usually the construction and/or expansion
stage for a hotel/resort project. The requirement of capital is highest at this stage and investments can
be made at lucrative valuations. Based on insights from industry practitioners and Intellecap analysis,
the capital value chain for possible exit options for private equity investors in 4 and 5-star hotels and
resorts is shown in Figure 32.
Figure 32: Broad timeline for private equity exits in 4 and 5-star hotels and resorts segment
Source: From primary interviews conducted during the course of this study in May 2014, and Intellecap analysis, 2014
In order to manage risk of investing in an early stage hotel or resort venture, investors can use the
non-financial valuation metrics discussed in Section 10.4 to identify high potential opportunities.
Additionally, investors may find it less risky to enter at construction stage in more well-established
ventures; and just before or in early stage operations of green-field ventures.
198
Refer Annexure 11.4.1 for detailed discussion in capital markets in Nepal
199

Promoter buy-back likely to be most popular approach for private equity exits in 4 and 5-star
hotels and resorts segment in Nepal
Re-purchase of private investor’s shared by promoter(s) is likely to be the more prevalent approach
for exits in 4 and 5-star hotels and resorts since the business model enjoys high margins and has a
high market opportunity as well. While promoter ability to buy-back will be one driver; the other will
probably be the prevailing promoter sentiment where existing promoters want to ultimately retain
complete control of the firm. There seems to be a high degree of apprehension about loss of control
200
that could result from diluting management stake .
IPO may be observed in a few cases given the successful listing of 3 large 5-star hotel firms
While public listing of firms is still rare in Nepal as a general matter; this could be a likely exit route for
private equity investors to exit given that 3 large hotel operators have achieved successful exits and
201
are actively traded as shown in Table 6. These firms reported a median return on equity of 21% in
FY 2013, and can be used as blueprints to model potential exits in 4 and 5-star hotels and resorts in
Nepal.
Trade sale and secondary sale have lower likelihood in the near future
Overall, trade sale and secondary sale show less likelihood in the near future. Trade sales are
unlikely given reluctance to acquire existing properties amongst domestic firms on one hand, and the
preference for entering early as first investors amongst foreign firms on the other. Secondary-sale is
also unlikely since it requires the establishment of a value-chain of equity investors who have differing
but complementary investment sizes, risk appetites and preferred stages of investment. Give that the
practice of equity investing in Nepal is very nascent, this value-chain will take time to emerge. Most
investors are likely to prefer growth-stage investments with lower risk and shorter return timeframes
and their investing activity is more likely to be competitive than complementary as was observed in
the Indian context 7-8 years back.
7.2.1 Exit Trends Observed in Tourism in India
202
The capital markets in India are much more developed compared to Nepal and the private equity
investing activity is at a more advanced level. The most popular exit route for both venture capital and
private equity investments in India is through public market sales, including IPOs. Out of the 115
equity exits reported in India 2012, more than 50% were through public market sales, including
203
IPOs . The trends in exits in India have been shown in Figure 33 below.
200
From primary interviews conducted by Intellecap during the course of this study in May 2014
201
From Annual Reports of Soaltee, Taragaon and Oriental published in the public domain
202
Refer Annexure 9.4.3 for details
203
IVCA; India Private Equity Report 2013, Bain and Company

Figure 33: Distribution of private equity exits in India
Source: IVCA; India Private Equity Report 2013, Bain and Company
Public market sale and promoter buy-back are popular modes of exits from hotels and resort
companies in India
A total of 33 private equity investments cumulatively worth US$ 0.79 billion have been reported in the
204
hotels and resorts segment in India between 2009 and 2014 . A total of 16 exits have been
observed in the same period; with public market sale and promoter buy-back being the prevalent
forms of exit as shown in Figure 34.
Figure 34: Prevalence of different modes of exits in hotels and resorts segment in India (2009-2014)
6%
19%
44%
31%
Public market sale Promoter Buy-Back Trade Sale IPO
Source: Venture Intelligence India database
205
Return multiples across hotel and resorts exits in India typically range from 0.41x to 2x
Specific details of 16 exits observed in hotels and resorts in India between 2009 and 2013 are shown
in Table 13.
204
Until May 2014
205
Venture Intelligence India database, accessed in April 2014

Table 13: Private equity tourism exits reported in India between 2009 and 2013
Company Acquirer Seller Deal Size Exit Status Exit Return

(US$ mn) Procedure Multiple
Kamat Clearwater
BW Highway Star 10.85 Complete Strategic Sale 1.06x
Hotels Capital
Chalet Hotels Promoters IDFC PE Complete Buyback -
Coffee Day
Premji
Cicada Resorts Hotels & 1.78 Complete Strategic Sale 0.53x
Invest
Resorts
Paracor
Daman Hospitality Delta Corp 14 Complete Strategic Sale 2x
Capital
Company
Trinity
DB Hospitality (DB 22.53 Complete Buyback 1.17x
Capital
Hospitality)
Elephant Public Market
East India Hotels - 8 Complete 0.85x
Capital Sale
Elephant Public Market
East India Hotels - 3.12 Partial -
Capital Sale
Graviss Hospitality - Temasek 7 Partial Buyback -
Morgan
IHHR Hospitality Promoters Complete Buyback -
Stanley
Clearwater Public Market
Kamat Hotel - 0.78 Partial 0.46x
Capital Sale
NYLIM
Mahindra Holidays & Jacob
- 58 Partial IPO -
Resorts Ballas
Funds
Sequoia
Public Market
Royal Orchid Hotels - Capital 2.4 Partial 0.41x
Sale
India
Clearwater
Sayaji Hotels Promoters 11.5 Complete Buyback 1.76x
Capital
Sayaji Hotels - 2 Partial 1.64x
Capital Sale
Sayaji Hotels - 2.4 Partial 1.77x
Capital Sale
Sayaji Hotels - 0.45 Partial 1.8x
Capital Sale
Source: Venture Intelligence India database, accessed in April 2014
7.3 Challenges in Exit
The key challenges to private equity exits in Nepal fall under three broad categories as shown in
Table 14; i.e. systemic, equity investor-related and promoter-related challenges.
Table 14: Challenges in exits in Nepal
Systemic Challenges
Nascent industry, so higher risk and longer return horizons are possible
Little or no regulatory oversight for private exit markets

Lack of investor-entrepreneur connection platforms and investment intermediaries
Over-reliance on foreign equity
Currency devaluation risk
Lack of exit platforms designed for secondary-sale
Equity Investor-Related Challenges
Less experience of managing portfolio companies in economies like Nepal
Difficulty in building deal-flow
Lack of risk assessment frameworks customised for Nepal
Hotel/Resort Promoter-Related Challenges
Lack of awareness about the comparative benefits of debt and equity
Apprehensions around working with external boards and fear of losing control of company
In addition to these, some regulatory hurdles that could be challenges for private equity investors in
the hotels and resorts segment are:
Promoter lock-in period of 3 years: This is a key challenge for exits of private equity companies in
Nepal. The existing provision and law states that “the shares subscribed by the shareholders in the
groups other than public (group of promoter and other) of the body corporate which is eligible for
going public, shall not be qualified for sale unless a three years period after the allotment of such
206
shares is complete” . The three years lock in period for private equity investors is on the higher side
207 208
in the SAARC when compared to one year in India and Sri Lanka and no lock in period in
209
Bangladesh .
The repatriation of capital is a challenge for foreign equity investors in Nepal: at present the
repatriation of capital to a foreign country (except India) requires approval from the different
departments in the Nepal Rastra Bank (NRB) and department of industries and is often
210
discretionary . Given the uncertainty in the policies and regulations of future governments due to
political instability, this discretion could be major hurdle for foreign investors in exits.
7.4 Enablers Needed for Exit
The government and its aid partners, the regulatory regime, and private sector can work in a
complementary fashion to build enablers needed for exit as shown in Error! Reference source not
found.. When these actors begin to harmonise their functions, an “ecosystem” for equity investments
begins to emerge as has been observed in the case of Silicon Valley; and more recently in India and
parts of East and South Africa.
206
SEBON Annual report 2011-12
207
SEBI annual report 2012-13
208
CSE directive 2012
209
SECBD website, 2013
210
Intellecap primary research

