r2i forum

Hey guys,

To start with, I should thanks the Admin and fellow members for their inputs on the wealth of information available in this forums.

I am here because i think i will get some honest opinion from members who have returned to India and others who can add valuable information for me and others in the future.

I am not going to dig deep on my history but I have a interesting offer from someone which I would like to share with you guys for your opinions.

Opportunity

Build/Own/Manage a HOTEL ( 3 star, 60 rooms ) in a Tier 2 City in already owned land in a busy part of the city

Offer

A well wisher to my family is offering to "help" establishing the hotel. He is a hotelier himself and own three hotels in Tier 3 cities. He reckons the hotel business is very profitable and is willing to help out with all the permits/ rules/ etc...

My SWOT Analysis on this offer

Strengths
1. Already the land is fully paid off
2. Hotelier does not sound like a very bad career

Weakness
1. Capital ( Might cost around 3-5 C but will be eligible for atleast 60-70% loan from the bank )
2. Delay will lead to heavy competition in that city/area ( Cannot act today on this so have given myself 3 years or so to execute )

Opportunity
1. Potential to expand to other cities/ Regions/ etc
2. Career Changes on personal front
3. Can live close to parents

Threats
1. Current situation of politics/environment in TN which likely seems to improve but can go back to the same situation

Well you can see that this not well thought of but this is the best I can think of !!!

I am happy working for a descent pay but this offer is made me to think why not consider ? If there are more risks then will pull out of the venture. I am off to India after 6 years to meet this guy and take it a little further. But like I mentioned I have 3 years to make up my mind and then go execute if this is viable. Worth to note that my folks are either very interested in this or against it. There are having a win-win situation because I will be closer to them if this works out.

Well if the admin think this has too be in other sections then please move it !!

Thanks hoping to get some different perspective on this topic ( largely what people think of doing business in India in the current situation ).

You are knocking on an interesting opportunity. However am unable to understand the financial feasibility part.

If you could throw somelight on ROCE (Return on Capital employed), one would be in better position to judge the project viability. For the capital employed part, I suggest to sum the following:

1.Current market price of land if owned by you
2.Regulatory Approval costs (Building Permissions, power, water, sanitary, municipality, commercial taxes and so on)
3.Construction costs that includes materials, manpower for labour and supervision and bills (phone, power, water)
4.Final development costs (furniture, fixtures, systems, security, staff, clearances and so on)
5.Interst costs paid to the bank if loan is availed

This is my understanding that before any revenue is generated, you would incur the above costs and it is worthwhile to compare your annual forecast revenue generation and the rate of return (ROR). Ofcourse the ROR varies as per the forecast of annual revenue generation which could be tweaked to suite our purpose like aggressive (100% capacity occupancy), trend based of hospitality industry (70-80%) or conservate (50% & below).

If the RoR looks attractive even on conservative scenario, it makes sense to kick start the venture right away.

I think going back with an idea to start a business is fantastic. It really puts a better spin on R2I. The challenges i see are that you have never been a hotelier, it is business that relies heavily on manual labor, all you have is land, so you will be heavily reliant on the expertise of others including this relative to keep you afloat. You must have a lot of trust in your relative and the managers you will employ, trust me they have a lot of lee-way to steal if they want to.

Given India's growth and population, i can see how there will be a lot demand for hospitality/Food/beverage businesses but then you got to make sure you have the capacity to ensure the best service and management and be able to delight your customers.

Beyond the expense catagories that OP mentions, hotels fundamentally have huge fixed costs. Also in India, hotels tend to be a magnet for free-loaders particularly government employees who want to come use the hotel for food or lodging and expect not to pay.

Good luck!

krivan1;477058You are knocking on an interesting opportunity. However am unable to understand the financial feasibility part.

If you could throw somelight on ROCE (Return on Capital employed), one would be in better position to judge the project viability. For the capital employed part, I suggest to sum the following:

1.Current market price of land if owned by you
2.Regulatory Approval costs (Building Permissions, power, water, sanitary, municipality, commercial taxes and so on)
3.Construction costs that includes materials, manpower for labour and supervision and bills (phone, power, water)
4.Final development costs (furniture, fixtures, systems, security, staff, clearances and so on)
5.Interst costs paid to the bank if loan is availed

This is my understanding that before any revenue is generated, you would incur the above costs and it is worthwhile to compare your annual forecast revenue generation and the rate of return (ROR). Ofcourse the ROR varies as per the forecast of annual revenue generation which could be tweaked to suite our purpose like aggressive (100% capacity occupancy), trend based of hospitality industry (70-80%) or conservate (50% & below).

