EIH Associated Hotels Ltd Management Discussions.

Industry Structure, Developments and Outlook The Global Economy - Performance & Prospects

2019 saw global economic growth1 slow to 2.9% compared with 3.6% in the previous year, impacted by slowing rates of growth in most regions across the world. In Emerging Markets and Developing Economies (EMDE), GDP growth reduced from 4.5% in 2018 to an estimated 3.7% in 2019 due to increased Government debt and a slowing of investment. Simultaneously, weaker exports and investment in advanced economies (USA, EU and Japan), led to a slower GDP growth of 1.7% in 2019 against 2.2% in 2018.

GDP growth in the Emerging and Developing Asia2 fell from 6.3% in 2018 to 5.5% in 2019 strongly influenced by the slowdown in the Chinese economy. This the first time since the 1997-98 Asian financial crisis that growth in this region dropped below 6%.

The ongoing COVID-19 pandemic has brought global economic activity to almost a standstill. Owing to widescale lockdowns in most parts of Asia, Europe and in South and North America, the service sector, particularly travel, tourism and hospitality have seen severe disruption to their businesses. With businesses staring at severe liquidity crisis, unemployment rates have risen sharply. Likewise, sharp drops in consumer spending have affected global supply chains. Governments across the world have introduced stimulus packages to support their economies which will further exasperate their fiscal deficits. There are varying opinions on the shape and the scale of economic recovery with the outlook still uncertain till a vaccine or an effective treatment for COVID-19 is found. The International Monetary Fund3 estimates the global economy to contract sharply by 4.9% in 2020, much worse than during the 2008-09 financial crisis. The U.S. economy is projected to shrink in 2020 by 5.9% and the Euro area by 7.5%. China is expected to grow at a modest 1.2%.

The India Story

Indias4 GDP growth rate declined from 6.1% in 2018-19 to an estimated 4.2% in 2019-20. On the other hand, India improved its global ranking in the World Banks Ease of Doing Business Report from 143 in 2016-17 to 68 in 2019-20. Indias total foreign exchange (Forex) reserves increased to around US$ 508 billion in June 2020.

The Government of India has introduced several bold pro-corporate initiatives in the past year, including passing of the Insolvency and Bankruptcy Code (Second Amendment) Bill, rationalization of GST rates and reduction of corporate tax rates. Measures have also been taken to improve the Ease of Doing Business index, reduction of GST on hotel rooms with tariffs of 1,001 to 7,500 per night to 12% and those above 7,501 to 18%. Likewise, easing of credit, especially for the stressed real estate and NBFC sectors helped boosting investment and consumption.

Much like the rest of the world, the Indian economy has been deeply affected by the impact of the COVID-19 pandemic with its far reaching consequences on economic and social life. The lockdown in India that was imposed on 24th March 2020 has had an unprecedented impact on the economy owing to a steep fall in demand as well as supply.

The process of lifting of the lockdown in various states has since started in phases, effective 1st June 2020, guided by the decision of individual states, although during a major part of this lockdown period, hotel and flight operations were mandated to remain non-operational across India. We expect domestic travel to gradually pick up as the lockdown in various cities in India is lifted. Further, once border restrictions are lifted, we expect international travel to also progressively resume.

The IMF has projected Indias economy to contract by 4.5% in 2020 followed by a 6%5 GDP growth in 2021-22, implying that a recovery of business sentiment and resultant economic growth recovery may be on the cards once a vaccine and/or treatment is in sight.

Travel & Tourism

Global Scenario

As per the World Travel and Tourism Council, the global Travel & Tourism industry generated US$8.9 trillion (10.3% of global GDP) and 330 million jobs directly and indirectly in 2019. While the global economy grew by 2.4%, the Travel and Tourism industry grew by 3.5%.

India

The Travel & Tourism Industry has been a major source of growth for the Indian economy. Over the past few years, tourism has witnessed steady growth, aided by the shift from foreign to domestic tourism driven by the rising purchasing power of the expanding middle class. The 2020 edition of the WTTCs Economic Impact - India Report states that the Travel & Tourism industrys total contribution to the countrys GDP in 2019 equated to 6.8% or 13.7 trillion (US$194.3 billion). This decline in 2019 from 9.2% in 2018 is attributed to several factors, such as a general declining trend in economic activity, discontinuation of a national airline leading to reduced air travel, natural disasters and pollution levels especially during the winter months.