Figure 35: Typical ecosystem for private equity investments in emerging economies
Government and aid partners can create more impact by playing a facilitative rather than direct
role
Government and aid partners could potentially create most impact by helping to decrease risk of
investments; acting as anchor investors in funds; and bring in facilitative regulation like tax breaks and
other incentives for tourism companies.
The creation of „Guarantee funds‟ by public sector institutions can help to channel more debt
and equity capital into tourism companies
Creation of guarantee fund by Public sector institutions, both for debt and equity products could
provide commercial banks and private equity funds with partial coverage of risk exposure against
investment made in tourism companies. This would ensure that the capital supply to such companies
is not affected in the long term and this would facilitate further investments in the sector.
Building an ecosystem for the secondary markets to facilitate private equity investment exits
through open offer would create more exit opportunities
More awareness about the nuances of equity investing would be beneficial for both entrepreneurs and
investors. Industry networks, forums and conferences, incubators and investment intermediaries have
a key role to play in building this awareness and creating a better ecosystem for equity investments.
Historically given the low trading volumes in secondary markets in Nepal, an enabling environment for
211
promoting secondary market transactions should be created . The key drivers that would facilitate
the trading volumes in the secondary markets in Nepal are – (a) introduction of reliable online trading
system making trading affordable and (b) settlement of transactions to be shortened to a few days
from the present duration that could last for few weeks.
Regulatory regime can play a key role in putting in place regulatory structures to allow exit
platforms to emerge
Recognising equity investments as a separate asset class creates more formal structures and higher
degree of organisation in the private equity market, which helps investors to navigate the processes of
incorporation, licensing and approvals. This recognition can also pave the way for special
211
Refer Annexure 9.4.3

concessions to private equity investors as well as create the foundation for public and private exit
platforms to emerge.
Private sector actors like investment intermediaries can help to reduce duplication of efforts in
deal sourcing and early stage capacity building; and highlight best case practices for the
industry
Private sector actors like investment advisory firms; and industry networks and forums like
conferences and workshops are efficient aggregators of high potential businesses. By playing this
role, they can decrease duplication of effort in pipeline discovery across different private equity funds
and also ease the process of fundraising for entrepreneurs by helping them navigate through different
choices. This trend has been observed in India, where industry networks like TiE, FICCI and
NASSCOM; private and public incubators; and forums like TIECON and Sankalp Forum have played
a key role in helping the venture capital and private equity spaces grow.
8. Access to Capital
8.1 Access to finance amongst 4 and 5-star hotels
4 and 5-star hotels and resorts in Nepal have moderate access to debt but low access to
institutional equity
Larger hotels and resorts interviewed during the course of this study reported that access to debt is
comparatively easier in the hotel and resort business as collateral is available in the form of land and
212
building. These firms are typically able to access debt at 10.5 to 12.59% interest rates . However,
213
access to institutional equity is low in the country due to the less developed state of capital markets .
Difficult to estimate quantum of debt funding, but the larger hotels and resorts seem to have
easier access to debt funding and at better interest rates
In case of smaller hotels and resorts, access to debt is difficult due collateralisation requirements,
high interest rates, and capping of loan terms at 8 to 10 years. Data with further granularity is not
available, and hence it is difficult to accurately estimate flow of debt funding.
Overall, the supply of debt to businesses in Nepal appears to be inadequate since only 10%
businesses report that they are well-served by the banking infrastructure, and only 1% have a
214
commercial bank as source of financing . Some common challenges associated with access to debt
funding include:
 Requirement of high collateralisation: Banks tend to lend only to larger and well-
established businesses and often require up to 100% collateralisation
 Long lead times in loan approvals: The process of procuring a loan can take from 3
215
months to over a year with significant time investment from senior management .
212
213
214
IFC Enterprise Finance Gap Database, accessed in March 2014
215
From primary interviews conducted during the course of this study

Equity funding in 4 and 5-star hotels and resorts primarily consists of FDI and promoter
capital; very little organised private equity investing activity exists
Domestic promoter equity has been channelled by family-run business groups or High Networth
Individuals including NRNs. Over US$ 125 million has also come in through FDI route from
216
institutional as well as individual investors since 2005 .
4 and 5-star hotels and resorts face several challenges in accessing institutional equity capital which
include:
 Low supply of organised equity funding which means that promoters with existing
relationships/networks built with financiers are more likely to be evaluated for investments
 Low awareness about the pros and cons of raising external equity which leads many
hotel and resort promoters to be apprehensive about losing control of their company to an
external investor
 Very little activity in “investment intermediation” from investment advisors and others
who typically link investors and entrepreneurs in more mature markets
 Lack of clarity in valuations and nature of investment agreement
 Lack of exit platforms
8.2 Grants and Resources

There are several international financial and non- financial assistances available to businesses which
Nepal can explore to bring in measurable operational efficiency and success within a company. Some
of the relevant grants and resources along with their criteria have been listed below:
1. Austrian Development Co-operation – Business Partnerships
In cooperation with the Oesterreichische Entwicklungsbank (OeEB) the Austrian Development

Agency (ADA) promotes Business Partnerships.
Activities that can be undertaken with the support of ADA:
 Improvement in initial training and vocational training

 Know-how transfer
 Use of renewable energies or increase in energy efficiency
 Improvement in water supply and waste water treatment
 Improvement in waste disposal and/or recycling
 Promotion of rural development and responsible management of natural resources
 Increase in production, competitiveness and quality
 Consolidation of supply chains
 Improvement in social standards and working conditions
 Improvement of the health of workers and their families, fostering gender equality
These measures can be supported as part of a business partnership with a non-repayable grant.
Funding amounts to up to 50% of direct project costs (not exceeding EUR 200,000), which must total
at least EUR 100,000. The term of a Business Partnership is limited to three years. The programme is
open for applications all year round.
216

Criteria
ADA is interested in innovative and sustainable projects. To be eligible for funding, a project must
meet the following conditions:
 Applicant is a European company in partnership with a company from a developing country.
 Generation of local added value, turnover and profits.
 Long-term commitment in developing country.
 Benefits for local population beyond the applicant’s core business.
 Compliance with national laws and internationally recognised environmental and social
standards.
 The project includes flanking measures that contribute both to improving the local social,
ecological or economic environment and the success of the company.
Eligible costs
The application includes a budget according to ADA format. The following costs can be included:
 Time spending of project partners.

 Salaries of staff hired for the project.
 Local and international travelling and accommodation costs.
 Capital goods investments (only the annual depreciation costs are covered for the duration of
the project).
 Costs of training, advisors, certificates, marketing, studies etc.
2. German Development Co-operation - DeveloPPP
The develoPPP.de programme provides up to 50% grant (maximum of Euro 200,000) to selected
projects proposed by a European company or a company in a developing country in which European
companies or nationals own at least a 25% share. The programme is funded by the German
government and administered by its agencies DEG, GIZ and Sequa. These agencies hold ideas
competitions four times a year for the develoPPP.de programme with the following closing dates: 31
March, 30 June, 30 September and 31 December.
Criteria
To qualify for develoPPP.de grant funding under the ideas competition, a project needs to have the
following features:
 The applicant is a company registered in Europe or a company registered in a developing

country with at least 25% European ownership.
 The applicant is at least 3 years active, has at least 10 employees and a turnover exceeding
Euro 1 million.
 The applicant has a long-term entrepreneurial commitment in the target country and
demonstrates a commercial interest in the project.
 The project should be completed within 3 years from contract signing.
Activities

DeveloPPP will co-finance exclusively projects that prepare or accompany long-term private sector
commitments, like:
 Design and introduction of new products, technologies and services relevant to development;
demonstration or pilot projects.
 Improvement of range of courses offered at training institutes.
 Improvement of energy and water supply.
 Improvement of healthcare.
 Job creation.
 Improvement of labour and social standards.
 Measures to boost environmental and climate protection.
 Supply chain management.
 Economically and socially responsible value chain management.
Eligible costs
The application includes a budget according to DeveloPPP format. The following costs are eligible:
 Time spending of project partners.

 Salaries of staff hired for the project.
 Local and international travelling and accommodation costs.
 Capital goods investments (only the annual depreciation costs are covered for the duration of
the project).
 Costs of training, advisors, certificates, marketing, studies etc.
3. German Development Co-operation – Up-scaling
With the special programme “Up-Scaling”, DEG finances pioneer investments of small and medium
enterprises (SME) in developing and emerging countries that intend to scale up innovative business
models. The programme addresses companies whose financing needs lie somewhere between micro
financing and the traditional financing by commercial banks.
Target group
SMEs that are registered in the developing country- This may also be local subsidiaries of German or
European companies. The applicant company has to provide the resources in terms of finance and
manpower as well as the relevant know-how to implement the project and needs to be able to present
at least one annual financial statement.
Funding
DEG finances a maximum of 50% of the total investment volume (max. EUR 500,000) under the
condition that there are private sponsors who contribute a substantial share of equity (at least 25%).
The DEG share must be repaid in the event of success of the project (depending on pre-defined
financial criteria such as cash flow, revenue or profit).
Conditions of co-financing
 The project is based on an innovative business approach.
 A pilot phase has already been successfully completed with proof of concept as regards to
technology and business model at local level.
 The project must generate profit (proof by means of business plan and financial projections).

