Puneet Chhatwal’s first experience of the Taj hospitality after he took over as CEO of Indian Hotel Co. (IHCL) in November 2017 was at the Wellington Mews, the group’s plush serviced apartments in Mumbai behind the iconic Taj Mahal Palace Hotel. Though the hospitality was impeccable, what he did notice was a deep sense of scepticism among his colleagues. The Tata Group’s legacy hotel chain had been staring at losses for eight consecutive years. Employees were circumspect about this third expat leader at the helm of Indian Hotels in less than a decade. “I could faceread. The feeling, ‘let’s see how long this person lasts’ was evident,” says Chhatwal. The past two CEOs, Raymond Bickson and Rakesh Sarna, were also expats.
There was also an air of uncertainty in the Tata Group itself, which was in the midst of an ugly legal battle with former chairman Cyrus Mistry. Most companies were struggling with legacy issues and heavy debt, and IHCL ended up with a whopping ₹3,159 crore debt in FY17. It was also around this time all the big international hotel chains (Radisson, Mariott and IHG) had upped their ante in India and were grabbing market share. Despite the odds, Chhatwal says he saw immense promise and opportunity. “We were sitting on the best iconic assets and best land parcels,” says Chhatwal.
Seven years hence, at the 32nd-floor conference room at The Chambers in Taj Lands End in Mumbai, Chhatwal has scripted a winning story for the 121-year-old hotel chain. IHCL reported profitability in the first year of Chhatwal’s tenure. It registered a net profit of ₹101 crore in FY18, followed by eight consecutive quarters of profit until COVID-19 halted the streak. IHCL was in the red again for eight quarters during the pandemic. However, the cumulative losses of ₹968 crore during the two fiscals (FY21 and FY22) were set off with a ₹1,003 crore profit in FY23. In FY24, the profit further increased to ₹1,259 crore (up 25.5% year-on-year) on a revenue of ₹6,952 crore (up 16.86%). The hospitality chain is now debt free and its market capitalisation has grown eight times (₹1,04,950 crore) in the last seven years. In comparison, the market cap growth of peers such as EIH, Lemon Tree and Chalet Hotels stood at 16.13%, 9.34% and 25.30%.
The hospitality company of the Tata Group has announced its 2030 strategy and the plan is to more than double its consolidated revenue to over ₹15,000 crore, with a 20% return on capital employed (currently at 15%). Currently, with a portfolio of 350 hotels (232 operational), IHCL hopes to cross the 700 mark (with at least 500 operational hotels) by 2030.
Owning v/s Contracting
Chhatwal has spent a large part of his career in Europe and the norm of the (even in the US) hotel industry is not to own the hotels but run it on management contracts. The developer pays a fee to the hotel chain to lend its brand name and operate it as per its brand standards. When Chhatwal joined IHCL in 2017, capital light constituted 44% of the operational portfolio and capital heavy was at 56%. In FY24, capital light accounts for 60% of the operational portfolio and capital heavy is at 40%. The ratio now is 50:50 and going forward the plan is to move to a model of 40:60 in favour of management contracts. “If you are on a quick growth, you can’t build on your own or for a better-hedged portfolio you shouldn’t own everything. Asset-light models enable faster growth and more profitability. It gives you fee-based growth which leads to margin expansion. Our focus on fee-based growth has taken us from 18% in FY18 to 33% EBITDA margins,” explains Chhatwal. The percentage flow in a fee-based model is higher as the company doesn’t own the P&L.
The advantage of a contract management model is that the real value capture is with the developer and the capital risk is also with the developer. “Brands enjoy zero capital investment returns. They make money using the power of their brands and reservation networks. For instance, Chalet Hotels is building for Marriott and the latter is expanding its network in India. They take management fee, brand fee and reservation fee and make 6%-7% of the top line,” explains the former CEO of a leading hotel chain. He says that a few developers charge hotels a development fee. “If you have 100 keys, the hotel brand pays the developer ₹5 lakh per key more to show its skin in the game,” he further explains.