The industry continued to generate over 8% of employment, amounting to 40 million jobs, and significantly contributes to the Foreign Exchange Earnings of the country, increasing by 7.4% per cent during January to November 2019.

2019 witnessed an estimated 11 million Foreign Tourist Arrivals to the country, a growth of 3.2% over 2018. Among other factors, this may be attributed to easy access to e-visas and government schemes, as, of the total foreign visitors, over 2.5 million arrived on an an e-tourist visa - a growth of 24%. Top countries for inbound arrivals in 2019 include Bangladesh (12%), United States of America (9%), United Kingdom (6%), Canada (2%) and Australia (2%). In its latest report on the Tourism and Hospitality industries, the India Brand Equity Foundation projects that number of Foreign Tourist Arrivals in India will surpass 30 million by 2028, although Domestic tourism for the hospitality sector has equally continued to gain importance, being a significant generator of revenue.

Indias ranking in the Travel and Tourism Competitiveness Index (TTCI) of the World Economic Forum has moved from 65 in 2013 to 34 in 2019. The Government has adopted the development of thematic circuits comprising 77 projects under the Swadesh Darshan Scheme for an amount of 6,035.70 Crore.

Tourism & Hospitality - Trends and Opportunities for Growth

The past decade saw a substantial increase in hotel rooms in India and with a corresponding increase in demand, room rates and occupancies improving gradually till reaching a peak in 2018-19. The impact of COVID-19 on the hospitality sector is likely to constrain supply in the near term, which is expected to trigger growth in occupancy levels and rates once consumer and business confidence returns post this crisis. Indias tourism sector was, not long ago, projected to reach US$95.3 billion by 2028. Given the current circumstances, it may however be early to assess the possible impact of COVID-19 on future capital investments in the sector and whether the projection that are under planning or in the initial stages of development will still be developed.

We believe that with the demographic dividend of the country, the vast and widespread tourism landscape, forts and palaces, wellness retreats, wildlife sanctuaries, tea and coffee plantations, hill stations, deserts and seas, the cultural, religious and spiritual destinations which makes India a nation so rich and diverse, the opportunity for hospitality and tourism to flourish and drive employment and foster economic growth will help overcome any short and medium term impediments.

Financial and Operating Performance

The Companys primary business activity is hotel business. Total Revenue of the Company was 2580.68 million in 2019-20 as compared to 2737.00 Million in the previous year, a decrease of 5.71%. Earnings Before Interest, Depreciation, Taxes, Amortisations and Exceptional Items (EBIDTA) was 594.19.Million as compared to 730.41 Million, a decrease of 18.64%. Profit before Tax was 430.01 Million as compared to 583.45 Million in the previous year. The Net Profit for the year was 379.64 Million as compared to 379.38 Million in the previous year. Total comprehensive income was 377.44 Million as against 378.24 Million in the previous year. The Revenue and Profitability would have been higher had there not been the outbreak of the COVID-19 pandemic in the 4th quarter of the Financial Year. A note on the impact of COVID-19 on the Companys operations is given in Note No 49 of the Notes to the Accounts.

The Company and the Hotels have taken various initiatives to protect the Health and Safety of Guests and Employees. All precautions based on World Health Organisation Guidelines and directions of the Central and State Governments have been implemented and are being strictly adhered to. The exhaustive measures that have been introduced at Hotels have been published on the websites of Oberoi Hotels & Resorts and Trident Hotels.

The Company has taken adequate measures to conserve liquidity and to ensure access to required working capital. Steps have also been taken to reduce discretionary spending and eliminate avoidable costs.

In view of the current and evolving economic situation, the Board does not propose to declare any Dividend for the Financial Year ended 31st March 2020.

Internal Control Mechanism and Adequacy

The organisations commitment to internal controls flows from The Oberoi Dharma which states that we as members of The Oberoi Group, are committed to a conduct which is of the highest standards - ethical, intellectual, financial and moral. Adequate internal control processes have been laid down to provide an assurance on the orderly and efficient conduct of operations, safeguarding of assets, prevention and detection of fraud and errors, accurate and timely completion of accounting records and the timely preparation of reliable financial information.

Appropriate checks and balances have been built in the internal control mechanisms to reflect its necessary concomitance to the principle of governance without affecting the ease of operations and their management.