 The project shows high growth potential owing to the size of the market and the target group.
 The project may generally be planned in all developing or emerging-market countries, with
individual limitations owing to political or other risks. Projects in Africa and in LDCs (least
developed countries) will be considered preferentially.
Interested companies may deliver their proposals for the co-financing to DEG at any time.
4. Dutch Development Co-operation – Food security and private sector development

programme (public-private partnership)
The programme aims to stimulate public/private partnerships of Dutch and local partners within the
sphere of food security and private sector development in developing countries. There is one tender
round in 2014, closing on 1 December 2014.
Target group
Grants are available to public institutions, businesses, NGOs and knowledge institutions, within a
cooperative partnership which encompasses at least one business. The public component in the
partnership will, in every case, comprise the Dutch Ministry of Foreign Affairs. Participation by an
NGO is mandatory. Preferably, other public institutions will also form part of the cooperative
partnership.
Sub-themes
For food security:
 Improved local/regional availability of affordable and qualitative good food.
 Efficient markets and sustainable chain improvement in local/regional markets.
 Not eligible: projects exclusively aimed at non-food crops
For sustainable entrepreneurship:
 Inclusive business proposals with demonstrable impact on low income groups
 Improvement of female entrepreneurship
 Not eligible: proposals aimed at the financial sector (excluding insurance)
Grant
Maximum 50% of budget with project budget of minimum EURO 2 million. Minimum 25% of project
budget must be financed by private enterprise.
5. Norwegian Development Co-operation – Application-Based Support for Private Sector

Actors
Activities
The programme is primarily aimed at businesses / commercial companies seeking funding for:

 Feasibility studies (maximum 50% of budget with maximum grant of EURO 60,565). Norad
primarily covers the costs made in the development country.
 Preliminary studies may include market, technology, legislation, etc.
 Training related to establishment (maximum 50% of project budget with maximum grant of EURO
60,565). Support can be given to training of local employees for a limited time in connection with
establishment, in cases of major expansions or restructuring.
 Pilot production/demonstration in connection with private investment projects / business

establishment (maximum 50% of total costs with maximum of EURO 121,000). In the starting
phase of production in a developing country, there may be doubt on whether the chosen
technology is appropriate to the local conditions.
The purpose of the programme is to reduce the risks present before an investment decision is made
and to secure the sustainability and feasibility of the investment project.
For companies seeking funding it is important to note the following:
 Some sectors are prioritised (renewable energy, climate and environment-related technology,
agriculture, forestry, marine and maritime sector).
 Requirements of at least EURO 1.2 million in turnover for the last year.
 The applicant should normally have, or plan for, an ownership of at least 25% in the
established/ planned company.
 The applicant must show a high development effect to be probable.
 Sales and representation offices will not be supported.
Applications can be submitted continuously.

6. Swedish Development Co-operation – Innovation Against Poverty (IAP)
Applicants can be based in any country, but their inclusive business must be in a low-income country
(OECD/DAC list). The programme functions as a risk sharing mechanism for sustainable business
ventures (commercial companies or market oriented organisations) which have a strong potential to
reduce poverty. Companies can be active in all sectors where innovation leads to poverty reduction,
from agriculture and infrastructure to health and education.
Grants: Innovations Against Poverty has two parallel application processes:
 Small grants (maximum 50% of project costs with maximum of EURO 20,000) for the purpose of
exploring an innovation or a new market. The grant can be used for travel and pre-feasibility
studies; stakeholder needs assessments, and networking with local organisations. This
programme focuses on smaller organisations which have a wealth of good ideas with great
potential, but need the support of their business strategy and resources to penetrate new
markets.
 Large grants (maximum 50% of project costs, in the range of EURO 20,000 – EURO 200,000)
for the purpose of undertaking a development project aimed at a product, service, system,
business model or a concept ready to be put to market test, or adaptation of existing products to
be affordable and accessible by the poor. IAP also seeks to work with larger companies, to help
support the development of “inclusive business” models for these markets, which expands
opportunities for the poor and disadvantaged in developing countries. Such business models can
engage the poor as employees, suppliers, distributors and consumers.
Key criteria: development effects, commercial viability, innovation, cost sharing and additionality.
The process is of a competitive nature, where grants are awarded to the best business plans which
meet the criteria of the programme. The programme works with 1-2 tender rounds per year. No tender
round has been announced at present.
7. USAID
There are several programmes under USAID that are applicable for Nepal such as:
 Powering Agriculture
 Development Innovation Ventures
 Partnering for Impact
 Partnering to Accelerate Entrepreneurship
 Partnering for Innovation
9. Typical Capital Structure in 4 and 5-Star Hotels and Resorts
Typical emerging market 4 and 5-star hotels and resorts have debt-heavy capital structures
during initial years of operations, with debt component steadily decreasing as the business
grows
Hotels and resorts typically need access to debt for purchase of land, building constructions, and
fixtures and interiors in their initial stages. This debt is usually long term, and is paid back within a 5 to

10 year window depending on financial health of the business. During this period, the debt:equity ratio
217
is typically 70:30 in emerging market economies like India, Indonesia, Malaysia, and Thailand .
As the business grows and matures and long-term debt is paid off; the overall debt component
decreases. However, these businesses have cyclical requirements of medium to long term debt for
expenditure on facility upgrades and expansion, and periodic replacement of fixtures and furnishings.
They also need short term debt from time-to-time for operational expenditure on salaries and
218
maintenance. As a result, the steady-state debt:equity ratio can range from 50:50 to 20:80 .
Capital structures of 4 and 5-star hotels and resorts in Nepal align with this industry trend
The capital structures of hotels and resorts in Nepal also align with the emerging market trends in
capital structures as shown in Table 22. Their capital structures are debt-heavy in initial years, but as
the businesses grow and long-term debt is paid off; the overall debt component decreases.
Early stage private limited companies interviewed during the course of this study reported debt:equity
ratio of 70:30; while the more established and public limited companies shown in Table 6 show a
median debt:equity ratio of 30:70.
Table 15: Typical capital structure of 4 and 5-star hotels and resorts in Nepal
Capital Structure in Nepal

Debt Equity
Private Limited 4 and 5-star
70% 30%
hotels and resorts
Public Limited 5-star hotels 30% 70%
Source: Primary interviews conducted during the course of this study in May 2014;
annual reports of Oriental Hotel, Taragaon Hotel and Soaltee. Median values for
D/E taken.
4 and 5-star hotel promoters who prefer institutional equity often do so for strategic reasons
like improving brand value and enhancing management capacities
Not surprisingly, 4 and 5-star hotel promoters who prefer equity seemed to do so for the “non-
financial” value-add it creates; and sought enhanced brand value, improved outreach to foreign
tourists and improved management capacities as key contributions expected from an equity investor
as shown in Figure 36.
217
Venture Intelligence and Intellecap analysis, 2014
218
Venture Intelligence and Intellecap analysis, 2014 – see in Table 26 in the Annexure for complete sample set

Figure 36: Typical tourism business promoter preferences in capital structures
Source: Primary interviews conducted during the course of this study in May
2014
10. Valuation Trends in Tourism
Enterprise valuation in Nepal can often be challenging because – (a) there is limited historical
data; (b) there is a lack of adequate industry benchmarks, and (c) the use of comparable data
from SAARC countries is only partially adequate.
There is little public information available on past equity investments into tourism companies in Nepal
aside from publically listed firms (in Table 6). The lack of data is primarily due to infancy of the
investment value chain and support infrastructure such as research and ratings. Further, sparse
research coverage of capital markets in Nepal has resulted in limited availability of historical data and
limited access to updated industry benchmarks.
219
However, the investment landscape, particularly in the tourism sector , is witnessing brisk activity,
with 2-3 institutional investment funds setup over the last three years. The status of investment
landscape presents an opportunity for early entrants into the venture capital space in Nepal to make
investments at lucrative valuations.
In the absence of adequate industry benchmarks relevant proxy, comparable data and hurdle
rate methods may be used to guide valuation
Since adequate industry benchmarks from Nepal are not easy to access; valuation data from
comparable countries like India and Sri Lanka may be used as broad guides by investors. These
countries are comparable because like Nepal, they have inherent tourism strengths like natural
beauty and historical monuments; and the tourism industry makes significant contributions to GDP
and employment. They are also reliant on inbound tourism and suffer from many of the infrastructure
219
From primary insights garnered during the course of this study in May 2014

related challenges like poor waste management at populated tourism destinations. At the same time,
countries like India have much higher market capitalisation and better investment value chains, and
have several publically listed and traded tourism companies. Hence, even though some comparable
valuation ratios can be used from these countries, they can at best be broad guides since the
regulatory regimes, banking infrastructure, market capitalisation and other macro-economic indicators
vary widely from country to country.
In absence of consistent data on valuation ratios in the sector, hurdle rate can also serve a good
indicator of minimum returns expected from investments in the tourism sector. The two benchmark
rates considered for the analysis include (a) Cost of Equity and (b) Weighted Average Cost of Capital
(WACC) for a given financing mix of equity and debt.
10.1 Valuation of Listed 5-Star Hotels in Nepal
The Nepal Stock Exchange has 4 listed 5-star hotels, of which 3 are actively traded and report on
their financial performance as shown in Table 7. Based on the financial performance reported by
220
these 3 firms over the past two years , their valuation multiples have been calculated as shown in
Table 16.
Table 16: Valuations of 5-star hotels listed on NEPSE
ROE% P/E EV/EBIDTA EV/Sales

Listed Companies
2012 2013 2012 2013 2012 2013 2012 2013
Soaltee Hotel 23% 21% 27.37x 35.18x 22.97x 25.91x 6.43x 7.09x
Taragaon Regency
3% 5% 39.55x 16.96x 12.65x 6.72x 3.52x 2.30x
Hotel
Oriental Hotel 16% 22% 5.41x 6.64x 14.91x 9.95x 5.08x 3.66x
Source: Annual reports for Soaltee, Taragaon and Oriental; and Intellecap Analysis, 2014
A comparison of ROE and cost of equity could be used to evaluate if a firm is adding value to
investors
The cost of equity in listed and more established hotels is found to be 22 to 25% using the
assumption of capital structure for mature firms shown in Table 15. When compared against the
ROE% of listed 5-star hotels in Nepal, Oriental Hotel and Soaltee are found to be more likely to add
value to investors as shown in Figure 37.
220
Historical financial information prior to FY 2012 was not available.