“We cannot afford to own our properties. We have too many of them,” says Sebastien Bazin, Group chairman and CEO, Accor (which owns Ibis, Novotel, Sofitel, Pullman, Raffle and Fairmont). “The Accor network alone, which is 600 hotels, is worth $170 billion. Thank God, I don't own everything. I would have to redo the plumbing and the roofing, and it would have cost me a fortune. We decided to go asset-light and be only a service operator. Whether we manage a hotel or franchise, we do it on behalf of the owner,” Bazin explains.
IHCL has signed 175 contracts in the last six years and has opened over 90 new hotels. The fee income from the asset-light model has grown more than four times to ₹400 crore. In fee income, 75-80% comes to the bottom line as the company doesn’t have any cost centre. “We have 350 hotels as of October 31, compared to 310 on March 31, 2024. We are signing almost one hotel a week. While signing new hotels aggressively, we are conscious about brand positioning and continuous reimagining, in addition to which customer segment that we target and at which market it should be and in what form and facilities,” says Chhatwal. As per the 2030 strategy plan, the revenue from management fees is expected to cross ₹1,000 crore.
However, with Ginger, Chhatwal has preferred to move to an ownership model from an asset-light model it previously had. For an asset-light model to work, you need a big scale. You need to scale to 200-300 hotels, which gives you a fee. An asset-light model gives you just 6-7% of topline and if your revenue size is small, it’s not viable,” says Chhatwal.
A former hotel CEO agrees. “Ginger’s occupancy may not be as robust as Vivanta or Taj. If you have low occupancy, owners won’t want to associate with the brand. The developer’s mindset would be, if I pay a little extra I can have Vivanta or Gateway. Developers wouldn’t be ready to build Ginger as the ARR (average room rate) will always be much lower than Gateway, Vivanta or SeleQtions. If you put 100 rooms of Ginger, you will make almost 25% of the money that you would make in Ginger or Vivanta, but the capital investment won’t be that different." He says that IHCL would move to an asset-light model with Ginger once it proves the business model and shows high occupancy rates that could woo developers to sign up.
Reimagining Brand Architecture
The IHCL brand of hotels, be it the Taj Mahal Palace Hotel, Taj Mansingh or Lake Palace Udaipur were indeed recognised as iconic but they had ceased to appeal to the younger audience. The wealthy youngsters had started opting to stay in global hotel chains such as Marriott, Conrad or Hilton. Radisson also emerged as a preferred brand for business travellers. There was confusion around Taj and Vivanta (which is IHCL’s premium business hotel), as many of the group’s luxurious properties such as Fisherman's Cove in Mahabalipuram, Fort Aguada in Goa, Taj Mahal Lucknow or Hari Mahal Jodhpur were downgraded as Vivanta as they were incurring losses. The company decided to upgrade 25 such hotels into Taj. Luxury hotels such as JW Marriott or Four Seasons were growing exponentially and Taj wasn’t the destination of choice of the average Indian luxury holiday enthusiast. Since Fort Aguada was branded as Vivanta, it no longer appealed to luxury travellers.
The luxury segment has been rapidly growing in India and brands such as Conrad, Raffles, Westin, Six Sense and JW Marriott have started looking at the Indian market more seriously. Radisson, which is known for its business hotels, also announced the launch of its luxury lifestyle offering, Radisson Collection in India. Radisson has been the most aggressive international brand in India with 165 hotels in operation and development. More than 50% of its portfolio is tier 2-3 markets where it has a first mover advantage. In 2023 itself, Radisson has signed 23 new properties.
Bazin of Accor considers India as a country full of promises for the hospitality industry. “India has 32% of what is called the emerging middle class. Of course, within the emerging middle class, you have somebody who has a $5,000 income and somebody who has a $10,000 income. If you are on the lower end of the emerging middle class, you're going to be into Ibis or Novotel, if you have an upper hand, you're going to go to Swissotels, Pullman and Sofitel or even Raffle and Fairmont. The emerging middle class in India within 20 years, will probably double from 30% to 60% of the population. That alone will have a huge impact on hotel demand across all different sectors.”
