SAPTARISHI HOTELS PRIVATE LIMITED - ICRA

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ICRA Credit Perspective Saptarishi Hotels Private Limited Credit Strengths � Hotels to be managed under the Double Tree by Hilton brand; benefits from the worldwide marketing and reservation systems of Hilton � promoter’s past experience of hotel construction; equity partners in FII investor Indus Hotel Reality (Mauritius) Limited � Project has achieved financial closure for 100% of the debt and about 50% of the equity already brought in; agreement in place with FII investor for the remaining equity � Hotel strategically located to benefit from the business demand from both the IT hubs of Gachibowli and Hitec city in Hyderabad � Proposed Hilton Academy in the hotel premises to earn regular rental income and regular occupancy for the hotel apart from a possible revenue share from the academy Credit Concerns � Small scale of operations with single property with 200 rooms hotel and 40 key service apartment � Project at initial stages of construction � Ability to complete the project in time critical for debt servicing � Any significant cost over-run could create funding gap � Growing competitive pressures in the Hyderabad hotel market with the entry of numerous new players; local issues such as Telengana separation movement adversely impacting the business sentiments in the city Rating Rationale The ratings take into consideration the current status of project which is at nascent stages with excavation work still going on. The ability of the promoters to complete the project on time will remain critical for the debt servicing of the company as currently there is only a six month cushion between the COD and commencement of debt repayment. Furthermore, any cost overrun could create a funding gap. The ratings also take into consideration the small scale of operations of the company with a single hotel property, the growing competitive pressure in the Hyderabad hotel market with the entry of numerous new players and the negative impact the local issues such as Telengana separation movement have had on the business sentiments in the city. The rating however favourably factors in the hotel’s management contract with Hilton Worldwide for their ‘Double Tree by Hilton’ brand and the expected benefits from Hilton’s global marketing and advertising network. The hotel is favourably located in Gachibowli and is expected to benefit from the business demand from both the IT hubs of Gachibowli and Hitec city in Hyderabad. The ratings also take into consideration the promoter’s past experience in the hotel projects, the fact that the project has achieved full debt tie up, and half the equity has been brought in with remaining being tied up with FII investor Indus Hotel Reality (Mauritius) Limited and the proposed Hilton Academy at the hotel premises which would to earn regular rental income and stable occupancy for the hotel apart from a possible revenue share for the company. Land and lease agreement The proposed development is a part of the National Institute of Tourism & Hospitality Management (NITHM) on land measuring 3.0 acres (12,147 sq. mts.) which NITHM offered for development in December 2008. The promoters through the group company Maha Hotel Projects Private Limited (MHPPL) bid for the project and won. SHPL was then incorporated in October 2010 and the Lease Agreements and Development & Management Agreement were signed in November 2010 subsequent to which the site was handed over. The project is to be executed on a BOT basis with concession to run the hotel for 30 years (after 3 years for construction). The lease can be renewed as decided mutually between NITHM and SHPL. The fees payable by SHPL under the agreement is as follows – Development Fee – One-time non-refundable Development Fee of Rs. 2.50 crore Lease Rental - Annual Lease Rental of 5% of Market Value of land determined in December 2008 (with an annual escalation of 5%). Rental for first year starting Nov 2010 was Rs. 1.45 crore. Additional Development Premium – To be paid after COD at higher of Rs. 0.62 crore or 3% of Gross Revenue with an annual escalation of 5% Hotel facilities The property apart from the hotel and service apartment would also house an all day dining restaurant (230 covers), an Indian Specialty Restaurant (130 covers), a lounge and deli (50 covers), a pub and discotheque (140 covers), a bar (44 covers), a banquet/conference hall (max 1,200 pax), a small function room (200 pax), four board rooms/meeting rooms (12-20 pax each), health club and spa, outdoor swimming pool, ICRA Rating Services Page 2