Figure 37: ROE and cost of equity analysis of listed 5-star hotels in Nepal
Source: Annual reports for Soaltee, Taragaon and Oriental; and Intellecap Analysis, 2014.
Please see Section in Annexure for notes on calculation of cost of equity. D/E of mature
hotel companies has been assumed for calculations in this case.
10.2 Comparable Valuations in India and SAARC Countries
Valuation multiples from comparable countries like India and Sri Lanka may be used as broad
indicators by investors evaluating opportunities in 4 and 5-star companies as shown in Table 17. Data
from comparable countries has been used due to inadequacy of public data on valuation trends in
Nepal. Countries like India and Sri Lanka are found to comparable because – (b) they have inherent
natural, cultural and spiritual tourism “pull-factors” like Nepal; (b) significant reliance on inbound
tourism; (c) tourism is a key contributor to GDP and employment; and (d) they have common
infrastructure related challenges like poor waste management at populated tourism destinations
Table 17: Median of valuation multiples of some listed hotels and resorts from SAARC countries
EV/
ROE % EV/Sales P/E
EBIDTA
Hotels and Resorts 6.9% 9.32 2.46 14.7
Source: Data for valuation multiples is based on financial statements of publically traded
companies in India, Sri Lanka, Indonesia, Malaysia, Bangladesh and Pakistan. The specific
value represented here is the median of multiples of several companies – the details can be
accessed in Section 11.5.3 in the Annexure. Information on financial statements was
accessed from Capital IQ, Bloomberg and MoneyControl databases in March 2014.
Note: Due to limited size of sample set, this should only be taken as a broad guide to
valuation multiple ranges. Specific valuation multiples may differ significantly from company
to company.

10.3 Estimating Hurdle Rate for Tourism in Nepal
Hurdle rate is proposed as an indicator of minimum expected return from investments in 4 and
5-star hotels and resorts
In absence of consistent data on valuation ratios in the sector, hurdle rate can serve a good indicator
of minimum expected return from investments in the sector. The two benchmark rates considered for
the analysis include (a) Cost of Equity and (b) Weighted Average Cost of Capital (WACC) for a given
financing mix of equity and debt. Finance literature offers multiple methods of calculating the hurdle
rates; the current report uses the Damodaran Model (refer to annexure). As Nepal’s investment value
chain is in early stages of its development, investors may seek premium for illiquidity and size of the
investments.
Cost of Equity in 4 and 5 star hotels and resorts in Nepal ranges from 37% to 42%
Based on the data from the tourism sector in Nepal and comparable proxies, the Cost of Equity for
investments in 4 and 5-star hotels and resorts is estimated to vary from 37% to 42%; and Weighted
Average Cost of Capital is estimated to be 17% to 19%. The key assumptions for the estimations are
listed in Table 18 and ranges for Cost of Equity are presented in Table 19.
Table 18: Key assumptions taken to calculate WACC in 4 and 5-star hotels and resorts in Nepal
Parameter Assumptions
Market value
The data for debt component presented in Table 15 has been used.
of Debt (D)
Market Value
The data for equity component presented in Table 15 has been used.
of Equity (E)
221
Tax rate Corporate tax rate of 25% has been taken
The data from major banks in Nepal such as SBI Nepal and Bank of Kathmandu has
Cost of debt in been utilised to obtain the cost of debt. The range of cost of debt has been taken at
Nepal 10.5 to 12.5% as per information gathered during primary interviews conducted in
the course of this study
Risk Free
Taken at 9% based on the bond rates reported by Nepal Rastra Bank
Rate
 Beta for 4 and 5-star hotels and resorts in frontier markets has been estimated to
Beta be 0.74 based on data analysed from comparable geographies
estimation  The beta has been levered using Debt equity ratio for 4 and 5-star hotels and
resorts in Nepal as shown in Table 15. This gives the levered beta value of 2.04
Market Risk 222
The market risk premium ranges from 13.66% to 16.25%
Premium (Rm)
221
Inland Revenue Department, Nepal statistics
222
See calculations in annexure

Table 19: Cost of Equity across 4 and 5-star hotels and resorts
4 and 5-star Hotels

and Resorts
Cost of Equity (min) 37%
Cost of Equity (max) 42%
4 and 5-star hotels and resorts are found to have a higher cost of equity primarily due to a heavy
reliance on long-term debt for construction and operations of facilities in the first 7 to 8 years. As a
result, the capital structure of a typical luxury hotel or resort has up to 70% debt in initial years, which
decreases to 30 to 40% debt component for mature companies.
Cost of Equity and leverage are considered together to estimate the Weighted Average Cost of
223
Capital (WACC) using the formulae shown in Table 20.
Table 20: Estimated hurdle rate for 4 and 5-star hotels and resorts in Nepal
4 and 5-star hotels

and resorts
D/E 2.33
Beta Unlevered 0.74
Beta Levered 2.04
Total Equity Risk Premium 13% to 16%
Risk Free Rate 9%
Cost of Equity 37% to 42%
Cost of Debt (min) 10.5% to 12.5%
Tax Rate 25%
Weighted Average Cost of

17% to 19%
Capital
10.4 Non-Financial Metrics used in Valuation
The most important non-financial metrics for valuation of 4 and 5-star hotels and resorts are
location, brand recognition, strength of management team, robustness of operational model,
and strength of customer acquisition channels.
223
See Section 7.2 for details on calculation of hurdle rate

Valuation of 4 and 5-star hotels and resorts, especially in frontier markets, must take into account
both quantitative and qualitative indicators of firm value. These include “firm-level” criteria and “macro-
economic and market-level” criteria.
A small group of early stage equity investors from India were asked to evaluate the relative
importance of these valuation drivers to understand investor sentiment on this issue. Not surprisingly,
investors rated location, brand recognition, strength of management team, robustness of operational
model, and strength of customer acquisition channels as the most critical aspects of a hotel/resort
business and favourable metrics against these were likely to drive up valuation. More “systemic
issues” like regulation issues, exit opportunities, and inflation were not considered very critical and
investors were likely to make more concessions here unless there was a direct impact on revenues
and profitability. Table 21 shows a “high”, “moderate”, and “low” sorting of these criteria.
Table 21: Investor sentiment on non-financial valuation drivers in 4 and 5-star hotels and resorts
Investor Sentiment on Relative Importance

Valuation Drivers
High Moderate Low
Firm-Level Drivers: Internal
Location 
Brand recognition 
Management team 
Strength of operational model – margins,


scalability
USP 
Strength of customer acquisition channels 
Collateral and securities 
SME-Level Drivers: External
Regulation – sector-level policies, legal


structures, taxation
Exit opportunities – like secondary sale,


promoter buy back and IPO
Macro-Economic and Market-Level Drivers
Government focus on driving tourism 
Infrastructure 
Political stability 
FDI policies 
Inflation 
Source: Primary interviews and Intellecap analysis; 2014.

Note: A rating of “high” indicates that investors do not compromise on these drivers, of “moderate” indicates that they sometimes
compromise if all other critical drivers seem favourable, and “low” indicates that investors compromise almost always because
they expect these drivers to improve in the short-to-mid-term.

1. Location
Location is a critical criterion that predicts occupancy, average room rate, and average duration of
stay for customers of 4 and 5-star hotels and resorts. Locations that have a good view, or are co-
located with an important tourist attraction are more likely to attract a greater market share of the high
value tourists in Nepal, and thereby report better financial performance. A location with positive
attributes as enumerated here is likely to drive a higher valuation.
2. Brand recognition
Brand building in the hotels and resorts market is complex because end consumers often make
purchase decisions based on influence of either a third-party like a travel agency or an e-commerce
portal or driven by more nebulous influences like word-of-mouth. Hence, hotels and resorts that invest
in multi-pronged brand building efforts are more likely to have higher valuations. A tie-up with an
international hotel chain is especially helpful in augmenting brand value.
3. Management team
Quality and experience of the management and technical teams is the most critical aspect for private
equity investors since they are mostly betting on the team’s ability to turn a business plan into a
profitable venture. This is especially true in Nepal where the larger supporting environment for
businesses is missing; and the ingenuity, networks and skills of founding team members are called
upon to bridge this gap. Presence of a strong management and separate technical team with diverse
skillsets and clearly established roles and responsibilities will help to drive up valuation.
Good governance practices like maintaining audited financials, good book-keeping, and presence of a
few external and well-reputed individuals on the Board of Director or Advisors help to drive up
valuation.
4. Strength of operational model – margins, scalability
The strength of operating level cash flows help to determine financial state of 4 and 5-star hotel and
resorts, and investors analyse these to estimate the predictability of revenue. Key metrics to measure
operational efficiency for hotels and resorts have been described in Section 6.1.1, and include metrics
such as number of rooms, average occupancy rate, and average room rate.
Such healthy metrics indicate predictability in revenue; such that it sufficiently covers operational
costs and services debt. An operationally efficient business that shows healthy metrics is likely to
have a higher valuation.
5. USP
The key customer segments for 4 and 5-star hotels and resorts include high value leisure and
business travellers from domestic as well as international markets. Since the purchase of services
from 4 and 5-star hotels and resorts falls under the purview of “luxury category”, it is important to have
a well-defined and aspirational USP to attract customers. USPs in the hotels and resorts business can
range from international brand tie-ups to location to “special themes and attractions” like golf courses,
ayurvedic spas and heritage buildings. USPs like these tend to influence customer decision-making
process to a high degree and are likely to drive up valuations.
6. Strength of customer acquisition channels
4 and 5-star hotels and resorts rely on both B2B and B2C channels for customer acquisition. B2B
sales are primarily driven by travel agencies and B2C sales by international e-commerce platforms
like TripAdvisor, corporate websites and direct walk-ins. Hotel and resort companies that have strong