If the RoR looks attractive even on conservative scenario, it makes sense to kick start the venture right away.

OP

I would look one more factor. Your personality. I mean are you aggressive person? Coming from business family? Ready to break law and pay bribe time to time. Have political connection/power. Your relative ( I don’t know how close you are to him), why he picked you? Are you ready to learn everything to do business in India. Remember you have spent 6 (or may be more) years in US. Have you done some analysis like how much constant occupancy require to break even (after paying loan + interest and other expense).

It appears that all you have land at prime location, but this is not easy business to do if you do not have any background.

My 2 cents…

extrano;477049
Threats
1. Current situation of politics/environment in TN which likely seems to improve but can go back to the same situation

Agree with Lakshya. It may not be everyone cup of coffee to run a hotel.

I am guessing your are a good boy type (As most of the Indian in USA :) ) educated, worked in US and became rule abiding person.

SWOT analysis will not work in real life in India.

A case study for you:

A man checked into your hotel with fake name and address and next day he is found murdered in your hotel room.

Police came and arrest you put you behind the bar.

How will you come out with this situation ?


I am not scaring you but similar cases are very common in hotel business in India.

krivan1;477058You are knocking on an interesting opportunity. However am unable to understand the financial feasibility part.

If you could throw some light on ROCE (Return on Capital employed), one would be in better position to judge the project viability. For the capital employed part, I suggest to sum the following:

1.Current market price of land if owned by you
2.Regulatory Approval costs (Building Permissions, power, water, sanitary, municipality, commercial taxes and so on)
3.Construction costs that includes materials, manpower for labour and supervision and bills (phone, power, water)
4.Final development costs (furniture, fixtures, systems, security, staff, clearances and so on)
5.Interest costs paid to the bank if loan is availed

This is my understanding that before any revenue is generated, you would incur the above costs and it is worthwhile to compare your annual forecast revenue generation and the rate of return (ROR). Of course the ROR varies as per the forecast of annual revenue generation which could be tweaked to suite our purpose like aggressive (100% capacity occupancy), trend based of hospitality industry (70-80%) or Conservative (50% & below).

If the RoR looks attractive even on conservative scenario, it makes sense to kick start the venture right away.

Thanks for your analysis Krivan!!

For now, I have been told about this only a month ago. I am sorting out my work here to be in India for a Face-to-Face chat and get some facts around this. Saying that I have had phone conversations with all my contacts (family/Friends/ Friends- friend who owns a hotel) and gathered some valuable information.

Well with the limited info I will try sharing some,
1.Current market price of land if owned by you
I have been told that, the current market price of the land is 10 C ( Half an Acre ) but like all the RE deals the guideline value is probably 10% of the market value.

2.Regulatory Approval costs (Building Permissions, power, water, sanitary, municipality, commercial taxes and so on)
Probably the main thing here is the "BRIBE". Will have more understanding of the cost when i come back from my trip.

3.Construction costs that includes materials, manpower for labour and supervision and bills (phone, power, water)
4.Final development costs (furniture, fixtures, systems, security, staff, clearances and so on)
Construction Cost -
60 Room 3 Star hotel on a average will have 20,000 SQ Feet built up area.
Going by the average construction cost - 20000 *1000 = 2 C

(Ideally a three star hotel room + en-suite is roughly around 150 Sq Feet)

Furnishing Cost -
60 Rooms - 60* (50,000 - 75,000 )= 30 Lakhs- 45 Lakhs
Others (Rest,Kitchen, hall, etc,,, )= 50 Lakhs

Staff required to run the hotel ( 60 rooms, 3 star )

House keeping - 10 staff on shift basis
Reception - 4 on rotating basis
Managers - 3
Security - 4 staff ( 24 hrs)
F&B - 5 Staff ( 2 chefs )

Basically this really depends on what other features the hotel will have. Bare minimum is a Rest or two, Function Hall for 3 star which are actually money spinners.

Cost of Room / Night

2000 Rs After Discount ( advertised will be a higher price )

Cash Flow

Conservative ( 50% Occupancy )

60(Rooms) * 182.5 (Days ) * 2000 (Final Price ) = 2,19,00,000
Others = 25,00,000 ( Not really thought off )

Average ( 65% Occupancy )

60(Rooms) * 237 (Days ) * 2000 (Final Price ) = 2,84,40,000
Others = 25,00,000 ( Not really thought off )

Expense for the first 5 years - 70%/80% of total income

5.Interest costs paid to the bank if loan is availed
I am yet to start this conversation with the bank but roughly have to borrow 60% of the total cost. This is the figure I have been told that will be lent in India. Not sure have to dig about this !!

