Making the Taj shine again

On September 9, Rakesh Sarna, newly anointed managing director and chief executive officer of the 112-year-old Indian Hotels Company (IHCL), kicked off his first town-hall meeting with the managers and staff of the company’s properties across the world. The meeting, at Mumbai’s Taj Mahal Palace hotel, was followed by management sessions with small groups of general managers. Sarna then spent a month meeting the team in Mumbai, before taking off to conduct 10 more town halls covering 40 hotels in 10 cities.

Sarna, 57, had joined IHCL a week before the Mumbai meetings, after having put in over three decades at the Hyatt in the U.S. After his series of meetings with the staff and management, Sarna says he had some idea about the complexity of the task ahead of him: getting IHCL back in shape. While some of his sure-footedness could be the result of his decades of experience, it’s easy to argue that anyone coming into the corner office at IHCL would have little choice but to run hard.

For starters, between 2007 and 2009, in the aftermath of the Mumbai terrorist attacks and the global recession, IHCL’s revenue per available room (RevPAR) had fallen from Rs 8,000 to Rs 6,000.

Then there were the non-performing assets. Between 2005 and 2007, the company spent more than Rs 1,300 crore to acquire four hotels in the U.S., including the iconic Pierre in New York on a long-term lease. The hotel hasn’t made a profit yet. There’s also the Sea Rock Hotel in the Mumbai suburb of Bandra bought for Rs 900 crore, which is yet to get off the ground.

The Ginger brand of budget hotels, housed in a separate special purpose vehicle, was expected to list at some point, but that too hasn’t taken off. In fact, Ginger’s more successful properties are in cities where land prices are the highest, thus flipping the original budget model on its head. Meanwhile, the lease for the Taj Mansingh Hotel in New Delhi, which has already been extended a few times, has expired. The property will come up for auction in the next three months.

The upshot of all this: Rs 2,300 crore in debt weighing down on the company’s balance sheet, and aggressive competitors snapping at its heels.

More recently though, things have been moving up. The stock is up over 70% since the lows of 2012, and the company has squarely outperformed competitors on every key financial indicator—revenue, operating profit, and net profit (see graphics). While these improvements are doubtless the culmination of slow-cooking internal as well as external factors, there is a feeling that Sarna’s decisive leadership and penchant for reinvention (more on that later) will be the real force multiplier for the company steeped in tradition and heritage.

“What’s the new boss like?” I casually ask the concierge at the Taj Mahal Palace during one of my visits to the hotel. “He’s making lots of changes. Good ones,” he says.

SARNA’S EARLY MOVES after assuming office included a series of steps aimed at energising the company’s workforce. Like increasing the number of holidays each staff member gets to six days a month from four. The holiday plan has also been tweaked to give every staff member, regardless of grade, 10 complimentary nights a year at the group’s hotels. But for each such popular manoeuvre, Sarna has also pushed through a number of deep-rooted organisational shifts. Gone is the chief operating officer position, replaced by three regional senior vice presidents of operations who will report directly to him. The SVPs will be responsible for a portfolio of approximately 20 hotels each, and, in turn, will be supported by area directors, handpicked from the pool of general managers running individual hotels.

Over the course of a rare interview, Sarna tells me that the area director is vital for a number of reasons. “Three SVPs can’t look after all the hotels, but through the area directors, the company can cultivate leaders for the future,” he says. Also, with this structure, the top management can never be accused of being out of touch with the hotels. “When the area directors see the train coming off the tracks, they intercept and report it to the SVPs, who in turn report in to me,” he says. Five area directors have already been identified and several more will be appointed soon.

Changing the alignment of executives from specific brands to specific geographies is critical to Sarna’s plans of making the company nimble again. Earlier, a COO would oversee hotels for, say, Taj Gateway (classified as ‘upscale’ within the group) but not Taj Palace (‘luxury’) in the same region. A regional orientation means that the same executive oversees all the properties in the same area, regardless of the segment or brand. Under the old order, if a bartender or a banquet manager had to be moved from a Gateway to a luxury hotel on a busy weekend, the bureaucracy between the different COOs’ offices could have slowed things down. With the new structure, things should move faster.

Another disadvantage of the old system was that executives managing a certain brand had to spend a lot of time travelling across the country to keep a tab on that brand’s properties. With the new structure, each executive can concentrate on a captive zone.

To drive accountability, Sarna has taken a whole range of senior managers under his wings as direct reportees, including a global head of HR, an executive director of finance, a vice president of real estate and development, an executive director of corporate affairs, a general counsel, and a chief revenue officer instead of the sales and marketing officer. (The last two positions are yet to be announced.)

During our meeting, Sarna reveals his vision for some of these mission-critical roles. For instance, the chief revenue officer will take “a slight left turn” from the conventional sales and marketing mandate and oversee digital strategy, customer analytics, and e-commerce. But he is at pains to explain that all this rejigging in no way signals a policing culture. “I want the general managers to be left alone so that they can take ownership of business,” he says.

