Budget Hotel Private Equity

Several Indian budget and midrange hotel chains are scouting for private equity money to fuel growth and expansion.

Global and domestic investors are optimistic about India’s emerging branded budget hotels, though the overall hospitality sector is yet to recover from the downturn of 2008-09, analysts said.

“It wouldn’t be difficult to raise money because for investors, India is one of the largest target markets for budget hotels,” said Akshay Kulkarni, executive director, hospitality services, Cushman and Wakefield India, a property advisory.

Peppermint Hotel

Peppermint Hotels is preparing to boost its valuation before raising funds.
.”Economy hotels help to hedge risk by playing the volume game and the investments don’t need to be very big in the beginning.”

PE firms invested $226 million (10 billion rupees) in five hospitality deals in India in the first six months of this year, compared with $146 million in four deals in all of 2010, according to Venture Intelligence, which tracks PE and venture capital deals across sectors.

Hotel groups, sensing the potential for branded low-fare chains, a relatively new business in the country, are striving for large volumes in both metros and small cities.

Samhi Hotels Pvt. Ltd, a hotel and investment firm that’s set to close its first round of fund raising of about $120 million, will deploy most of the money in the economy hotel segment, said Ashish Jakhanwala, managing director and chief executive officer.

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.”The mandate we took to our investors is to acquire good-quality assets and build hotels,” he said. “The biggest challenge in raising money is the track record of hospitality companies in India because only a few have delivered.”

Keys Hotels, the mid-market brand of Berggruen Hotels Pvt. Ltd, and Peppermint Hotels are seeking money for their next phase of growth.

Keys needs to deploy about $65 million of fresh equity for 8-10 properties, said Sanjay Sethi, managing director and CEO, Berggruen Hotels.

Peppermint Hotels is preparing to boost its valuation before raising funds.

“We were talking to PE funds,” said Arjun Baljee, managing director, Peppermint Hotels. “We have three operational hotels and want to build 10 more over the next few months, after which we would get a better valuation and will be in a better position to raise money.”

Among the advantages in the budget hospitality business are “the possibility to scale up quickly… and higher returns on investments,” said Achin Khanna, associate director, consulting services, HVS Hospitality Services, a consultancy.

Of the 89,000 hotel rooms that are being constructed in India now, Mr. Khanna said about 35,000 will be in the mid-segment category.

The Lemon Tree and Red Fox brands are aiming for 4,000 rooms by 2013. “I would look at an IPO then, once I hit the 4,000 mark,” said Patu Keswani, chairman and managing director, Lemon Tree Hotels, which owns the two brands.

Lemon Tree Hotels was one of the country’s earliest budget hotel chains to receive global funding when Warburg Pincus picked up a 27% stake for 2.8 billion rupees in 2006.

“The budget and mid-market hospitality segment in India presents a large and under-explored opportunity,” said Niten Malhan, managing director, Warburg Pincus India Pvt. Ltd. “Surging domestic business travel and tourism across India should create an interesting growth opportunity for hotels that are able to offer consumers a high quality product-service mix at reasonable rates.”

Analysts also see competition increasing in the space, and say hotel companies will have to offer value propositions along with the right location to survive.

Hospitality fund Duet India Hotels Group, which has tied up with the UK-based InterContinentalHotels Group Plcto develop its economy brand Holiday InnExpress in India, will invest about $300 million through a combination of debt and equity to build about 3,300 rooms across 19 hotels in India over the next three years.

“We have closed four property deals and are looking at six more,” said Navneet Bali, chief investment officer, Duet India. “Location is a key factor and the property has to be in the vicinity of a good catchment area.”


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