Bharat Hotels Revised

Bharat Hotels Company
THE COMPANY
Bharat Hotels Company (BHC) is a major hotel chain of India with a century old history. The
company operates 35 hotels of which 14 are owned by it and the rest are owned by others but
managed by BHC.
BHC has had a significant innings spanning the last three decades both in India and overseas
and has established itself as the premier hospitality body in this country. Indeed the BHC has
spanned the length and breadth of the country, gracing important industrial towns and cities,
beautiful beaches, hill stations, historical and pilgrim centres and wildlife destinations. Over the
years, the BHC has won international acclaim for its quality hotels and its excellence in business
facilities, services, cuisine and interiors. The BHC’s operations covers over 60 hotels in India
and abroad, and encompass a number of brands across various price segments. The Company
has a dominant position in most areas it is present in. Providing world-class personalized service
to guests while authentically reproducing the traditions and heritage of India has made the
"BHARAT" brand a symbol of luxury and service the world over. The BHC is grouped into
strategic business units to get consistency across the different units in the same brand and
standardize the product and service across the brands, making them distinct and identifiable.
These brands have been classified as Luxury, Business and Leisure.
BHC's principal strategy has been to serve the high end of the international and leisure travel
markets in major metropolises, secondary cities, and tourist destinations. It plans to continue to
develop new business and leisure hotels to take advantage of the increasing demand that is
emanating from the larger flow of commercial and tourist traffic of foreign as well as domestic
travellers.
BHC believes that the unique nature of its properties and the emphasis on personal service
distinguishes it from other hotels in the country. Its ability to forge management contracts for
choice properties owned by others has given it the flexibility to swiftly move into new markets
while avoiding the capital intensive and time consuming activity of constructing its hotels.
BHC's major competitors in India are two other major Indian hotel chains and a host of others
five star hotels which operate in the metropolises as an extension of multinational hotel chains.
The foreign hotel majors are considerably stronger than the Indian hotels in terms of financial
resources, but their presence in the country has historically been small.
THE INDUSTRY
The hotel industry's evolution as a market favourite can be traced to the early 1990s when the
economy had just opened up and was the thriving hub of much activity. Business and tourist
travel into India travel had risen manifold, and hotels did well. With supply lower than demand
they were able to generate revenues through exorbitant prices.
Post-Covid-19, room rates and occupancy levels have been dropping..
The drop in the average room and occupancy rates has affected the earnings stream of major
companies, evident from the performance of most majors in the quarter ended September. The
1
trend is likely to continue, with earnings for the next two quarters also likely to be under
pressure.
While this can be attributed to a particular event, worrying is that on a cumulative basis, the
growth rate of arrivals into the country trickled to around 1.7 per cent in 2001 compared to the
6.5 per cent growth in 2000. Though the number of tourist spots in India is much more than
other South-East Asian destinations, the country does not attract tourists.
One reason is the pricing system. The higher cost can be attributed to the higher tax structure.
This results in disparities, leading to pricing differences across States.
The other problem is the country's poor infrastructure. With travel becoming increasingly
competitive in the region, travellers will not only look for locations but consider the services
available. Of these, the most important factors would be increasing airline capacity, provisions
of clean drinking water and an efficient inland transport system. It is essential that these service
providers join hands and offer customers attractive packages. This is especially important to
woo international tourists.
CHANGING SCENARIO
The role of the business traveller is all too familiar to the Indian hotel industry. Going back ten
years, most of the major hotel properties were set up in Delhi and Mumbai, the country's key
business centres.
The high-end luxury hotels derived close to 70 per cent of their revenues from this segment.
Corporates were also high in-house spenders, adding to the revenue stream. But with economic
slowdown setting in, many corporates have been cutting on travel. Corporates have also started
to ask for bargains and the margins of the major properties in the metros have been affected.
With the economy showing no signs of improvement, the growth rates in the business travel
segment is likely to be modest. While hotels in the luxury class will have to depend on business
travellers, the lower segments are likely to target more bargain travellers.
THE EXPANSION PLAN
Keeping in view, the expected growth in the hotel industry in India, Bharat Hotels has built
up an ambitious expansion plan.
Exhibits 1 and 2 provide the latest operating and financial position statements. Exhibit 3
provides details of the expansion plan
2
Exhibit 1
BHC's operating revenues and expenses for the year just concluded (year 0)
Rupees (in million)

Operating Revenues
Room rent 1043
Food and beverages 678
Management fees for managed properties 73
Operating Expenses
Materials 258
Personnel 258
Upkeep and services 400
Sales and general administration 400
Exhibit 2
BHC's assets and liabilities at the end of year 0
(in million rupees)

Owner's Equity & Liability Assets
Net worth 1126 Net Fixed Assets 1510

Debt 900 Gross Block : 2110
Accumulated
depreciation 600
Current Assets 516
2026 2026
BHC had no non-operating assets.
3
Exhibit 3
Existing and Proposed Additions
At the end of year 0, BHC owned 2190 rooms. It has planned the following additions for the
next seven years. Most of the land needed by the company for these additions has been already
acquired.
Year Rooms Investment (in million

rupees)
1 90 200
2 130 300
3 80 240
4 130 500
5 186 800
6 355 1400
7 150 800
You may assume
 All additions will take place at the beginning of the year.

 The occupancy rate will be 60 per cent for year 1. Thereafter, it will increase by 1
percent per year for the next six years
 The average room rent per day will be Rs. 2,500 for year 1. It is expected to increase at
the rate of 15 percent per year till year 7.
 Food and beverage revenues are expected to be 65 percent of the room rent.
 Material expenses, personnel expenses, upkeep and services expenses, and sales and
general administration expenses will be, respectively, 15,15,18, and 18, percent of the
revenues (excluding the management fees).
 Working capital (current assets) investment is expected to be 30 percent of the revenues.
 The management fees for the managed properties will be 7 percent of room rent. The
room rent from managed properties will be more or less equal to the room rent from
owned properties.
 The depreciation is expected to be 7 percent of the net fixed assets.
 Given the tax breaks it enjoys, the effective tax rate for BHC will be 20 per cent.
 There will be no change in deferred taxes.
Other relevant Information

 The market value of equity of BHC at the end of year 0 is Rs. 17100 million. The
imputed market value of debt is Rs. 900 million.
 BHC's stock has a beta of 0.6775.
 The risk-free rate of return is 6 percent and the market risk premium 8 percent.
 The post-tax cost of debt is 6.4 percent.
 The free cash flow is expected to grow at a rate of 4.5 per cent per annum after 7 years.

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Bharat Hotels Company

Post-Covid-19, room rates and occupancy levels have been dropping..

THE EXPANSION PLAN

Rupees (in million)

BHC's assets and liabilities at the end of year 0

(in million rupees)

Net worth 1126 Net Fixed Assets 1510

BHC had no non-operating assets.

Existing and Proposed Additions

Year Rooms Investment (in million

You may assume

 All additions will take place at the beginning of the year.

Other relevant Information

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