To cope with the growing demand, The IHCL brands needed to be aligned under a clear brand architecture. After upgrading the Vivanta properties as Taj, the company re-imagined Vivanta as a premium business hotel brand. In a bid to expand, it also acquired independent brands such as The Ambassador Hotel in Delhi, President in Mumbai or Blue Diamond in Pune and branded them as Vivanta. The strategy had backfired. Though these were well-known brands their SOPs were different from the IHCL brands. “We had tried to fit in hotels which are very well-known brands on their own, but they didn’t fit into the Taj or Vivanta brands. The President was called Taj President and Vivanta President. Ultimately people who go to The President for a meal at Thai Pavilion, or Konkan. It’s a F&B hub with some rooms on the top, you can’t make a Taj out of a President or make a Vivanta out of it. We decided to leave it as is as everybody knows The President,” explains Chhatwal. He says that bringing these hotels into the Taj fold was actually destroying the Taj brand. “A Blue Diamond in Pune will never be able to compete with Conrad or Westin,” he further explains.
Therefore, the decision to put all these unique standalone brands under the portfolio of SeleQtions. “These hotels didn’t have common standards and creating common standards was becoming expensive,” explains Alpana Parida, founder, Tivrra Ventures, who in her earlier avatar as co-founder DY Works was given the task of re-engineering the brand architecture. The company is also giving a facelift to its Gateway brand, which is targeted at micro markets and competes with the likes of Novotel and Radisson BLU. “These hotels are mostly in tier 2-3 towns and due to its confusing positioning and an effort to make a Taj out of them, Gateway started losing business,” says Parida.
“It is a full-service hotel brand, classical in its look and feel, focused on F&B, weddings and social events, but it’s not the Taj. We have four Gateway hotels -- Nashik, Madurai, Varkkala and Chikamangalore,” adds Deepika Rao, executive vice president, Indian Hotels.
Reimagining IHCL was long overdue, says Ashish Mishra, CEO, India & South Asia, Interbrand. “For the flagbearer of the Indian hospitality industry IHCL, to my mind, it was always a case of the business lagging the brand. The recent cost pressures, stronger competition from global chains with a bouquet offering, tech precluding travel, talent crunch which directly had an impact on the service experience, independent F&B brands coming into their own vs. the dated F&B brands of the hotels -– these have further affected the industry and IHCL as a business. There seems to be a clear focus on fixing the business in a bottom-up manner. Targeting the biggest gaps and laggards in the portfolio and then working their way up. This is what would have improved the value-driving performances.”
Chattwal’s game plan has been to operate multiple brands at multiple price points. The pandemic saw a huge growth in the homestay concept, with brands such as Saffron Stay making huge inroads into that market. IHCL launched Ama Homestays in 2019 by taking over nine Tata Coffee bungalows in their plantations. With demand for the segment rising exponentially, it quickly scaled it up to 227 homestays in two years. There are 110 more in the pipeline as October 31, 2024.
In 2005, IHCL bought The Pierre in New York. It bought a property in Boston the next year, followed by another one in San Francisco. In 2013, it acquired a stake in Orient Express Hotel. The overseas attempts failed to turn profitable. IHCL sold most of the properties and stakes, except St James Court in London and The Pierre. If IHCL under Bickson chased growth and stretched itself, Sarna wanted to be contained and calculative. He focused on the quality and profitability of the existing large assets
Chhawtal isn’t looking at the US at all. “It is a difficult market,” he says. “Our strategy is the Indian subcontinent and the rest. In the rest we will keep opening in strategic locations, maybe a hotel a year. In the Indian subcontinent, we are opening three in Bhutan (two Taj and one SeleQtions) this year and two in Dhaka next year. We are opening in Frankfurt this year and would also focus on the Middle East, Europe and SouthEast Asia,” he further adds.
STARTING UP IHCL
When the Tata-Mistry feud broke out, everything changed in IHCL. Though Mistry was removed on October 24, 2016, from Tata Sons as chairman, he continued on the board of IHCL till December 19, a day before the EGM. His elder brother Shapoor Mistry, K.B. Dadiseth and N.S. Rajan also quit the board after Mistry's ouster. Soon after, Rakesh Sarna, the high-profile recruitment of Mistry, had to step down. It was when former TCS MD & CEO, N. Chandrasekaran was elevated as group chairman, who hired Chhatwal.
