Senior ITC Hotels officials told The Financial Express that the 350-room project will now be set up by ITC, while the subsidiary will manage it.

Sources said that ITC will raise the funds partially through internal accruals and debts. ITC Hotels will use the sale proceeds for other hotel projects on the anvil.

The subsidiary's fortunes have been on the decline over the last 18 months owing to sluggish market conditions, with the company posting a near 20 per cent decline in net profit at Rs 26.21 crore in 1997-98, against Rs 31.04 crore in the previous fiscal.

Its income from operations remained stagnant at Rs 130.36 crore. The company's performance has been well below the projections made in its letter of offer in November 1995. It had projected a Rs 161-crore turnover and Rs 36.45-crore net profitduring 1997-98.

According to sources, the Sahar project's financial burden was too high, and the company decided not to take it on its books at this point of time. The sources added that the 3.3-lakh sq ft of prime property near Mumbai International airport was sold at a profit.

The transfer of the land to ITC also fits into the cigarette major's growth plan. In a Rs 2,000-crore corporate plan announced by it in 1998, the company had kept aside about Rs 1,000 crore for investments in real estate and hotels, while investment of an equal amount was be taken up by ITC Hotels and its subsidiaries.

Sources at ITC Hotels said that while investment in the 5-star hotel at Sahar will be made by ITC, the execution will be done by ITC Hotels under a technical arrangement. On completion it will be managed by ITC Hotels.

It is learnt that some of the larger projects that are being planned by the ITC group, may be taken up by the parent company, while the management of these hotels would be entrusted to ITCHotels.

ITC Hotels officials said that the company is considering a second hotel in Mumbai. The ITC subsidiary has zeroed in on Parel in central Mumbai as the possible site. The official said that the company has decided to complete the 250-room 5-star hotel in Calcutta, its first in the city, by 2001. The project has been estimated at Rs 125 crore.

The company is also augmenting the capacity at its flagship hotel, Maurya Sheraton in New Delhi, by setting up another tower. This will increase the hotel's capacity by another 80 rooms and will cost the company Rs 80 crore.

INSIGHT
A win-win situation

ITC Hotels' arrangement with its parent appears to be a win-win situation for both. Given the backdrop of dwindling tourist arrivals and as a corollary lower-occupancy levels, performances of even the major hotels like EIH, Indian Hotels and Hotel Leelaventure have not been spared.

This background also helps put into perspective the plight of ITC Hotels which is understandable.

Giventhis situation, the inflow of Rs 132 crore augurs well for ITC Hotels. Additionally, ITC Hotels' shareholders stand to benefit from the operational-agreement fee which the company will receive from its parent for managing the hotel.

As for ITC, it makes sense to diversify into hotels, given the fact that cigarettes are a mature market. The company can definitely afford to pump in the money for the project given its cash-rich status. More importantly, the fact that the project will operate in north Mumbai also gives it a definite demographic advantage given that most of the hotels in the city are concentrated in south Mumbai. ITC would, however, do well not to ignore the problem of additional room capacities by major hotels, which could stifle growth.