Internal Financial Controls (IFC)

The Directors have devised a framework for internal financial controls to be followed by the Company that conforms to the requirements of Section 134(5) (e) of the Companies Act, 2013, and incorporates measures that ensure the adequacy and continuing operating effectiveness of such internal financial controls. Furthermore, in accordance with Section 149(8), read with the Code for Independent Directors laid down under Schedule IV, Clause II (4) of the Companies Act, 2013, the Independent Directors have satisfied themselves on the integrity of financial information and ensured that financial controls and systems of risk management are in place.

In order to enable the Directors to meet these responsibilities, the Board has devised the necessary systems, frameworks and mechanisms within the Company and empowered the Audit Committee to periodically review and confirm that the mechanism remains effective and fit for purpose.

In line with global best practices applicable to organisations of a similar size, nature and complexity, the Companys internal control framework has been designed through structured control risk assessments by way of Standard Operating Procedures (SOPs), Risk and Control Matrices (RACM), Information Technology (IT) Policies, ERP-based Information Systems including MIS and automated system controls inbuilt within the ERP and other IT Systems. With increased instances of information security breaches and data leakages being reported from across the globe, the Company has created a policy for reviewing its information technology security infrastructure. Commensurate actions are taken to mitigate risks arising in the information technology framework.

The RACM framework is periodically tested through independent internal audits using data analytics tools. The Internal Audit team has also implemented systems to ensure continuous audit monitoring, in order to identify deviations from the standard, if any. Such exceptions, if any, are then reported to the functional/unit heads with the responsibility of rectifying these exceptions within a definitive time frame. The audit team also has the responsibility to ensure adequate monitoring mechanisms and procedures to ensure prevention and detection of failures and faults in processes and possible fraud.

Internal Audit Mechanism and Review Systems

The Internal Audit Department is headed by the Internal Auditor and comprises of a strong internal workforce of ERP-trained Chartered Accountants with specialised skillsets in areas of Information Security, Financial, Business, Legal, Statutory, Projects and Process Audits.

The Department works on the latest Computer Assisted Audit Techniques (CAATs) and deploys online monitoring mechanisms across the IT systems of all functions and units of the Company. Focus areas for specific audits are determined based on structured assessment of risk and the yearly Internal Audit Plan as approved by the Audit Committee. All reported observations of audits are maintained in online databases for comprehensiveness, ease of accessibility and structured follow up.

Periodically, IT Security Audits are conducted by joint teams of Internal Audit and the IT Department. Vulnerability assessment and penetration testing (VAPT), of IT systems are also done by specialised external agencies.

The Company has a structured follow-up team of Senior Executives who meet periodically under the aegis of the Managing Director to address and resolve pending audit issues. The Internal Auditor presents the findings to the Audit Committee every quarter, in the order of the impact of risks and probabilities of their occurrence, and highlights pendency of issues, if any.

The Audit Committee takes cognizance of the presentation and provides its directions and guidance for further action. Besides, the Internal Auditor has also been entrusted with the responsibility to report to the Audit Committee on the adequacy of Internal Financial Controls (IFC) in accordance with Section 177 (4) (vii) of the Companies Act, 2013.

During the Financial Year 2019-20, separate presentations on internal audit findings on four occasions and internal financial controls on two occasions were shared with the Audit Committee in its meetings. The Audit Committee was satisfied with the adequacy of the internal control systems and procedures of the Company and the performance of the Internal Audit Department in respect of monitoring of such systems.

Risk Management

Risk Management is an integral and important component of Corporate Governance of the Company. Robust risk management ensures adequate controls and monitoring mechanisms for the smooth and efficient running of the business.

Although the Company does not qualify for constituting Risk Management Committee or for holding committee meetings as required under Regulation 21 of LODR, the Risk Charter & Risk Management Framework formulated by the Risk Management Committee of EIH Limited has been made applicable to its subsidiaries and associates. The Companys Board at its meeting on 5th May 2020 noted that the Risk Charter of EIH Limited would be made applicable to all the subsidiaries and associates of EIH Limited, including EIH Associated Hotels Limited.

The Board Committee on Risk Management comprises of Board Members and Senior Executives with the majority of the Members belonging to the Board.

During the year, the Board Committee on Risk Management ("the Committee") of EIH Limited met twice on 30th July 2019 and 25th January 2020. The Committee formulated the Risk Charter and the Risk Management Framework for the risks associated with the companys business and the business of its subsidiaries and associates, the salient features of which are as follows:

Risk Charter

The Committee has an oversight role and in fulfilling that role, it relies on the reviews and reports to periodically assess risks to the effective execution of business strategy and review key leading indicators in this regard.