tie-ups with travel agencies or even operate their own travel agencies are more likely to attract higher
number of customers. Similarly, hotels and resorts with active online presence on e-commerce
platforms, well-developed and search engine optimised websites for e-bookings, and prominent
advertising/brand placements at international airports are more likely to win business directly from
customers. Hotels and resorts that have tie-ups with international hotel chains also benefit from the
centralised sales and booking infrastructure operated by such chains.
Overall, hotels and resorts with strong B2B and B2C sales channels are more likely to have higher
occupancy and revenues, and hence higher valuations.
7. Collateral and securities
The availability of collateral and securities with a hotel or resort helps to gauge financial health, and
also services to mitigate risks for an equity investor. Securities like debt funding and owner’s equity
can contribute to driving up a firm’s valuation; while collateral like land bank in addition to this direct
influence is also a signal to the equity investor that the firm can raise debt financing to grow.
8. Regulation – sector-level policies, legal structures, taxation
Facilitative government policies like encouraging FDI and ease of doing business increase valuation
of hotels and resorts, while inhibitory policies decrease valuation. Section 4.3 explains the current
impact of different government regulations on enterprise value and operations. The current regulatory
regime is positive and likely to drive up valuations.
9. Exit opportunities – like secondary sale, promoter buy back and IPO
Clarity on potential exit opportunities is important as well. The secondary sale value-chain in Nepal is
224
underdeveloped so the only two strong possibilities that investors have are promoter buy-back and
trade sales. Thus far, no track-record of secondary exits or a limited track record of public listing is
available, and early entrants in the private equity field in Nepal may have to plan for a longer
investment time-period than in more mature markets. This could drive down valuations due to higher
risk perceptions.
10. Government focus on driving tourism
Investors also tend to place a high degree of importance on government’s support for the tourism
industry. Government provides support to the sector by way of running promotional campaigns and
improving transport and tourism-related infrastructure. Ambitious government plans and high
budgetary allocations tend to build up investor confidence in the macro-economic environment for
tourism projects.
11. Infrastructure
The current and projected state of infrastructure including airports, roads, tourist facilities, and
maintenance of key tourism destinations also play a key role in investment decisions. Improving state
of infrastructure tends to drive up investor confidence in a country’s ability to attract tourists, and in
turn drives up confidence that a hotel or a resort property will have demand in the market.
12. Political stability
Confidence in the macroeconomic environment and political stability drives up firm valuations as it
gives financiers confidence that the business environment for their portfolio will remain reasonably
conducive, and at the same time their investment will be protected. Since Nepal has only regained
224

political stability over the past 6-7 years, investors are likely to attach greater risk premium to
opportunities they evaluate as shown in Table 20.
This is an especially critical factor for private equity investors in tourism since political instability and
civil unrest can have a negative impact on inbound tourism as was witnessed in Nepal between 2000
225
and 2006 .
13. FDI policies
Long-term regulatory stability around FDI policies is likely to drive investments at greater valuation
since investors can be confident that they will have the freedom to exit a business when it is most
lucrative for them to do so. The recent decision by NRB to disallow FDI in commercial banking could
potentially drive investors to attaching a higher risk premium. However, on the flipside the government
and regulator have stated their intention to support greater FDI inflows, and in a March 2014 address,
NRB Governor indicated that domestic banks and financial institutions are able to provide
supplementary capital to foreign investors. Approaches like this would give more confidence to
investors and drive up valuations.
14. Inflation
Nepal reported an inflation rate of 9.72% in January 2014, and both the current rate of inflation as well
as historic trends compare unfavourably to other SAARC countries as shown in Figure 22. This
degree of inflation could potentially decrease value of earnings for investors and in turn reduce the
P/E ratio. In order to build a cushion against this, investor may consider addition risk premium and this
may in turn drive down valuations. In addition to decreasing value of earnings for investors, inflation
can also drive up prices and negatively impact inbound tourism as discussed in Section 3.5.
11. Annexure
11.1 Demand and Supply Assessment Methodology
Demand assessment for hotels and resorts was done using number of tourists visiting Nepal
from various countries and according to purpose of tourism, mostly relying on secondary data
from NTB
Growth rate is forecasted according to past 6 years CAGR of the inbound tourists visiting Nepal. An
optimistic growth rate is also used to indicate the high growth if the systematic challenges are
addressed. Forecasted occupancy rates are taken as per the present average occupancy rates in 4
and 5 star hotels in Nepal. Share of F&B is considered as per an average tourist expenditure breakup
for Nepal.
Supply assessment of hotels and resorts was done based on existing hotels and new
investments pouring in hotel industry, using a combination of primary data and secondary
data about upcoming luxury hotel investments in Nepal
Supply of room-nights in 4 and 5 star hotels in Nepal is considered constant till 2017 due to no new
plans for new hotels till 2016.
225
Decline in inbound tourism between 2000 and 2006; from MoCTCA Tourism Statistics 2012 report

11.2 Methodology for Estimating Market Opportunity
The market opportunity for luxury hotels and resorts was estimated based on high-budget foreign
tourists as key revenue drivers. The number of high-budget foreign tourists was assumed based on
trends in current purchase of luxury room nights as explained in Table 22.
Table 22: Estimating number of high-budget foreign tourists in Nepal
S.No. Metric Data Source
1 Total inbound tourists 0.8 million Government data
Primary interviews,
triangulated against
2 Average length of hotel stay 7 nights government data which reports
average stay in Nepal as 12.87
days
Average number of tourists per
3 2 Primary interviews
room
Approximate number of room
4 nights sold (across all types of 5.13 million Calculated from metrics 1,2,3
hotels)
Conservative estimate – based
on government data and
Typical occupancy rates for 4 and primary research. The best
5 60%
5 star hotels performing 4 and 5-star hotels
reported occupancy of 80%
during primary research
Calculated based on number
Number of 5 star and 4 star room
6 0.99 million of rooms shown in Table 1,
nights sold
and metric 5
Sales of 4 and 5 star rooms as a Calculated from metrics 4 and
7 19%
% of total rooms sold 6
Buyers of 4 and 5 star rooms as %
8 of total buyers of hotel 18 to 20% Estimated from metric 7
accommodation in Nepal
Source: MoCTCA, Tourism Statistics Nepal, 2012; and primary interviews conducted during the course of this study in
May 2014
Based on this data, the market opportunity for luxury hotels and resorts in serving the high-budget
segment was calculated as shown in Table 23.
Table 23: Calculating market opportunity for luxury hotels and resorts in Nepal
S.No. Metric Data Source

Reported number of 5 star and 4
1 0.99 million Government data
star room nights sold
US$ 140 for 5-star and Primary interviews and as
2 Typical rate per room night
US$ 100 for 4-star per hotel websites
Approximately Calculated from metrics 1
3 Revenue from rooms
US$ 60 to 80 million and 2
Typical F&B revenue, as a % of Based on primary
4 30%
room revenue interviews and India data,

including revenues from
restaurant sales, room
service sales, and MICE-
related banqueting
Approximately Calculated from metrics 3
5 Revenue from F&B
US$ 20 to 25 million and 4
Calculated from metrics 3
6 Total revenue US$ 80 to 100 million
and 5
Source: MoCTCA, Tourism Statistics Nepal, 2012; and primary interviews conducted during the course of this study in
May 2014
11.3 Calculation of Hurdle Rate
Cost of Equity and leverage are considered together to estimate the Weighted Average Cost of
Capital (WACC) using the formulae shown in Figure 38 and Figure 39.
Figure 38: Formula for calculating WACC
Where -
D: Market value of Debt, E: Market Value of Equity, Tax rate: corporate tax rate in Nepal,
Kd: Cost of debt in Nepal, Ke: Cost of equity calculated by the formula:
Figure 39: Formula for calculating cost of equity
Where –
Rf: Risk free rate (treasury bond rate), ß: Predicted equity beta, Rm: Market risk premium
Cost of preferred stock has not been included while calculating WACC as the capital market
information on the same was not available in Nepal. The key assumptions made while calculating
WACC for tourism in Nepal are shown in Table 18.
The following methodology has been used to assess Market Risk Premium and Hurdle rate:
 Current risk premium was taken for a mature equity market at 5%

 No shadow rating is given by Moody’s or S&P for Nepal. Based on ratings given by IFC at CCC+
(CAA1 in Moody’s) the default spread is 7.5%. This has been multiplied by volatility factor of 1.5
for frontier markets to reach country risk premium of 11.25 % for Nepal. This is done because
equity markets are about 1.5 times more volatile than bond markets.