THE GENERAL UPTICK in sentiment in the economy has come at the right time for Sarna. If there’s one industry that benefits the most from a revival in sentiment, it’s hospitality. That’s one reason why IHCL’s stock climbed some 56% in the last year to Rs 110. Analysts see it climb even further once it is able to ensure higher occupancies, higher rates, and lower debt. That, coupled with the hoped-for improvement in the country’s image as a tourist destination and better roads and infrastructure, would add legs to IHCL’s rebound.

While traffic and foreign tourist arrivals are still slow, industry data shows that there just aren’t enough hotel rooms in India once demand picks up. According to hospitality consulting firm HVS, supply has grown slowly in the past and is expected to accelerate in the next two years. There were about 103,855 branded hotel rooms in India in March 2014, and the number is estimated to grow at an average of 11% annually up to 2016. Of that, IHCL has some 12,500 rooms or almost 12%—the most for any operator.

Achin Khanna, managing director of consulting and valuation at HVS South Asia, says that even as average room rates lie flat or even dip over a three year trendline, the good news is that occupancies are steadily rising and are expected to close at 61% this fiscal, up 2% from last year.

Niraj Mansingka, analyst with Edelweiss Securities, expects the Taj’s occupancy to reach 75% in the financial year 2016, up 9% from 2014, “which along with higher room rates should see as much as 100% increase in RevPAR by fiscal 2018, and an Ebitda margin expansion to 30% on the back of high operating leverage”. Current growth and revenue are however expected to remain muted.

SARNA DIVIDES IHCL’s strategic imperatives in three different buckets. There’s the debt situation brought on by the non-performing properties; the customer-service facet which he loves the most but wistfully admits has the least amount of time for right now; and the pipeline of future hotels that the company needs to build.

The first part of his charge includes taking tough calls on the Pierre, the Sea Rock, and the Ginger chain. Sarna says they are all top priorities for him. In reference to the Pierre and the Ginger hotels, he has commissioned a search for fresh leadership teams. For Ginger in particular, he says it is key to hire a “strong leader”. “I’m going to take Ginger head-on and make radical changes if necessary, but I refuse to admit that it can’t do better, given that [India’s] demographics support such a product,” Sarna says.

As far as Taj Mansingh is concerned, all he says is that the company is watching the government’s moves and is hopeful of retaining the property. He doesn’t get into the nitty-gritty of what it will take to get construction started at the Sea Rock property, but affirms that he is in favour of mixed-use development—apartments and banquet halls in addition to hotel rooms—as and when things move.

Last July, just before Sarna joined, the company floated a rights issue to raise Rs 1,000 crore in order to slash debt, and shut down four non-operational foreign subsidiaries including Ideal Ice and Storage, Residency Foods and Beverages, Taj Rhein Shoes, and Tifco Security Services. The company’s net debt, which is approximately half its turnover, doesn’t worry most analysts who say IHCL is not over-leveraged, and that a smaller company like Hotel Leela Venture is worse off, with debt of Rs 4,000 crore stretching its books.

Is there a plan to wind down its foreign hotels altogether? Sarna dismisses the idea, saying that of the company’s 15 foreign hotels, “11 are doing okay, two are in decent shape, and the other two need recalibration”. More important, he wants IHCL to develop “a global reputation rather than just a global presence”, without going off the boil in the domestic market. “I am just as desperate to open four more hotels in New Delhi and at least a couple more in Mumbai,” he says.

For now, IHCL’s pipeline for new properties includes markets like Abu Dhabi, Muscat, Doha, Hong Kong, Singapore, Shanghai, and Bangkok. “Those are the centres where we have maximum customer crossover. They also have a fair amount of reverence for the Tata brand,” he says. The company will apply its balance sheets in certain markets and go for sliver equity partnerships and pre-opening loans in others. “My preference is for management contracts,” Sarna says.

AFTER A TORRID TIME, is now a good time to ask what the Taj stands for in today’s world? Given that the company operates across four different segments (budget: Ginger, upscale: Gateway, upper upscale: Vivanta, and luxury: Taj Resorts and Palaces), it’s not easy to project one single profile. But there’s a concept of “Tajness” which is on the drawing board. Loosely, it is defined as “the sum of experiences inspired by the nobility of Indian heritage”.

Internally, much thought is being applied to revisiting the brand promise and experience, how the Taj is different from its competitors, and so on. “There are a lot of worthy competitors coming in, and we have to be ready with our food, our website, our loyalty programme,” Sarna says. The company has signed on consultancy Sapient Nitro to help balance the brand’s premium, languid messaging with the demands of snappy digital platforms.

Any big surprises thus far for Sarna? Not so much, he suggests. “When I meet people in their sixties and seventies, they describe the Taj as this most amazing place,” he says. “They actually get teary-eyed talking about the good old days.” That said, he knows that past glory will not carry the day, neither will the hubris that comes with a legacy brand. “It’s not in my DNA to live with an issue if it is harmful to the company’s health,” he claims. “I won’t allow my ego to come in the way if I realise a decision I made isn’t working out.” His only priority is his financial responsibility to his shareholders. That, and the pride of the 26,000 people toiling hard to bring the shine back to the Taj.