Will the proposed merger of ITC Hotels with ITC deliver a more synergistic business model?

SOMNATH DASGUPTA

When cigarettes and tobacco major ITC Ltd said last week that its board would meet on August 25 to consider the merger of 72-per-cent subsidiary ITC Hotels Ltd with the parent, the key question was: why now? Parent ITC Ltd is a Rs 6470 crore company that has been winning global awards and rolling out an array of new ventures away from cigarettes, ventures whose rationale can sometimes be summed up only with that famous motto: Who dares wins.

But why this “flashback” to hotels? ITC, born in 1910, has been in hotels since the mid-1970s (its first property came up in 1975), when it began to branch out into businesses other than cigarettes and tobacco despite the doubts of its main shareholder, BAT plc of the UK. After building up the famed Welcomgroup chain of hotels over the 1980s and 1990s, ITC took to “super deluxe” hotels.

But the new millennium saw ITC grabbing headlines with innovations like the e-choupal or village internet kiosks in India’s farm belts, forays into ready to wear apparel, greeting cards, branded food and even matchboxes. Meanwhile, its older businesses like paper and paperboard and hotels continued to strive for world class goals.

Now, with the proposed merger, one thing is for sure: ITC could use its huge cash pile to build and acquire properties without taking on a paisa of debt. ITC alone reported a profit after tax of Rs 1,593 crore on net sales of Rs 6,470 crore for 2003-04, against a net profit of Rs 1,371 crore on net sales of Rs 5,866 crore the previous year. Segment-wise, its hotels business fetched a Rs 254 crore in revenues and a profit of Rs 33 crore. This came from the properties owned by ITC and run by the subsidiary for a fee.

As a subsidiary, ITC Hotels reported a profit after tax of Rs 20 crore on net income of Rs 158 crore for 2003-04, against a net profit of Rs 57 lakh on revenues of Rs 121 crore the previous year. ITC’s hotel segment’s figures are higher because it owns the only super-deluxe or seven star properties in the group, and these fetch the highest margins.

ITC’s hotels business is largely run under the umbrella ITC Welcomgroup brand. ITC Hotels runs 66 hotels in 50 locations across India, and ranks no 2 after leader Indian Hotels Co of the Tatas and ahead of East India Hotels of the Oberois. It has four “sub-brands” — the prefix ITC for super deluxe category, WelcomHotel for five-star hotels, WelcomHeritage for palaces, forts and havelis and Fortune Hotels for four star properties. It also has a marketing tie-up with Sheraton Corporation of the US for eight Welcomgroup properties.

It may be interesting to recall that during the seventies, when ITC took the first steps into the hotel business, the Oberois of EIH Ltd were partners initially, while the Tatas were competitors for properties. At that time, ITC did not have much management experience in hotels. The foray was largely sparked by the need to get into a comparatively less capital-intensive industry in which a failure would at least leave it with some value by way of land. It was ITC’s break with the Oberois following an argument over the choice of a property that forced it to develop its own hotel management cadre — in those days, ITC regulars transferred to the hotel side saw it as a sort of shunting!

Long Way

ITC has come a long way since then. The bulk of its hotels revenues comes from properties that it owns directly; ITC Hotels fetches the rest. After ITC’s annual general meeting last month, Mr YC Deveshwar, the chairman, had unveiled plans for new hotels in Bangalore, Chennai and Hyderabad. Each of these projects could cost Rs 250-300 crore. Now, with ITC’s cash reserves to fall back upon, the hotels business is expected to power ahead. In fact, after the annual general meeting of rival East India Hotels on August 18, its chairman PRS Oberoi stressed that he would focus on management contracts rather than outright acquisitions or setting up new properties. “The merger of ITC Hotels with ITC will not affect any of our decisions on expansion or promotion of our brand,” said Mr Oberoi. But he also pointed out: “We will no more buy, acquire or set up new hotels just for the sake of it. Rather, we will be managing hotels owned by others,” Mr Oberoi said.

At ITC, no one was willing to go on the record ahead of the August 25 board meeting to consider the amalgamation. ITC had earlier declined to comment on speculation about such a merger. But there were hints about such a merger in ITC’s annual report for 2003-04, in the directors’ report to shareholders.

Commenting on the huge demand-supply gap in hotel rooms (forecast at around 40,000 by 2008), the report had noted: “The accommodation sector therefore presents attractive growth opportunities for companies like yours that can sustain the impact of capital intensity through the strength of its balance sheet”.

Ramp Up

Sources at ITC Hotels have already indicated that the hotels business will ramp up its growth plans keeping in mind the power of the amalgamation. Apart from strengthening the alliance with Sheraton, struck in 1979 to gain mileage and inward tourists from the international brand, ITC Hotels has identified international projects in Dubai and the Far East. ITC subsidiary International Travel House (ITH) also aims to launch new products and services, by way of boutiques that will provide complete travel services. ITH will also play a more active role in getting inward luxury tourism traffic by taking part in travel fairs abroad, the target being individual tourists.

However, while gaining from the investment clout of parent ITC, the hotels business will have to compete stiffly for marketing funds with the new businesses like branded apparel, food, packaged foods, greeting, gifting and stationery — all part of its fast-moving consumer goods (FMCG) segment. So, it is yet to be seen how much of funds hotels will get.

According to Mr Ravi Bhoothalingam, who was a senior executive at ITC and later at parent BAT plc in the seventies and eighties, the success of the hotels venture has shown that BAT had been wrong in opposing ITC’s foray into hotels. “The most important message of the merger is that the hotels business is now core to ITC,” says Mr Bhoothalingam, now CEO of a travel services advisory firm. He notes that BAT had always felt that shareholders interests would be best served if the several businesses were held under separable corporate identities. Given Mr Deveshwar’s clear goal of making each business the number 1 or number 2 in its domain, it will be interesting to see the race now. After all, it was Mr Deveshwar as hotels division chief, way back in 1970 who first spearheaded the initiatives in this sector. Can Deveshwar deliver this time around?