Vascon ‘shells out' a hotel strategy

Vascon Engineers, a recently listed construction firm, has embarked on a unique strategy for the hospitality sector which allows it to focus on its core business of construction while at the same time lets it earn a huge premium.

Instead of erecting and running hotels on its own, the company is now taking a structured exit route with its ongoing and future developments, following crucial learnings from its hospitality foray in 2006-07.

R Vasudevan, managing director, Vascon, told DNA Money: “Operating a hotel is a specialised job and our forte is in the construction area. Moving away from being hotel owners, we have adopted a built-to-suit strategy wherein we have the land, procure all the clearances and necessary approvals, take the property to RCC/cold-shell stage and eventually sell out completely to an investor and/or continue to hold a minority stake.”

“As part of our engineering, procurement and construction operations, we also then construct the hotel as per the specifications provided by the investor/hotel brand,” he said.
The strategy helps Vascon monetise the development thereby freeing the cash that would have otherwise got blocked until the hotel breaks even and starts generating profits—which generally takes over five years.

“While I could have sold the hotel plot for say Rs 100 crore, what I do instead is add value by putting up a cold shell thereby allowing for a premium while exiting (fully or partially) to a strategic investor. The premium sometimes works out to be as high as 50% of the original land cost and the cash flows get taken care of efficiently, too.”

As with the minority stake positions, the approach allows for a regular income in the long run, he said.

Vascon has already tasted success with this model with some of its ongoing projects. Its upcoming Novotel in Pune is a built-to-suit development wherein the cold shell has been acquired by hospitality focused investment firm India Blue Mountains for an undisclosed sum.

The hotel will be managed by the French hospitality major Accor which is also a minor equity partner.

Similarly the under-development Four Points by Sheraton in Pune was earlier sold to Dawnay Day Hotels which eventually got acquired by Duet Hotels India.

Another development is the Park Plaza hotel adjacent to a Rs 300 crore IT park being developed by Vascon in joint venture with Credit Suisse, which acquired 75% in the project.

The engineering, procurement and construction (EPC) firm currently has four upcoming developments in Nashik, Aurangabad, Coimbatore and Zirakhpur (Chandigarh), with an overall guest room inventory of 500 keys.

“We are currently in the process of getting into a strategic tie-up. Once that happens we should be adding another 16 sites to this pipeline taking the total to 20 hotels. The locations will continue to be tier II and III cities. We have already acquired sites in Madurai and Hyderabad for future developments and will be adding new locations at regular intervals,” Vasudevan said.

Vascon envisages an overall investment of Rs 500 crore in hotel developments wherein the equity component will be Rs 125 crore and balance will be debt.

Vascon’s current debt:equity ratio is a healthy 0.5: 1 with almost Rs 640 crore in cash reserves.

The company has earmarked Rs 350 crore towards land banking and another Rs 200 crore for executing various EPC and realty projects.

With an equity investment of Rs 100 crore, Vascon Engineers currently has 3 hotels in Pune and 2 in Goa.

In Pune, Vascon holds 26% each in soon-to-be-launched Hyatt Regency and Holiday Inn hotels wherein the equity is Rs 35 crore and Rs 16 crore, respectively.

Its Golden Suites in Pune and Galaxy Resort in Goa are under management contract with Bangalore-based Royal Orchid Hotels.
The 40-room boutique resort in Goa Vista Do Ria is managed by Vascon Engineers itself.