These are the figure which was discussed with various people. Again these are rough around the edge but this is a fair cut from my discussions.

I am a big skeptic on forecasting and was constantly asking What If? scenarios.
What if ? I don't get approvals
What if ? construction stops because of environment protest
What if ? 50% occupancy is not achieved ( everyone said this will not happen )
What if ? .........................

I have so many what if ? going on in my mind but realized if I don't take risk then business is not something for me. Also have to mitigate all the risk to a considerable level.

i hope I have give you a lots of data to think about. Please shoot your thoughts!!

Lakshya;477136OP
I would look one more factor. Your personality. I mean are you aggressive person? Coming from business family? Ready to break law and pay bribe time to time. Have political connection/power. Your relative ( I don’t know how close you are to him), why he picked you? Are you ready to learn everything to do business in India. Remember you have spent 6 (or may be more) years in US. Have you done some analysis like how much constant occupancy require to break even (after paying loan + interest and other expense).

It appears that all you have land at prime location, but this is not easy business to do if you do not have any background.

My 2 cents…

Thanks for your 2 cents. I know I still have a long way to go but certainly there are pointer which I have to consider !!

Chakraan;477138I am guessing your are a good boy type (As most of the Indian in USA :) ) educated, worked in US and became rule abiding person.

Cant really guarantee that ;-) LOL

[QUOTE] A man checked into your hotel with fake name and address and next day he is found murdered in your hotel room.Police came and arrest you put you behind the bar.How will you come out with this situation ?

Hmm!! that's all i need to pull the plug :-) In India/developing world i guess there is "ALWAYS A WAY OUT" and hopefully i learn all the tricks !!!

Actually this situation did not scare me a bit, cos for a fact this does not happen unless you are involved !!!

OP, I wish you luck on your bold initiative. With a burgeoning middle-class in India, hospitality/tourism seems like a promising growth sector.

A big advantage you have is that you own the land outright. The bank can use it as collateral to provide you a loan.

By the way, have you read this Hotel Survey from HVS (pdf)? It covers 32 Indian cities and provides average occupancy rates, room rates, number of employees etc.

Another interesting one is this Hotel Investment whitepaper (pdf). It has lots of data and info about starting a hotel in India. They did a survey of 118 hotels that opened in India in the last 4 years. According to that survey, the absolute minimum development cost (excluding land) for a budget 2-star hotel was Rs. 14.4 lakhs per room. So, a 60-room hotel will require an investment of about Rs. 8 crores (excl land). Average would be closer to Rs. 16 crores.




Here is another article from The Economic Times focusing only on budget hotels. It claims on page 4 that it costs Rs.30 lakhs / room. You could do it cheaper but these surveys provide interesting data points.

Extrano, looks like half of your project report is already underway. My understanding of figures that I gathered are slightly different as that of yours and on higher side. Ofcourse this is also my nature as a PM of Infrastructure projects to overestimate the expenses and underestimate the revenues.

Land cost = 10C ( you are the better judge here)

Excluding the plot cost, you may land up at a cost of INR 10,000/sft that includes the construction, furnishing, regulatory, pre-interest, bills, wages and tips as final price for a 3-star hotel. INR 1000/sft construction cost is long gone and we here that lot from common public. The construction costs are really staggering these days and verymuch higher side for hotel sector.

Final Development cost could be : 20 C (Based on 20,000 sft area and INR 10,000/sft)

I would put the total project (plot + development) cost as : 30 C.

The net revenues from conservative to average are about : 1.5 to 2 Crores (30% cost is taken off for expenses)

We are at Pre-Tax RoR of 5-7% excluding the appreciation cost of land & development.

If the bank loan is availed which normally charges an interest rate of 12%, one may end up paying interest alone of 1.2 crores (all your profit) on 10 Crores loan (50% of the development cost) wiping all of our ROR.

Here is the summary I put it:

With bank loan of India coming with higher interest cost, you would not see real profits from the venture for 10 years at least.

From time to time, you need to provide cheap entertainment at free of cost to politicians/Officials/Goondas to save & run your venture to pay atleast bank interest costs on monthly basis.

More often the guest behaviour, shortage of essential resources (water, power, ACs), notices from concerned departments, barely making any profit in the intial years keep you on toes.

Simple calculations tells lot of truths. This venture is nerve breaking consuming all individual savings. Any hindrances at any stage would certainly give sleepless nights. For economy, this is a good venture in terms of jobs creation, property market, brokers, tourists, regualtors and politicians. Unfortunately does not make money for investor.