Soon after joining, Chhatwal’s first move to ensure stability in the organisation was to make sure he worked with the existing team. “I never gave an impression of an elephant in a porcelain shop. They first break half of the organisation and say they are building a team and one year is gone. The team is still settling down in the second year and in the third year they come up with a plan and whether the delivery comes or not, the clock keeps ticking, and the costs keep accumulating. I kept everything as is and tried to drive change with the same people.” The need of the hour was a complete rewiring of the legacy hotel chain.
Like most legacy businesses, IHCL had cultural baggage. “IHCL was confusing,” says Alpana Parida, founder, Tivrra Ventures. “The gap between Vivanta (premium business hotel) and Taj wasn’t clear. Vivanta wanted to be a Taj but there was a price point difference. The rates they were charging were vastly different, but the service standards were similar since the backend team was the same. There needed to be a distinction in the brand so that the brand promise was clear both internally as well as externally. Ginger was so far behind that nobody in Taj wanted to touch Ginger. The Gateway (mid-segment business hotel) brand was languishing too. It was also trying to be a Taj.”
Chhatwal’s plan was to play to the strength of each brand and operate at multiple price points. “Organisations have three kinds of culture – family culture, innovation culture and machine culture. IHCL can be described more like a very strong family culture, with a little bit of innovation (we were stuck there for decades…a napkin is folded in a certain way and tea is served in a certain way) and machine culture. I would call Taj Sats (which produces 1,20,000 meals per day) a machine culture. When I joined, we were a combination of 70% family and 15% machine and 15% innovation. Today, we are 50% family, 25% innovation and 25% machine and would want to keep it that way.”
Turning Around
Within a week of joining, Chhatwal called a strategy meeting at Taj Fort Aguada in Goa, the beachfront resort overlooking the ramparts of the historic 16th-century Portuguese fort in Goa. The top 35 people of the management spent two days to structure an interim strategy called ‘Project Win’. The idea was to register profit on its books. The senior management team met in November 2017 and decided to ensure that the company made an EBITA of ₹100 crore at the end of the fiscal, March 31, 2018. “We looked at revenue and costs of our key assets and tried to optimise costs wherever we could. We defined unit by unit and started monitoring. We had earlier forecast a loss albeit less than the previous fiscal, but we ended with a PAT of ₹101 crore,” remembers Rao.
“For me, it was important to show people after eight years of PAT loss, we can be profitable,” adds Chhatwal. In February 2018, Chhatwal asked for a meeting with the Tata Group chairman, N. Chandrasekaran (just before the company presented its Q3 results), where he presented ‘Aspirations 2022’. The document stated that IHCL would target an 800 basis points margin expansion, and would add 15 hotels per year. “We said we will have a balanced portfolio of 50:50 (between company-owned hotels and management contract), we will reimagine our brands, re-engineer our margins and restructure our portfolio and yet keep the Taj values,” adds Chhatwal.
IHCL launched another five-year strategy Ahvaan in 2023 to expand the 155-hotel portfolio to 300 hotels by FY26, with a 50:50 ratio for company-owned and management contract assets, besides a net debt zero balance sheet. Indian Hotels, though, crossed the 300-hotel goal in FY24. It had a record signing of 53 contracts, compared to 36 a year before. It targeted an EBITDA margin of 33% by FY26, which was also achieved two years prior to the deadline. Ginger, which was making losses for years, made a PBT of ₹55 crore on a turnover of ₹486 crore. The PBT margin was 15%.
Chhatwal decided to start the re-engineering process with the weakest links in the business – Ginger Hotels (the group’s budget hotel offering) and Taj Sats (the flight kitchen business). Realising that Taj was an emotion for its employees, most of whom had spent their life in the organisation, big-ticket changes at the outset with brand Taj or even Vivanta would meet with resistance. Ginger and Taj Sats, he says, were the dumping ground for all the non-performing IHCL employees. Mostly in tier 2-3 towns Ginger was hugely loss-making and extremely tacky. Chhatwal decided to put up a flagship Ginger hotel next to the domestic terminal in Mumbai.
