Pressed by debt, hoteliers scout for contracts

Weighed down by huge debts on their books, three of India's biggest hospitality brands, Taj, Oberoi and Leela, are moving away from funding new properties and are relying on management contracts for adding new hotels instead.

The three companies, after witnessing the increased presence of international hotel companies over the last few years, are making very little or no fresh investments in building hotels under their own brands.

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Collectively, the books of Indian Hotels Company (owner of Taj Hotels), EIH (owner of Oberoi and Trident Hotels) and Hotel Leelaventure (owner of Leela Hotels), currently account for about Rs 8,100 crore (Rs 81 billion) of debt.

This has forced the companies to scout for management contracts with developers, a process involving negligible investment but guaranteed returns or share in profits, thus making their business less vulnerable to cyclical downturns.

The Tata Group-promoted Indian Hotels Company, the country's biggest hotel chain, is adding 27 new properties under four different brands over the next two years. However, only three properties are funded by it.

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Anil Goel, executive director (finance), IHCL, said, "IHCL has closed the financing of the three hotels that we are directly funding, and the balance properties coming up under management contracts over the next two-three years have also secured their project funding through the asset owners.

At the moment, the focus continues to be funding ongoing capital commitments only through fresh internal accruals and not allowing debt to increase."

IHCL's current debt stands at Rs 3,250 crore (Rs 32.5 billion).

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Similarly, Kolkata-based EIH, which runs luxury and business hotels under the brands Oberoi Hotels and Resorts, would add five new properties over the next three-four years, primarily under the management banner.

"Going ahead, the growth would primarily come from management contracts and this model is the priority for the group.

"We are in the process of opening five new properties, which would be primarily management contracts, along with some equity", said Oberoi Group chief planning officer and joint managing director Arjun Oberoi at the opening of its hotel in Gurgaon.

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The Nair family-promoted Leela Palaces, hotels and resorts have switched to the management module from the asset-owing one as a result of their burgeoning debt burden of Rs 3,800 crore (Rs 38 billion).

The Mumbai-based company spent Rs 1,800 crore (Rs 18 billion) in building a luxury hotel in the heart of New Delhi and this added to the company's debt burden.

All the three companies are either raising funds or have partially achieved their fund raising plans through sale of stake in the company.

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While IHCL received Rs 500 crore (Rs 5 billion) through preferential allotment of shares to its promoters Tata Sons and is due to get additional Rs 373 crore (Rs 3.73 billion) by June next year, EIH would use over 76 per cent of the proceeds, or Rs 900 crore (Rs 9 billion), it raised through the issue of rights shares towards retiring debt.

Leela Hotels too, is raising Rs 1,950 crore (Rs 19.5 billion) through the sale of equity, assets and foreign currency bonds.

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The amount thus raised would be primarily used to reduce debt. C P Krishnan Nair, chairman, Hotel Leelaventure, said, "The expansion for Leela Hotels would be through management contracts. We are not making further investments for new hotels."

Leela would raise about Rs 950 crore (Rs 9.5 billion) through sales of non-core assets.

Rs 400 crore (Rs 4 billion) would be raised through foreign currency convertible bonds and the remainder, through the sale of stake to private equity players.

 Through this, the company hopes to bring down the debt equity ratio to 1.5 from 3.89 recorded in March.