 Alternately we can calculate country risk premium using volatility of stock markets.
Default Spread= US bond rate * (σ Nepal Stock/ σ US Stock)
 US bond rate is taken as 5% and 5 years standard deviation of Nepal Stock was calculated using
stock market data and comes out to be 219. The corresponding 5 years standard deviation of US
Stock market comes out to be 190. Utilising this data default spread has been estimated is 5.77%.
This has been multiplied by volatility factor of 1.5 for frontier markets to reach country risk
premium of 8.66 % for Nepal.
 We take minimum and maximum values obtained from both methods to get a range of Total
Equity risk premium to be 13.66% to 16.75%.
 Through our primary research, we found that the average D/E ratio for hotels and resorts in Nepal
is generally 70:30. The values shown in Table 15 were also benchmarked against comparable
countries like India and Sri Lanka.
 Unlevered Beta for hotel and resort sub-sector is estimated at 0.7409 across the sub-sector in
comparable countries like India, Bangladesh, Pakistan and Sri Lanka. Hence a conservative
estimate assumption across sub-sectors was taken, and further levered using the aforementioned
D/E ratio and following formula -
β levered = β unlevered * (1 + (1- tax rate) * D/E)
 The levered beta comes out to be 2.04 across the sub-sector
 The risk free rate can be obtained from major banks in Nepal such as SBI Nepal Rastra Bank and
Bank of Kathmandu and comes out to be around 9-10% as yielded by most of the banks on bonds
issued.
 Cost of equity can be calculated by using following method-
Ke = Rf + β (mature market equity risk premium + country risk premium)
 Ke comes out to be in the range of 37 to 42% across the sub-sector
 Through our primary research in Nepal we found out that most hotels access debt in range of
10.5-12.5% interest
 WACC or the hurdle rate can then be calculated using the following formula-
WACC = E/(D+E) * Ke + D/(E+D) * (1 – tax rate) * Kd
 WACC comes out to be in the range of 17% to 19% across the sub-sector
11.4 Investment Markets in Nepal and Impact on SME Valuation
11.4.1 Overview of Capital/Investment Market in Nepal
Role of capital in economic growth for any country is universally accepted and the fluctuations in the
index of capital market could be seen as the barometer of economic performance. The capital
markets in Nepal are sustained by the shares of banks, financial institutions and insurance companies
226
that contribute to over 75% of the market capitalisation . There is minimum presence of real sector
in the capital market in Nepal but off-late there is an increasing presence of hydropower companies
on the stock exchange.
The Nepal stock market or NEPSE since its establishment in 1992-93 has seen the number of
227
companies listed in 1994 at 66 to 230 companies in 2013 . Despite the increase in the number of
listed companies, it is estimated that only 10% of the companies registered on Office of the Company
226
Nepal stock exchange website
227
Nepal stock exchange website

228
Register are listed on NEPSE . This in turn could indicate that firms in Nepal tend to avoid stock
229
market as an alternative source of long-term capital .
Primary capital market in Nepal is quite diversified and securities such as Debentures, Ordinary Share
and Right Share are used for training the market place. Out of the total approvals for public issues in
2013 as shown in Error! Reference source not found.; 30 companies got approvals for initial public
ffering (IPO) of US$ 33.02 million, a substantial increase of over 130% on the amount when
compared with the previous year. Political stability and institutional support was considered as the key
reason for the spurt of activity in the primary capital.
Table 24: Primary approval issued by SEBON for the FY 2012/13
S. No Types of FY 2012-13 FY 2011-12

Securities
No of NRs In No of NRs In
Issues Million Issues Million
1 Debenture 7 3550 3 1200
2 Ordinary Share 30 3114 15 1298
3 Right Share 5 3939 7 452
Total 42 10602 25 2950
Source: NEPSE Annual report 2012-13;

Note: currency rates shown are in Nepalese Rupee. At the time of writing this report; the exchange rate was 1 US$ =
94.19 Nepalese Rupee.
The general investors in Nepal are still are attracted only toward primary shares. The fact that initial
public offering (IPO) is listed many times more than that invited by the companies making IPO in the
primary markets but the transactions in the secondary market is very low. This in turn shows the lack
of awareness about capital market and trading in general in Nepal.
Trading in secondary markets in Nepal is a major challenge due to high trading and transaction costs,
long duration of settlements and lack of reliability in the transactions.
11.4.2 Nepal Investment Market Valuation and Key Drivers
The three key parameters to measure the capital market development for Nepal have been discussed
briefly below. They are a) Market Capitalisation Ratio (MCR), b) Total Value Traded Ratio (TVTR) and
c) Turnover Ratio (TR)
228
Department of industry, Industrial statistics 2012-13
229
Stock Market Development and Economic Growth report, Dr. Udaya Raj Regmi, 2012

In terms of Market Capitalisation Ratio (MCR), Nepal ranks the third best in the SAARC region after
India and Sri Lanka. However the MCR in Nepal is very low in comparison to the world average and
India as shown in
Figure 40. A lower MCR in Nepal indicates that the stock market is yet to show its impact on the
economic activities of the country.
Figure 40: Market Capitalisation Ratio (MCR) for SAARC countries
76%
68%
29%
22% 19% 15%
World Avg India Sri Lanka Nepal Pakistan Bangladesh
Market capitalisation of listed companies as % of GDP
Total Value Traded Ratio, as a market liquidity indicator, shows that Nepal has one of the lowest
values of shares traded in the world when compared to its GDP as shown in Figure 41. This indicates
the illiquidity in secondary markets in Nepal and that trading is very costly and difficult. One of the key
reasons for increased cost of trading is the reliance on legacy based data systems for trading and
absence of an online platform for trading.
Figure 41: Total Value Traded Ratio (as % of GDP) in SAARC countries
70%
33.5%
10.8%
5.3% 2.8% 0.3%
World Avg India Bangladesh Pakistan Sri Lanka Nepal
Total value of stocks traded as % of GDP, 2012
The next measure of stock market development Turnover Ratio shows that Nepal has one of the
lowest total values of shares traded to the average market capitalisation as shown in Figure 42. This
indicates that trading and transaction costs are high in Nepal and buying and selling of shares in
secondary markets is very difficult. Of all the three parameters, there are ample opportunities for
Nepal to develop its capital markets fast by increasing turnover ratio even though market
capitalisation is very low.
Figure 42: Turnover Ratio in SAARC countries

100%
61.2%
54.6%
31.3%
9.2%
1.2%
World Avg Bangladesh India Pakistan Sri Lanka Nepal
Turnover ratio (%) of stocks traded in 2012
A comparison with the present stock market development indicators in Nepal with the Indian stock
markets just after the liberalisation era in 1991-92 shows some similarity in the two stock markets.
India has come a long way on secondary capital markets in the last two decades as shown in Figure
43. Nepal could witness the same pace of growth given the requisite institutional framework and
investor friendly eco-system is put in place. Allowing foreign institutional investors to trade in
secondary markets in Nepal could put the country on fast track development in capital markets.
Figure 43: Comparison of capital market development in Nepal with India
68%
54.60%
36.70% 33.50%
22% 22%
7.10%
0.3% 1.2%
India in 1992 (liberlization era) Nepal in 2012 India in 2012
Market capitalization of listed companies (% of GDP)

Stocks traded, total value (% of GDP)
Data Source: World Bank Development Indicators database, accessed in March 2014
The key drivers that would facilitate the trading volumes in the secondary markets in Nepal are - a)
introduction of reliable online trading system making trading affordable b) settlement of transactions to
be shortened to a few days from the present duration that could last for few weeks and c) with higher
GNIs per capita and increasing literacy levels emergence of a social class that is aware of the
benefits of wealth creation through the secondary markets d) an expected long-term political stability
would boost the confidence of investors to invest in the capital markets.
11.5 Miscellaneous
11.5.1 Legal Structures for Businesses in Nepal
Table 25: Legal Structures available to Businesses in Nepal
Structure Description Implications for financing

Only 1 shareholder allowed, registered
Sole Cannot issue shares or debentures and
with the Department of Cottage and
Proprietorship hence cannot take in equity investments
Small-Scale Industry

Structure Description Implications for financing
1 to 50 shareholders can register a Pvt.
Ltd. company with the Office of the Can issue different types of shares and
Private
Company Registrar under the debentures with limited liability to
Limited (Pvt.
Companies Act. A company that intends shareholder; and hence is an appropriate
Ltd.)
to trade also needs to register with the structure for equity investments
Department of Commerce.
At the time of incorporation 7
shareholders can register a Ltd.
company, but the actual number of Can issue different types of shares and
shareholders should exceed 51. Also debentures with limited liability to
Public Limited
registered with the Office of the shareholder; and hence is an appropriate
(Ltd.)
Company Registrar under the structure for equity investments, and can
Companies Act. A company that intends also raise capital from public markets.
to trade also needs to register with the
Department of Commerce.
Can issue shares and debentures and
net profits are distributed to members
after retaining 25%; however dividend
Minimum of 25 members can register a
Cooperative cannot exceed 15% of the paid up capital
Cooperative under the Cooperative Act.
per share. This is a less appropriate legal
structure for equity investors expecting a
market rate of return.
Source: Ministry of Industries
11.5.1 Comparable Valuation Multiples of Hotels from SAARC Countries
Table 26: Comparable Valuation Multiples of Tourism from SAARC Countries
Sub-Sector: Hotels and Resorts