ICRA Credit Perspective Saptarishi Hotels Private Limited beauty salon, a shopping arcade with 7,000 square feet retail area and a Hilton Academy (50,000 sq. ft.) for training of Hilton staff from across Asia. The academy would be operated by Hilton and would engage in training of Hilton employees for hotels across the country at the commencement of their assignments. The academy would be Hilton’s first such venture outside the American subcontinent. It would attain importance considering Hilton’s aggressive plans of expansion in India from the current portfolio of 7 hotels to about 50 in 5-6 years time. The modalities of the agreement are yet to be finalized but SHPL would be guaranteed rental income at prevailing rates for the area it offers. It could also earn a revenue share from the academy but the shares are yet to be finalized. Apart from such direct income, the hotel is also expected to benefit significantly from the guaranteed occupancy it would get from the extended stay of the staff that has come for training since the expenses are to be borne by the respective hotels that send the staff. Project cost and funding The total cost for the project is estimated at about Rs. 252 crore for the 240 keys (294 bays) at an estimated cost of Rs. 1.05 crore per key (Rs. 0.86 crore per bay) which is at par with industry standards for similar category in Hyderabad. SHPL proposes to fund it through a 60:40 Debt:equity. This entails a debt requirement of Rs. 150.0 crore which has been fully tied up from Punjab national Bank and Punjab & Sind Bank. The equity amounting to ~Rs. 102 crore would be brought in. Currently about Rs. 50 crore has been brought in by the promoters while the remaining would be brought in by dilution of equity into the holding company MHPPL to FII - Indus Hotel Reality (Mauritius) Limited (Indus was also one of the equity partners of the promoter’s other hotel venture Golden Jubilee Hotels Limited – rated ICRA BB+(stable)/A4+). The promoters have indicated an agreement with Indus for an equity infusion to the extent of Rs. 75 crore to be invested into SHPL and other ventures of MHPPL. Project status Currently about 70% of the excavation is done. The excavation at one half of the site is complete and is ready for foundation work. The excavation at the remaining site is expected to be complete by mid Dec 2011. It is estimated that the basement work would be completed by end Feb 2012 and the structure would be ready by Jan-Feb 2013. Post that the interior work would start, the hotel would be ready for soft launch in Oct 2013 and full COD by Jan 2014. The timelines seem tight and even a slight delay in any of the above stages could delay the project which could adversely impact its debt servicing which is currently proposed to start with a six month moratorium from June 2014 onwards. However considering the past tract record and experience of the promoters in such projects, it can be assumed that no major delays would ensue apart from the unavoidable ones. Hyderabad 5-star market Historically, the 5-star market of Hyderabad was primarily clustered towards the Banjara Hills/Begumpet area. However over the last decade, with the development of new business districts such as Hitec city and Gachibowli, the movement of airport outside the city to the Shamshabad area and the rapid development of infrastructure such as expressways connecting the periphery of the city (especially the Hitec city and Gachibolwi areas) to the new airport, Hitec city and Gachibowli has developed as a major catchment area for hospitality. The Hitec city is the IT hub of Hyderabad and enjoys IT/ITES traffic and MICE traffic. With the stabilization of the 3,000 seater Hyderabad International Convention Centre (HICC) and the existing 2,000 seater centre Shilpakala, both in the Hitec city, this area is fast emerging as a MICE location. The 4/5-star/D hotel market in Hyderabad presently has ~2,660 rooms comprising of 12 hotels out of which eight hotels (1,458 rooms) are in the old CBD area, three hotels (873 rooms) in the Hitec city/Gachibolwi area and one hotel (330 rooms) in the new airport area. The properties in the Hitec city/Gachibolwi area currently include Ista (166), Novotel (287) and Westin (420). While Ista being in Gachibolwi received room and MICE business from that area, until recently Novotel was targeting the room and MICE business from the Hitec city area. Post the opening of Westin a major portion of the room business has moved out of Novotel which currently is focusing on MICE and banqueting business. We estimate about 50% addition to the existing supply in the city to definitely take place within the next two years. While the old CBD in the city is expected to see an incremental supply of 40%, the inventory in Hitec city/Gachibowli is expected to about triple within the next 3-4 years. The hotel is expected to face significant competition from existing hotels such as Ista and Novotel in 2-3 km radius and also the upcoming properties of Royal Orchid (207 rooms; interiors going on) and Hyatt Regency (500 rooms; basement work going on) which would be in the same category and in 3-4 km radius. ICRA Rating Services Page 3
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SAPTARISHI HOTELS PRIVATE LIMITED - ICRA

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