In New Delhi?s tony diplomatic enclave, the new 260-key Leela Palace stands tall and bright, a mark of opulence. But the luxury hotel chain?s balance sheet is a stark contrast ? bleak with a debt of R3,800 crore (at the end of last fiscal), around a third, or R1,100 crore, due to investments needed to build its R1,700-crore Delhi hotel, the country?s most expensive hotel property till date.
The burgeoning debt is dictating the future course of the group, with the Mumbai-based Hotel Leelaventure ? the company that runs Leela Palace and six other Leela properties in the country ? not planning to invest in any new hotels for the next five years. As chief financial officer Krishna Deshika confirms, ?We won?t be looking at any kind of capex (capital expenditure),? adding that the company intends to be asset-light, signing only management contracts for the next five years.
Other plans to reduce debt are afoot, too. The company is in talks with various merchant banks to raise R1,000 crore and is looking at selling a stake to a clutch of private equity players and also eyeing foreign currency convertible bonds (FCCBs). ?Of this R1,000 crore, at this point we can?t say how much of it will be through FCCBs and how much will be equity, though we have sought approval from our shareholders,? says Deshika. Vice-chairman Vivek Nair had earlier talked about selling a little less than a 15% stake. The promoter holding in the company is currently at 54.6%. Rival ITC, which runs ITC Hotels, has a 12.9% stake in Leelaventure.
It is also trying to reduce debt by raising R750 crore from the sale of its non-core assets. It will be selling 90% of the Leela IT Park (which has a saleable area of 272,000 square feet) in Chennai and will be leasing out the rest.
Currently, approval for conversion from an IT park to business park is awaited.
It will be monetising its land parcels in Pune and Hyderabad, too. In Pune, it has entered into a joint venture with Sky Realty Projects that will be developing high-end residential-cum-commercial units. This arrangement will help the company in getting half the revenue when the units are sold. For Hyderabad, too, it is in talks with potential real estate developers for a JV, confirms the CFO of the company. Industry analysts point out that considering the fact that there is an oversupply of hotel rooms in these markets, it is a logical step for Leela to utilise this land for residential development.
As per the NSE website, the company?s total debt in March 2008 ? accumulated as a consequence of aggressive expansion ? stood at R2,035.6 crore. By end of March 2009 it was at R2,449 crore and by March 2010 at R2,878 crore. The total debt on its books now is about R3,800 crore.
A Mumbai-based hotel analyst working for a brokerage firm says that looking at the steps the hotel chain is taking, it seems its debt might be reduced by about R2,500 crore in the next 15-18 months. A report by Centrum points out that the company’s Mumbai and Bangalore properties will be the key contributors to revenue. However, the cities have witnessed new supply, thus restricting growth in average room rates. The two cities contributed to over 60% of the company?s revenue in FY10.
Even after opening of the new properties, the share of revenue from these two cities would be around 44% by FY12. But a lot depends on the revenue earned by its exorbitant Delhi property. ?We don?t have any guidance for its room rates and revenues, but it will demand premium as compared to other luxury hotels in Delhi,? says Leela CFO Deshika.
The hotel chain currently owns and operates six hotels across the country? New Delhi, Mumbai, Bangalore, Goa, Kovalam and Udaipur. It also has another hotel at Gurgaon under management contract, owned by the Ambience Group. It?s total inventory is of 1,800 rooms. While Hotel Leelaventure is not the only hotel company reeling under high debt, analysts say it?s clearly the most stretched one. East India Hotels, which owns and operates Oberoi and Trident hotel brands, opted for the R1,178.86-crore rights issue to retire R900 crore debt in March and will have a healthier balance sheet this fiscal. Indian Hotel Company (IHCL), which operates Taj Hotels, too went for R850 crore preferential allotment of shares to its parent Tata Sons in December 2010 to retire debt. Though IHCL too has R3,250-crore debt on its books as of March, its revenues are three times of that of Leela.
Meanwhile, chairman of the Leela Hotels and Palaces, 89-year-old Captain Krishnan Nair has postponed his plan of retiring this month. Clearly, before he passes on the baton to his sons ? Vivek Nair, currently the vice-chairman, and Dinesh Nair, who is the joint MD ? the task at hand is to get the company debt light.
