Why IHCL has paid through its nose for Taj Mansingh

As it turned out, the Indian Hotels Corporation Ltd (IHCL), or Taj Hotels and Resorts, gets to keep the iconic Taj Mansingh hotel after a fierce e-auction that saw bidding price - the license fee - for the property going up as high as 78 per cent as compared to the previous license fee paid by IHCL.

The winning entity IHCL will pay Rs 7.03 crore every month - as against Rs 3.94 crore it was paying previously - to the New Delhi Municipal Corporation (NDMC) which conducted the auction today for the 292-luxury room property in the heart of the capital. The license fee constitutes 32.5 per cent of the gross turnover of the property that's clearly going to hit the bottomline of the hotel until IHCL finds way to grow revenues.

For IHCL, which operates seven properties in Delhi NCR, it's a trophy asset with legacy value. There are enough reasons to believe that IHCL has ended up paying exorbitant price. Other major luxury hotels - Le Meridien and The LaLiT New Delhi - in the vicinity of Taj Mansingh have a much lower license fee.

For instance, NDMC is charging Rs 3 crore per month for Le Meridien hotel which has a much bigger plot area of 4.29 acre. Similarly, The LaLiT New Delhi has been asked to pay Rs 4.4 crore monthly license fee for a property spread over 6.04 acres of land. Though, the LaLiT is disputing the NDMC's claims.

The annual fee of Rs 84.36 crore also looks steep for a company that posted net profits of Rs 103.5 crore in 2017/18.

It seems that NDMC has got a decent deal from the auction. The civic authority had, in the past, given nine temporary extensions to IHCL after the license term expired in 2011. "ITC has made the property expensive for the Taj Group, and the beneficiary has been NDMC. Taj is definitely in a better position than ITC to run the hotel. If ITC had won the auction, it would have to spend money on renovating the property," says Vijay Thacker, director at hospitality consultancy Horwath HTL.

The IHCL's winning bid is also good news for employees of Taj Mansingh who will not have to worry about a new management.

Competing with financially-strong ITC Group wasn't easy. IHCL and ITC seem to be the only operators who were in the position to bid for this property. For other luxury hotel operators - Oberoi Group and The Leela Group - this asset would not have made sense in the financial terms. Oberoi Group, for example, has just made a major investment in renovating its New Delhi property. As for The Leela Group, the hospitaly chain has been posting net losses for several years in a row.