Royal Orchid to Invest Rs700 Crore on 50 Budget Hotels

One of India’s fastest growing listed hotel companies, Royal Orchid Hotels Ltd, said it plans to spend Rs700 crore to build about 50 budget hotels in the country to cash in on a shortage of affordable rooms in India’s hotels.

Bangalore-based Royal Orchid will create the budget brand ‘Peppermint’ and it hopes to build these hotels by 2010 and profit from the chain by 2013.

Royal Orchid, India’s franchisee for the international Ramada brand, has undertaken large expansion plans, including a move into North India this year. Its subsidiary, AB Holdings, will oversee the creation of the Peppermint chain.

Arjun Baljee, managing director of AB Holdings and son of Royal Orchid’s CMD, said his company is hoping to fuel the expansion effort by a mix of private equity and debt, but declined to give further details.

“It’s going to be difficult with Rs700 crore with the property prices going so high,” said analyst Pratik Dalal, who follows Royal Orchid Hotels Ltd.

Baljee refused to disclose how the company would secure land at prices affordable for budget hotels.

Real estate prices are ballooning. A five-acre property in Delhi’s suburb of Gurgaon was recently sold for  255.2 crore, making it viable only for a luxury hotel.

Royal Orchid’s sales grew 46.4% to Rs83.45 crore in the year ending March last year from the year-ago period. Its sales grew 474% from fiscal 2003 to fiscal 2006.

Dalal said although the company would have little trouble raising funds for what he labelled an “aggressive” expansion plan, securing permissions from the government would slow them down.

It can take as many as 120 permits before hoteliers can get their properties fully operational.

However, Dalal added that with the lack of budget hotels in India, if Royal Orchid were to develop even up to 25 such hotels in the next three years, the company would have added a sizable number of rooms to India’s total pool of affordable places to stay at.

The ministry of tourism estimates that India’s economy needs 150,000 additional rooms to meet business and leisure tourism demand, and has emphasized the need for budget hotels in particular.

As a result of the shortage, overall occupancy rates reached 70.8% in fiscal 2006, and rates in cities like Hyderabad, Jaipur, and Delhi increased more than 30% over the prior year.