India
Market
EV/ EV/
Company ROE % D/E Ratio P/E Cap (in
EBITDA Sales
US $)
Hotel Leelaventure Limited -50.3% 0.33 NA 9.93 1.4 126.9
Kamat Hotels -35.6% 0.74 NA 5.54 1.24 22.2
TGB Banquets And Hotels

Limited 1.8% 0.00 53.66 3.94 0.97 29.3
TAJGVK Hotels & Resorts

Limited 0.0% 0.53 40.99 8.82 2.17 66.4
Viceroy Hotels Ltd. -3.0% 9.65 NA 23.37 6.92 13.2
Asian Hotels (North) 6.3% 0.02 3.06 2.51 0.58 33.7
-0.8% 2.23 NA 10.48 2.39 18.5

Asian Hotels (West)

EIH Associated Hotels Ltd. 20.3% 0.16 15.9 5.81 1.8 60.1
UP Hotels Ltd. 6.6% 0.00 24.14 12.27 1.94 28
UP Hotels Ltd. 11.8% 0.25 10 5.88 1.71 15.5
Advani Hotels & Resorts 0.2% 0.15 44.83 16.02 3.49 21.7
Sinclairs Hotels Limited 14.4% 0.00 9.89 27.28 7.2 26.1
Royale Manor Hotels &

Industries Ltd. 4.2% 0.93 6.37 3.82 0.9 1.72
Best Eastern Hotels Ltd. 5.4% 0.05 58.27 25.11 7.1 5.71
Gujarat Hotels Ltd. 16.5% 0.00 14.79 15.13 14.13 9.11
Sri Lanka
Market
EV/ EV/
EBITDA Sales
US $)
Aitken Spence Hotel Holdings

PLC 16.9% 0.37 12.74 7.73 2.59 179.7
John Keells Hotels PLC 8.0% 0.57 15.75 11.66 2.91 139.2
Asian Hotels and Properties

PLC 16.6% 0.01 11.03 9.4 3.48 217.3
Trans Asia Hotels PLC 18.9% 0.01 14.55 15.04 5.45 122.2
Tal Lanka Hotels PLC -7.3% 0.34 17.07 11.9 2.53 29.7
Galadari Hotels 46.8% 0.07 NA 10.98 3.41 43.3
Serendib Hotels Plc 8.9% 0.36 10 6.91 2.44 21.3
Ceylon Hotels Corporation PLC -2.7% 0.48 NA 15.39 3.25 20.1
Amaya Leisure PLC 14.8% 0.04 9.16 7.59 3.35 27.2
The Nuwara Eliya Hotels

Company Plc 11.3% 0.00 9.3 7.25 3.07 19.9
Dolphin Hotels Plc 11.7% 0.40 6.94 7.22 2.42 10.9
Eden Hotel Lanka PLC 8.7% 0.01 7.01 5.2 1.87 11.7
Palm Garden Hotels PLC -28.6% 1.42 NA 11.54 2.32 5.18
The Lighthouse Hotel PLC 3.6% 0.04 17.53 11.94 3.28 15.5
Royal Palms Beach Hotels PLC 5.6% 0.02 12.87 6.87 2.17 10.1

The Fortress Resorts PLC 18.8% 0.22 9.42 6.68 3.05 11.4
Mahaweli Reach Hotels PLC 1.2% 0.23 10.57 5.92 1.59 5.76
The Kandy Hotels Company 2.1% 0.00 28.55 18.13 7.26 31.4
Tangerine Beach Hotels PLC 4.5% 0.03 11.53 7.58 2.51 10.4
Pegasus Hotels of Ceylon 7.7% 0.02 7.29 5.72 2.09 8.16
Marawila Resorts PLC -3.9% 0.97 27.71 16.9 4.07 4.96
Sigiriya Village Hotels PLC 9.7% 0.06 8.52 8.85 2.09 4.1
Hotel Sigiriya PLC 16.5% 0.01 6.36 5.2 1.72 3.4
Renuka City Hotels Plc 12.2% 0.02 6.91 3.75 2.08 13.4
Hunas Falls Hotels PLC 14.6% 0.02 11.75 8 1.86 2.01
Ramboda Falls PLC 8.5% 0.06 11.67 7.63 3.29 2.17
Indonesia
Market
EV/ EV/
EBITDA Sales
US $)
PT Panorama Sentrawisata Tbk 17.5% 1.34 11.23 5.62 0.29 38.4
PT Jakarta International Hotels

& Development Tbk 57.1% 0.08 72.57 5.07 1.5 254
PT Pudjiadi & Sons Tbk 13.8% 0.09 11.15 4.56 1.46 37.9
PT Bukit Uluwatu Villa Tbk 5.5% 0.30 26.89 16.52 8.51 154.9
PT Hotel Sahid Jaya

International TBK 1.2% 0.92 23.62 11.54 3.08 30.7
PT Indonesian Paradise
Property Tbk 1.9% 1.06 92.74 14.42 4.72 43.4
PT. Pudjiadi Prestige Tbk. 7.4% 0.23 5.94 4.93 1.26 13
Mas Murni Indonesia PT 0.4% 0.94 39.5 9.13 2.29 9.48
PT Pembangunan Graha
Lestari Indah Tbk 56.5% 0.08 230.77 18.58 2.71 6
Malaysia
Market
EV/ EV/
EBITDA Sales
US $)

Genting Berhad 15.5% 0.39 8.4 5.02 1.8 11572.7
Genting Malaysia Berhad 12.3% 0.08 16.54 9.23 2.76 7583.9
Berjaya Land Berhad 2.2% 0.80 117.78 9.58 1.47 1283.8
Berjaya Sports Toto Berhad 63.1% 0.18 12.8 9.78 1.59 1645
Magnum Berhad 7.2% 0.15 18.6 15.31 2.01 2066.8
Shangri-La Hotels Malaysia

Bhd 8.0% 0.03 41.28 17.97 5.97 908.1
Berjaya Assets Berhad 2.0% 0.49 22.26 15.37 4.16 322.8
Reliance Pacific Bhd 0.6% 0.44 210.1 30.02 2.47 120.6
RGB International Bhd. 16.7% 0.61 17.68 3.23 0.89 38.9
The Nomad Group Bhd 1.7% 0.55 75.94 11.38 3.33 56.5
Grand Central Enterprises Bhd 4.1% 0.00 13.05 11.91 2.67 55.6
Pan Malaysia Holdings Bhd -34.1% 0.30 NA 26.05 7.12 19.9
Bangladesh
Market
EV/ EV/
EBITDA Sales
US $)
Unique Hotel and Resorts

Limited 4.4% 0.02 20.63 18.93 10.34 297.1
Pakistan
Market
EV/ EV/
EBITDA Sales
US $)
Pakistan Services Ltd. 1.8% 0.08 18.5 6.22 1.34 87.7
11.6 References and Field Research Data
The organisations interviewed during the course of this study have been listed in Table 27.
Table 27: List of primary interviews
Organisation Sector
Government
Nepal Tourism Board Tourism

Organisation Sector
Pokhara Tourism Board Tourism
Industry associations
Hotel Association Nepal Hotel
Private Sector Organisations
Fulbaari Clarks Hotel- International
Kathmandu Guesthouse Hotel- Domestic
Gokarna Hotel- Domestic
Barahi Hotel- Domestic
Himalayan Expedition Adventure –trekking and tour operators
Eco Treks Adventure –trekking and tour operators
Social tours Non-mountaineering tours
Bawarchi Restaurant
Himalayan Java Restaurant
The references used in this study are as follows:
1. Meteorological Forecasting Division, Department of Hydrology and Meteorology, Government

of Nepal
2. United Nations Development Programme's Human Development Report, 2013
3. World Bank Development Indicators database, accessed in May 2014
4. World Travel and Tourism Council; Travel and Tourism Economic Impact; 2014
5. World Travel and Tourism Council; Travel and Tourism Economic Impact; 2013
6. Government of Nepal, Nepal Tourism Statistics, 2012
7. Nepal Rastra Bank, Economic Activities Study, 2012-13
8. Ministry of Tourism; India Tourism Statistics; 2012
9. Asian Development Bank, The Rise of Asia’s Middle Class, 2010
10. Nepal Business License e portal
11. Government of Nepal, Ministry of Tourism, Preliminary Statistics for 2013
12. Adventure travel trade organisation; Adventure tourism market report; 2010
13. Government of Nepal, Ministry of Tourism website, accessed in May 2014
14. Department of Industries, Industrial Statistics Reports 2005 – 2013
15. SEBON Annual report 2011-12
16. SEBI annual report 2012-13
17. Venture Intelligence India database, accessed in April 2014
18. India Private Equity Report 2013, Bain and Company
19. SECBD website, 2013
The survey questionnaires used in this study are as follows:
Tourism Companies Survey Questionnaire - Generic
Section A. Understanding private sector activity in tourism