The Committee has an overall responsibility of reviewing, with management, the Companys risk appetite strategy relating to key risks, including credit risk, liquidity and funding risk, market risk, product risk and reputational risk, all short term and long term risks that significantly affect the operation of the Company as well as the guidelines, policies and processes for monitoring and mitigating such risks.

The Committee is responsible for ensuring that the Company has a structured risk governance framework which includes risk assessment and risk management practices and the guidelines, policies and processes for risk assessment and risk management.

Specific responsibilities of the Committee includes:

i) Annual review and approval of Risk Management Framework of the Company;

ii) Periodic review of the risk management processes and practices of the Company to ensure that appropriate measures are taken to achieve a prudent balance between risk and reward in both ongoing and new business activities;

iii) Evaluation of significant risk exposures of the Company and assessment of managements actions to mitigate the exposures in a timely manner;

iv) Reporting to the Board its evaluations, actions and recommendations.

Risk Management Framework

The Committee has identified ten key risk outcomes for the organization as under:

• Risk of inadequate growth;

• Risk of business slowdown;

• Risk of low or negative returns;

• Risk of deterioration of financial health;

• Risk of business interruption;

• Risk of impact on reputation;

• Safety, health, environment and security risk;

• Cyber risk;

• Risk of inadequate compliance;

• Risk of fraud.

The Committee shall closely monitor risks associated with the Company and its subsidiaries and associates, as above, periodically, based on the aforesaid guidelines.

The Oberoi Centre of Excellence

During the year, The Oberoi Group initiated major process improvement initiatives through "The Oberoi Centre of Excellence" ("TOCE"). The Centre provides services to all hotels of EIH Associated Hotels Limited. The centre commenced operations on 01st October 2019 with the broad objective of introducing contemporary IT-enabled processes, modifying various processes across the organization to enhance efficiency, eliminating manpower redundancy, promoting scalability and achieving economies of scale.

This is done by channelizing collective resources; ensuring smart and efficient delivery of transactional services; driving expertise in Finance, Procurement, Master Data Management, Taxation, Business Transformation, Budgeting; all resulting in realisation of benefits from scale, standardisation, collective experience, high-end technology, Research & Development and mitigation of attrition risk.

TOCE has helped the Company optimise manpower in various functions such as Finance, Procurement and IT simplifying approval system; better Delegation of Authority based workflow , improved compliance and optimised controls with reduced manual intervention; better vendor management, robust budget control system; financial planning and analysis system and BOT based accounting and reconciliations reducing human intervention.

The services are provided to all Business Units in the Group to streamline and better control functional and operational processes.

All services provided at arms length and invoiced under chargeback mechanisms that are in line with industry and international best practices; Chargeability to every Business Unit has been estimated based on the cost incurred.

Awards

Oberoi Hotels & Resorts has been voted the Best Hotel Group for the third consecutive year by Telegraph Travel Awards, UK - 2019, 2018 and 2017.

Oberoi Hotels & Resorts was voted Best Indian Hotel Group in the Travel + Leisure, India & South Asia Indias Best Awards, 2019.

Oberoi Hotels & Resorts was voted the Best Luxury Hotel Brand by Business Traveller UK Awards, 2019

Oberoi Hotels & Resorts was ranked second amongst the Best Hotel Brand in the world by Travel + Leisure, US, Worlds Best Awards, 2019.

hotel award awarded by
The Oberoi Top 25 Hotels - India TripAdvisor Travelers Choice
Rajvilas, (Ranked 1st) Awards 2019
Jaipur, Rajasthan, Top 25 Luxury Hotels - Asia TripAdvisor Travelers Choice
India (Ranked 2nd) Awards 2019
Top 25 Luxury Hotels - India TripAdvisor Travelers Choice
(Ranked 1st) Awards 2019
Top 25 Hotels for Service - India TripAdvisor Travelers Choice
(Ranked 1st) Awards 2019
5 Best Resort Hotels in India Travel + Leisure, USA Worlds
(Ranked 2nd) Best Awards, Readers Survey 2018
The Oberoi Cecil, Best Hotel in Heritage Grand National Tourism Awards
Shimla Category 2017 - 2018
Top 25 Hotels - India TripAdvisor 2019 Travelers
(Ranked 11th) Choice Awards
Top 25 Luxury Hotels - Asia - TripAdvisor 2019 Travelers
(Ranked 21st) Choice Awards
Top 25 Luxury Hotels - India - TripAdvisor 2019 Travelers
(Ranked 5th) Choice Awards
Top 25 Hotels for Service - India TripAdvisor 2019 Travelers
- (Ranked 8th) Choice Awards
Best Hotel in Heritage Grand National Tourism Awards
Category 2016 - 2017

Development in Human Resources and Industrial Relations

The Oberoi Group continuously reviews and re-aligns its people practices and policies with an aim to provide its employees the best working environment. Our team members truly demonstrate the Oberoi Dharma by placing guests first, the company second and self, last.

