 "Why Hotel Leela is thinking big and bold")
In what could be seen as a bold move, Hotel Leela is planning to retire around one third of its Rs 3,800-crore debt burden despite poor market conditions. Since the market cap of the company has nosedived to Rs 1,580 crore from Rs 2,555 crore in 2007, the company is in a sticky wicket and the only way out is to reduce its debt.
Hotel Leela, which is confident of retiring debt worth Rs 1,000 crore, is talking to private equity investors to raise up to Rs 450 crore to help reduce its debt burden over the next three months, said a company official.
It is also planning to raise up to Rs 900 crore through a qualified institutional placement- where a company can raise money without submitting a pre-issue filing with the market regulator - or foreign currency convertible bonds (QIP/FCCB) route. The company has hired Morgan Stanley as a merchant banker for the placement.
Apart from the equity infusion, the company also plans to raise Rs 850 crore by selling non-core assets over a three-year period. The company has some non-core real estate assets in Pune, Bangalore and Hyderabad. The company official said that the Hotel Leela could look at selling the property by developing it into commercial or residential apartments.
[caption id=“attachment_34601” align=“alignleft” width=“380” caption=“In order to fund its expansion, the company raised loans aggregating to Rs 3,800 crore over the past four years.Photo : Glen Mac Larty/Flickr”]  [/caption]In order to fund its expansion, the company raised loans aggregating to Rs 3,800 crore over the past four years. The company’s debt to equity ratio stood at 3.8 times compared to its peers EIH (1.08 times) and Indian Hotels (1.44 times). Such high leverage could dampen investor sentiments and keep them wary of the scrip’s potential.
Impact Shorts
More ShortsThe share price fell 17 percent over the past one year. Restructuring hopes have made the share price outperform EIH, which is down 29 percent and Indian Hotels, down 26 percent.
Rising room rates led Hotel Leela to expand its operations across other cities. While it is setting up a 329-room hotel in Chennai, it is also expanding its Goa property by constructing another 20 rooms. On completion, the number of rooms will increase to 2,218 from 1,869.
For the year ended March 2011, the company’s interest-cost more than doubled owing to loans taken to fund its expansion plans. Hence, its net income declined by 7.8 percent to Rs37.8 crore.
During FY11-13, revenues are expected to increase owing to the commissioning of its hotels, higher room rates and increase in foreign tourist arrivals (FTA). However, net profit could be under pressure owing to higher depreciation expenses and interest outgo, said a sectoral analyst.
Incorporated in 1981 in collaboration with Penta Hotels, UK, this Rs 1,580 crore 5-star hotel company has come a long way. It set up its first hotel, Leela Kempinski, in collaboration with Kempiniski Group in Bombay in 1986 . Since then, it has expanded to a pan-Indian footprint. Today, it operates six hotels located in Mumbai, Bangalore, Goa, Kerala, Udaipur and New Delhi and has also entered into a contract with the ‘Ambience’ group to mange a property at Gurgaon.
If you are shareholders or retail investors looking to pick your stock look out for the following
• Co to focus on reducing debt by raising funds through equity and hiving off its non-core assets.
• Chennai hotel to be operational by December 2011
• Co plans to open up hotels at Agra and Ashtamudi (Kerala)
• Co has differed its plan of setting up 3-star hotels in tier II cities
• Indian travel & tourism sector to increase at a CAGR (compounded annual growth rate) of 14.4 percent during 2010-2012
Private equity players / bankers /consultants watch out for:
• Company is planning to sell off surplus land at Bangalore, Pune and Hyderabad
• ITC has an 8.26 percent stake in the company
• It is planning to follow the asset light model
• Cash in hand is Rs 57 crore
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