‘We are a follower at the global level, but a disrupter locally’

SAMHI, a late entrant in the hotel and hospitality sector, today owns 23 properties with over 4,000 rooms in a short span of six years. The company has raised over $150 million in funding from investors including GTI, IFC, and Goldman Sachs. Founder tells

about his journey, the company’s growth, and the changes he expects to see in the industry’s structure. Edited excerpts:

How does India’s hospitality and hotel business differ from what one finds globally?

A large proportion of hotel ownership in the Western markets is with institutional investors. A lot of annuity funds, endowment funds, or pension funds will typically invest with an expected regular return.

In India, most hotels are owned by the brands themselves— be it the Taj, Oberoi, Leela, or even Lemon Tree. The brand, operations and the real estate ownership lie with the same company, whereas globally there is usually a real estate or property owner who signs a third-party contract with the Marriott or Carlson or Four Seasons.

The Western financial markets prefer ownership and operations to be vested in different hands as owning a business is very different from running it. Running a hotel is business-to-consumer. I need to

make sure I am updated on my food and beverages offerings, ensure good quality of rooms, understand what a customer needs and desires.

Hotel ownership is business-to-business. I need to understand where to raise capital from, what should be the capital structure, when and what to buy and sell — the decisions you need to make as a hotel owner are very different from those of a hotel operator. So in the Western markets, they have started saying “decide who you want to be”. Marriott in the 1990s used to be like the Taj. They owned most of their properties in the US. And in the mid-1990s, the stock market said this didn’t work: Split. So they separated the companies. The brand went to what we know today as the Marriott Corporation and the ownership went to the Host Marriott. Both companies became $50-billion-plus companies in market capitalisation. Accor used to be the last standing owner-cum-operator in the US. Accor as a company continued to own a lot of its real estate. It recently announced that the hotel ownership is being sold to institutional investors.

So how and when did you decide to take the plunge?

In 2011, I saw that there was no large institutional owner of branded hotels. That’s when the Eureka moment came. If we can attract global institutional investors, we can create the first large institutional owner of hotels in India. The idea is to invest capital in a brand-agnostic fashion where returns are the highest. Initially, the plan was to build properties but later we changed the strategy.

Why and in what way?

We saw that we could in fact grow faster by acquiring distressed or struggling assets. After 2008, the market was correcting and there was a high degree of financial distress in the real estate sector, and that was reflecting in the hotel industry as well. This helped us grow at a fast pace. We now own 23 assets — 3 built by us and 20 bought over the past few years.

Would this make you a disrupter in this space?

Well, Flipkart copied Amazon, Ola copied Uber, and we have copied the Host, US. None of us can claim to be technology innovators. But within this market, we have conducted ourselves in a way that hasn’t been done before. Typically, Indian hotel companies took 10-15 years to reach a portfolio of 4,000-plus rooms. We have managed to do it in 6-7 years.

I talk to investors all the time and one of the biggest challenges in India is scalability. Companies look at India’s 1.2 billion people and think this is where we will have 500 stores but it’s easier said than done. An H&M, Benetton or Starbucks expects to have in India 10 times the number of stores than some place in Europe or the US, but scalability is not easy in India. Building a business is not a cakewalk. Often economics does not stand up as wealth in India is highly concentrated. The moment you leave the wealth pockets, there is no affordability. Mom and pop stores still run the show.

In my view, anyone who has been able to meet the scalability challenge can be called a disrupter. So let me say we have done the business differently from the way it is being done in India but exactly as it has been in other parts of the world. I am a follower at the global level but in a sense a disrupter at the local level.

Do you see the traditional players following?

Eventually, yes. Financially, as I see it, they have to. Today IHCL’s (Taj) market cap should be $2.4 billion with 10,000 rooms. The value of real estate in that company will be at least $1.5 billion, if not more. That means the value of the management and the brand is just $1 billion. To my mind, it’s hugely undervalued.

Let me give you the example of Accor. The market cap was around $8 billion and it manages around 4,000 hotels. Marriott’s market cap was around $10 billion and it also managed 4,000-odd hotels.

But there was a difference. Marriott owned none of the hotels, whereas Accor’s real estate value was around $5 billion. What does that tell you? That the Marriott brand was valued that much higher. So today Accor is selling the ownership for $4 billion. And give it a year or two and its market cap will still be $8 billion. When you combine the two, the market is not able to value the two businesses separately. If IHCL was to separate the two, each would be valued at $2-2.5 billion. Unfortunately, public shareholders are not active enough in India to demand it.