The belief of "people being our biggest asset" has always guided the Company to continuously strive to create the next generation of people practices. In the last one year, several such practices have been instrumental in continuing The Oberoi Group being an employer of choice. Some of these initiatives are:

The Oberoi Group Employee Engagement Survey - Employee engagement has always been a strong focus at The Oberoi Group. In the Financial Year 2019-20, the Kincentric Employee Engagement study was concluded, where the Oberoi Group has achieved an overall engagement of 82% which is in the Top Quartile of Global and India Best Employers. An employee participation rate of 92% was achieved across all hotels and business units in India and overseas. Our scores are at par with the Global Best Employers at 82%.

Diversity and Inclusion - One of our key focus areas for the Financial Year 2019-20 was to focus on Gender Diversity, ensure we provide the best working environment to be inclusive and are a preferred employer for women. We achieved our internal plans and goals to foster and continue our Diversity mission across all our Hotels.

Retention - With a focus on employee engagement and managing peoples careers proactively, our Executive and staff turnover remained steady and well below current market trends.

Compliance - The Oberoi Group stands committed to the highest standards of compliance with all labour-related and other statutory requirements. A detailed Third Party Contract Labour Manual was created to standardise all policies governing the third party manpower. This was implemented across the Group as a best practice initiative for the year.

Humam Resource Automation - The journey to automate HR processes to ensure process efficiency, robust data analytics and better business delivery is continuing with the selection of automated solutions for Performance Management and Learning Management.

Industrial Relations remained stable throughout the year. We were also able to reduce the number of on-going labour litigations by reaching fair and equitable settlements.

Learning & Development

In keeping with The Oberoi Groups philosophy of training and developing people, its hotels and corporate training centre, The Oberoi Centre of Learning and Development (OCLD) continued to invest in comprehensive training interventions.

The Oberoi Centre of Learning and Development (OCLD) continued to be focused on its core programmes, namely, the Post Graduate Management Programmes in Guest Services, Housekeeping, Kitchen and Sales Management and the three-year Undergraduate Systematic Training and Education Programme (STEP). OCLD engaged with a Professor- in-Residence from the University of Nebraska to review the curriculum of the Management Training Programmes. The review resulted in the development of two new modules to focus on Business Acumen and Business Transformation. The Food and Beverage curriculum has also been revamped to include research in international cuisine trends and curating meal experiences.

OCLD created a module on Creating a Luxury Mindset to be used in orientation of team members and the STEP Programmes collaborated with the University of Nebraska, Lincoln via a global classroom to understand global hospitality.

As part of the Corporate Learning and Development initiatives, a series of 10 programmes were run for Executives in the Financial Year 2019-20. Over 200 executives attended these management and functional development workshops. Competencies covered included Leadership, Coaching, Performance Management, Productivity and Process Improvement.

Master Trainer workshops were conducted to enhance training capability and better compliance within the organisation. These were focused on Prevention of Sexual Harassment Train and a Trainer workshop for HR Managers.

A talent framework was established to identify, nurture and retain top talent by the senior leadership. Individual development plans for the Top Talent were rolled out. Executives received training interventions for their specific identified learning and development needs.

The Oberoi Group Coaching and Mentorship Programmes were launched. Executives who are General Managers, Hotel Managers, Executive Assistant Managers and Rooms Division Managers were identified as Mentees and carefully matched to Mentors who are members of The Oberoi Group Mentors Club. The Mentors Club is a group of 7 leaders in the Company who have a long and successful track record, role modelling the culture of the organization and epitomizing Leadership qualities at The Oberoi Group. The Oberoi Group Coaching programme has been created to support first time department heads.

As on 31st March 2020, the number of people employed by the Group was 9,959.

The Board takes this opportunity to thank all employees for their unwavering commitment to guests and the organisation and for their dedication and co-operation.

For and on behalf of the Board
VIKRAM OBEROI RADHIKA HARIBHAKTI
Managing Director Chairperson, Audit Committee
New Delhi Mumbai
23rd June 2020 23rd June 2020