The Leela's new gamble: Will it succeed?

Capt C P Krishnan Nair, 90, has been a trailblazer of sorts in the hotels business. His bold moves have almost always paid off.

When no self-respecting Mumbai hotelier would think of any place other than the downtown areas, he opened The Leela Kempinski near the airport. By the time others acknowledged that he had got it right, Capt Nair had had a free run of almost a decade.

Again in Bangalore, when nobody dared to charge more than Rs 7,000 a night, he moved in with double the price and, to the surprise of rivals, pulled it off.

His beach property in Goa was another gamble. While all the tourists congregated at north Goa, his hotel was in the south.

"I am always original," Capt Nair had told Business Standard a year ago. "When I set up (the resort) in Goa, nobody came there because it wasn't popular. I had a campaign that the last man who walked on this beach was Vasco da Gama. Don't you want to be there? I got a thousand enquiries on the first day. I sold out the resort in one campaign."

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The biggest gamble came last year when Hotel Leelaventure inaugurated the Leela Palace in Chanakyapuri, New Delhi's diplomatic enclave. The hotel has 260 rooms and suites and cost the company Rs 1,700 crore.

At Rs 6.53 crore per room, this is the most expensive hotel ever built in India. Henceforth, it will be a less risky strategy.

The company has decided to switch to an asset-light strategy. This is the strategy leading hotel chains of the world have started to follow.

They lend their brand names to hotels and also run them. The owner of the property gets a cut of the profits. So, top hotels around the world have come to be owned by real estate developers and other investors, though these are run by hotel chains.

Hotel Leelaventure's long-term strategy is to own certain trophy assets and do management contracts and branding for the rest of its properties. In an earlier conversation, Vivek Nair, vice-chairman and managing director of the Leela group, had said: "Our next cycle of growth is through management contracts."

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In Hotel Leelaventure's case, the shift in strategy seems to have been caused by the huge debt of Rs 4,300 crore on its balance sheet. The company wants to bring it down to manageable limits by next year.

To start with, it plans to hive off its non-core assets, mainly land banks in various parts of the country, to raise money.

The company is planning to make Rs 700 crore by selling land parcels in Hyderabad, Pune, Bangalore and also a business park in Chennai. The company has already sold its Kovalam property for Rs 500 crore. According to people in the know, Hotel Leelaventure is scouting for buyers for its Chennai and New Delhi properties too.

"A leading foreign luxury hotel has shown interest in the Leela Palace, New Delhi, and it has come closest to the asking price of Rs 2,000 crore," says a senior executive close to the development who does not wish to be named. The company, on its part, did not respond to a query on this issue.

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Debt burden

The Chennai hotel is ready, and the company is planning to open the sea-facing 11 floor, 326-room hotel very soon.

"Leela over the years has established itself as a credible upscale brand. Most luxury hotels across the world are not serious cash cows but over a period they do generate good assets. They have built some really good properties and there will be a fair number of buyers if they decide to sell," says Chintan Patel, director (real estate and hospitality), Ernst & Young.

Apart from sale of assets, the corporate debt restructuring of Hotel Leelaventure involves a moratorium on the payment of principal and interest on loans worth Rs 3,000 crore. In return, the promoters of the company, the Nair family, will have to infuse equity of Rs 200 crore.

There is also a plan to bring in an additional amount of around Rs 2,000 crore through qualified institutional placement or foreign currency convertible bonds. But that will depend on how much the Nair family is willing to dilute its stake of around 60 per cent in the hotel.

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The ITC group, the tobacco, paper, FMCG, lifestyle and hotels conglomerate, along with its wholly-owned subsidiary Russell Credit, owns close to 13 per cent of the company. During the April-June quarter, Russell Credit had picked up another 1.1 per cent in the company.

Last year, Hotel Leelaventure had indicated that in case of any hostile takeover attempt from ITC, it could approach Mukesh Ambani to act as a white knight. "There is a lot of value in Leela's underlying assets which people might be interested in. Besides, Leela has capable partners, in case (they are) needed," Patel adds.

For the moment, the threat seems to have receded. Earlier, under the takeover code of the Securities & Exchange Board of India, ITC would have had to make an open offer for another 20 per cent to the shareholders of Hotel Leelaventure the moment its stake hit 15 per cent. Now, that threshold has been raised to 25 per cent by the stock market regulator.

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Debt restructuring aside, Leela is moving ahead with its expansion plans, although this time it is only limiting itself to signing management agreements with the developers.

The company is coming up with its ninth property in Noida through a management contract agreement with real estate developer Supertech.

The 250-room luxury property is expected to be ready by 2016 at an investment of Rs 450 crore (Rs 4.5 billion). The hotel is part of the mixed-use project called Supernova with an overall investment of Rs 2,700 crore (Rs 27 billion).

The hospitality company is also launching Leela residences in partnership with Supertech to provide luxury service apartments.

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Risks ahead

Compared to its peers like Taj which has the largest presence in the country and Oberoi which is a much older brand, Leela sits differently.

"It has not been smart with its money. A hotel has to justify its cost by revenue which has not happened in case of the Chanakyapuri property, for instance," a sector analyst says.

Experts also point out that in these times of growing competition from domestic and international brands, Hotel
Leelaventure has not been able to make its international foray.

However, within India, the company is going to tie up with private equity investors to develop hotels in Agra and Lake Ashtamudi in Kerala where it owns land banks. It is also opening hotels in Jaipur and Bangalore.

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By 2016, the company would have over 3,000 rooms in its portfolio. Currently, it has around 2,200 rooms across eight hotels in Bangalore, Gurgaon, Mumbai, New Delhi, Chennai, Goa, Kovalam and Udaipur.

Of these, two follow the management contract model.

In a scenario where hotel room supply is pacing ahead of demand and the economy's outlook is not at its brightest, industry experts point out that Hotel Leelaventure would do best to take measures to control costs and add to its bottom-line in addition to planning its debt.