1. Rank the following subsectors from 1 to 8 based on:
a. Growth potential (with 1 having greatest growth potential and 8 least)
b. Profit margins (with 1 having highest profit margins and 8 least)
c. Organised activity (with 1 having most organised activity and 8 least)
d. Competition from foreign firms (with 1 have most competition and 8 least)
Rank for Rank for Rank for Rank for

Sub-Sectors Growth profit margins organised competition
Potential (1-8) (1-8) activity (1-8) (1-8)
Hotels- 4&5 star
Hotels- 3 star
Hotels- Other
F&B
Travel & Tour Operators
Tourism Related Transport
Services
2. Please select the approximate range of profit margins for companies in each of the following
sub-sectors as per your assessment.
Less than 5 to 10% 10 to 15% 15% to 20% More than

Sub-Sectors
5% 20%
Hotels- 4&5 star ☐ ☐ ☐ ☐ ☐
Hotels- 3 star ☐ ☐ ☐ ☐ ☐
Hotels- Other ☐ ☐ ☐ ☐ ☐
F&B ☐ ☐ ☐ ☐ ☐
Travel & Tour Operators ☐ ☐ ☐ ☐ ☐
Tourism Related
☐ ☐ ☐ ☐ ☐
Transport Services
3. Please mention the approximate annual turnover, production capacity and utilisation of
production capacity for companies operating in the following sub-sectors
Approx. Capacity Description Capacity % utilisation

Sub-Sectors annual of capacity
turnover
# of rooms and conference
Hotels- 4&5 star
halls
Hotels- 3 star
halls
Hotels- Other
halls
F&B Seating capacity
Travel & Tour -
Operators
Tourism Related # of vehicles available
Transport Services
4. How is the overall policy and regulatory environment? In what ways does it support growth of
businesses and in what ways does it negatively impact growth. Please select any of the following
that apply
Applies to tourism in Nepal

Impact of regulation/policy
(select all that apply)

a) High upfront setup costs due to licenses ☐
b) Difficulty in acquiring land ☐
c) Competition with unorganised facilities in the market ☐

Any others? – Please explain
Section B. Understanding Barriers to Growth of Private Tourism Companies
5. Rate the following challenges as “high”, “medium” or “low” based on the degree to which they act
as barriers to growth (with “high” ranking indicating a critical growth barrier and “low” a less
important growth barrier).
Challenges High Medium Low

Access to Finance ☐ ☐ ☐
Access to markets ☐ ☐ ☐
Access to technology ☐ ☐ ☐
Access to talented employees ☐ ☐ ☐
Taxation ☐ ☐ ☐
Regulation ☐ ☐ ☐
Infrastructure: road, electricity, transport ☐ ☐ ☐
Corruption ☐ ☐ ☐
Any other challenges you would like to mention?
Section C. Understanding access and use of capital
6. Which type of capital do tourism companies prefer and why? Please rate “high”, “medium”, and
“low” (with “high” ranking indicating most preferred and “low” least preferred).
Capital Type High Medium Low

Debt (bank loans, NBFC loans, venture debt) ☐ ☐ ☐
Domestic Equity (raising money from local
☐ ☐ ☐
investors by selling a stake in your company)
Foreign Equity (raising money from
international investors by selling a stake in ☐ ☐ ☐
your company)
Why?
(Please explain your preference for debt/ domestic equity/ foreign equity briefly)

7. Which of the following do you see as the most important contribution by an equity investor?
Please rate “high”, “medium”, and “low” (with “high” ranking indicating most important and “low”
least important).
Contribution by equity investor High Medium Low

Add expertise to your company ☐ ☐ ☐
Build new market linkages for your company ☐ ☐ ☐
Add financial value only ☐ ☐ ☐
Help to unlock capital for you by divesting or
☐ ☐ ☐
diluting company
Help in accessing international growth
☐ ☐ ☐
opportunities
8. Which of these following financing needs do tourism companies prefer to use debt for and which
do they prefer to use equity for? Please tick in the appropriate column
Financing need Prefer debt Prefer equity No Preference

Purchase fixed assets (land, building,
☐ ☐ ☐
furniture & fixtures)
Extend to new markets ☐ ☐ ☐
Extend to new geographies ☐ ☐ ☐
Short term operational expenses (salaries,
☐ ☐ ☐
rent etc.)
9. What is the growth rate that tourism companies can potentially achieve in the next 3-4 years?
Please select any one of the following.
Growth Rates Potential growth rates for tourism companies

in next 3-4 years
10-15% ☐
15-20% ☐
More than 20% ☐
Tourism Companies Survey Questionnaire – Sub-sector Specific
3. Rate the [specific sub-sector] as “high”, “medium”, “low” for each of the following parameters
Parameters High Medium Low Comments (if any)

Growth potential ☐ ☐ ☐
Profit margins ☐ ☐ ☐
Organised activity ☐ ☐ ☐
Competition from foreign firms ☐ ☐ ☐
Demand from domestic market in
☐ ☐ ☐
Nepal
Demand from international markets ☐ ☐ ☐
4. Please select the approximate range of profit margins for [specific sub-sector] companies as
per your assessment
Less than 5% 5 to 10% 10 to 15% 15% to 20% More than 20%

☐ ☐ ☐ ☐ ☐

3. Please mention the approximate annual turnover, production capacity and utilisation of
production capacity for a typical company in [specific sub-sector]
Approx. annual turnover Capacity % utilisation of capacity
4. Please mention the top 3 companies in [specific sub-sector] by turnover and capacity? How many
medium to large [specific sub-sector] companies operate in Nepal?
Top 3 Companies
1)
2)
3)
Approximate number of [specific sub-sector]
companies in Nepal
6. How is the overall policy and regulatory environment? In what ways does it support growth of
businesses and in what ways does it negatively impact growth. Please select any of the following
that apply
Applies to [specific sub-sector] in

Impact of regulation/policy
Nepal (select all that apply)
a) High upfront setup costs due to licenses ☐
b) Difficulty in acquiring land ☐
c) Competition with unorganised substitutes in the market ☐

Any others? – Please explain

DIF I - Tourism Market Report - Final - 1-10-2014

Uploaded by

Copyright:

Available Formats

DIF I - Tourism Market Report - Final - 1-10-2014

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

DIF I - Tourism Market Report - Final - 1-10-2014

Uploaded by

Copyright:

Available Formats

A Report on

Market Data for Private Sector Investments in Nepal

With the support of DFID Nepal

Dolma Development Fund Page 2

“This publication may contain advise, opinions, and statements of

Dolma Development Fund Page 3

Dolma Development Fund Page 4

Figure 1: Distribution of key tourism destinations across Nepal ........................................................... 14

Dolma Development Fund Page 5

Dolma Development Fund Page 6

Case 1: Bhutan’s Success Story ........................................................................................................... 44

BOT Build Operate Transfer

Dolma Development Fund Page 7

BACKGROUND OF THE STUDY

METHODOLOGY AND APPROACH

Dolma Development Fund Page 8

CURRENCY EXCHANGE RATE

Dolma Development Fund Page 9

Significant demand-supply gap exists in tourism infrastructure, particularly in facilities for

Dolma Development Fund Page 11

Dolma Development Fund Page 12

Dolma Development Fund Page 13

Figure 1: Distribution of key tourism destinations across Nepal

Source: Government of Nepal, Nepal Tourism Statistics, 2013

Dolma Development Fund Page 14

Figure 2: Direct and indirect contribution of tourism industry to Nepal's economy

Source: Intellecap analysis, 2014

Dolma Development Fund Page 15

Figure 3: Contribution of Tourism to Nepal GDP and employment

2010 2011 2012 2013

Direct % Contribution of Tourism to Nepal's GDP

Dolma Development Fund Page 16

Source: Government of Nepal; Nepal Tourism Statistics, 2012

2.2 Overall State of Demand and Supply in Tourism

Dolma Development Fund Page 17

2.2.1 Analysis of Demand-Side Dynamics

The tourism sector in Nepal is benefiting from growth in domestic tourism

Dolma Development Fund Page 18

Entertainment Business Conference Medical Tourism Official Pilgrimage

Source: Government of Nepal; Nepal Tourism Statistics, 2012

Dolma Development Fund Page 19

Figure 7: Number of tourists‟ arrival by month (average of 2010-12)

Source: Government of Nepal; Nepal Tourism Statistics, 2012

Dolma Development Fund Page 20

Source: Government of Nepal; Nepal Tourism

Dolma Development Fund Page 21

Figure 9: Percentage of tourists by purpose of visit (top 5 countries), 2012

India (165,815) 35.3 2.1 6.7 14.7 10.1 31.1

China (71,861) 73.9 4.4 3.1

Sri Lanka (69,476) 22.7 3.2

U.S.A. (48,985) 54 17.1 2.84.9 3.8 17.5

U.K. (41,294) 46.5 26.5 2.64.12.7 17.6

Holiday/Pleasure Trekking/Mountaineering Business Piligrimage Official Other Purpose

Source: Government of Nepal; Nepal Tourism Statistics, 2012

2.2.2 Analysis of Supply-Side Dynamics

Dolma Development Fund Page 22

Figure 10: Room occupancy rate of 5 star hotels in Nepal (2012)

% room occupancy Rate of 5 star hotels in Nepal (2012)