January 02, 2007


India's largest Hotel Chain

The Indian hotel industry is on a roll. The demand for rooms is outweighs supply by large margin. Some reports suggest that hotels are booked till March 2007.

Well, come June, and India's biggest hotel chain will be unveiled. That "Taj" is currently with Indian Hotel with some 10,000-odd rooms in India. But, don't expect the room rents coming down as this group will cater to only a select few. Any wild guesses on the name of the company?

Well, according to this NYT article [No-registration link], Infosys Technologies will have 15,000 company-owned rooms across India. That beats Indian Hotels by large margin. This is funnier than the news that Nokia happens to be world's largest camera manufacturer.

Sure, when the average room rent of 5-star hotels in Bangalore is north of Rs 12,000 per day, it makes sense to have in-house facility. This should partly answer the questions raised about why a software company requires hundreds of acres of land.

But, this raises another question. Should the company run this business to cut costs (or improve bottomline)? The answer is not an unequivocal yes, as the baggage associated with such non-core activities can be high, even if they outsource the entire operations to another company. Thanks to inadequate infrastructure in Bangalore, already, many software companies are running an internal transportation department which if taken together will look like a state transport company. In short term, such cost savings may boost profits and, thereby, share price. (I must add that the impeccable management of Infosys will never do things with just stock price in mind.) But what is the long-term price the company will pay? And I'm sure calculating that is not easy since it is mostly intangible.

T. V. Mohandas Pai, director of human resources, “It’s much more efficient in India to do it yourself.” The only question to that is, just because you can do something more efficiently, should you be doing everything yourselves? Or a little directly, should an oil-giant have an army of engineers to work on its website or they should outsource it?

To use investment Guru Peter Lynch's terminology, this is "Diworsification".

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