The land near the domestic terminal in Mumbai had been lying idle for 30 years. There was a flight kitchen there earlier. Later it turned into a godown, where Taj employees could buy old hotel furniture. “We spent about ₹230 crore for Ginger Santacruz. We expect the entire investment will be recovered in 3 years 9 months,” he says. The flagship hotel of Ginger, which opened on November 10, last year, was EBITDA positive in 20 days and PBT (29%) positive within the first five months of operations. “We expect to generate ₹100 crore turnover in this financial year. We have more than 95% occupancy for 20 days a month,” claims Rao.
“Ginger has been re-imagined as a fun, young and vibrant place. Earlier it used to be where the lowest rung of the Tata Group employees used to be put up. It’s now becoming the destination of choice,” says Parida of Tivvra. The reimagination exercise has also helped the group to take up rates. “If I get 45,000 sq.ft. of real estate, I can build out 100 rooms. It means what is working is efficiency. We don’t have unnecessary space in Ginger. No extra restaurants, no large lobbies and no banqueting in Ginger. We held on to what was working and made the brand aspirational,” explains Rao.
Similarly, with TajSats, the plan was to improve market share (it competes with Gate Group, Ambassador’s Sky Chef and Oberoi Flight Services). The flight kitchen business in FY24 touched a revenue of ₹900 crore revenue, closed ₹220 crore in EBITDA and 25% margin. “It is expected to do more than ₹1,000 crore in revenue in this fiscal and more than ₹250 crore EBITDA. In a very good year this used to be the profit of entire Indian Hotels, today it is just the flight kitchen business. We have 60% market share,” says Chhatwal.
Business of Hotels
The hotel industry has bounced back after the COVID-19 disruptions. Occupancy rates in 2023 were in the range of 63-65% compared to 65%-67% in 2019. “We expect India-wide occupancy to improve to 66-67% in 2024, coupled with a 6-8% increase in ARR will push RevPAR to ₹5,281 during the year, almost 31-33% higher than the pre-pandemic RevPAR recorded in 2019,” says Mandeep S Lamba, President (South Asia) of consulting firm HVS Global Hospitality Services.
Though the industry is growing across categories, it is the luxury segment which generates the highest margins and revenue. The total revenue of Taj Mahal Palace and Taj Lands End is ₹1,200 crore. The revenue of these two hotels would be double that of 100 Ginger hotels. “New hotels could come in Ginger, Vivanta, Gateway etc, however, the backbone will be Taj,” says Chhatwal. The Taj will stay upscale and luxurious and the company would be extremely choosy about the location of the hotel. Chhatwal says every State capital city would have a Taj, but the rest would have other brands.
Bazin of Accor says that while luxury hotels churn a margin of 12%-15% compared to 6%-7% margins of mid-segment hotels, the former needs more investment. “It's more difficult to execute because the brand has to be of greater content, greater promise, you can't fail when people are paying you $500 per room. It's a greater incarnation, it's more difficult to execute.”
In fact, Bazin says that when one works out the math the margins of luxury and mid-scale hotels turn out to be similar. “The pricing for luxury may be better, but you have more personnel. Since you have more personnel you have more cost, then more services, and more food and beverage. So, it's actually the same margin, even though you have a better pricing advantage in terms of dollar revenue per room.” The trick therefore is to have a balanced portfolio of luxury, premium and budget hotels.
One of the reasons consumers prefer Marriott or Radisson to IHCL hotels is because of their wider global presence. Marriott's loyalty programme, Bonvoy, is a huge catch for upwardly mobile consumers, as it enables them to redeem their points at Marriott properties across the globe. IHCL’s overseas strategy isn’t successful.
After steering the IHCL ship into safe waters, Chhatwal has now taken up the task of reimagining the jewel in the crown, Taj Hotels. He wants to make it more appealing to a younger audience. It’s a work in progress.
