A Case Of Too Much Too Late

Early last year, when M S Shoes promoter Pawan Sachdeva quoted Rs 64 crore for the Andrews Ganj complex in south Delhi, many thought the price was much too high. In December 1996, the bid was finally won by Hotel Leelaventure Ltd through its newly formed subsidiary Leela Hotels and Convention Centre Ltd at an enormous sum of Rs 201 crore. Not just the price, even the Housing and Development Corporation (Hudco) site which is closer to the shopping arena than the business district, was considered unsuitable for a five-star hotel.

Ten years, two properties and a few controversies later, Leela is finally expanding. Plans include a 450-room hotel at the Hudco site, a 250-room abode overlooking the golf course in Bangalore and another one in Mumbai. Backing the project is a tie-up with the Canadian hotel chain, Four Seasons. The viability of the project, with an investment of Rs 500 crore, is questionable.

 

Take, for instance, the Delhi project. Plans for the hotel are being chalked out, says C P Krishnan Nair, the flamboyant chairman of Hotel Leelaventure Ltd. Though Hudco is going to benefit from such a high bid, Leela may find it difficult to make profits from this project because of the heavy investments in land alone. Apart from the Rs 201 crore, Leela will have to pay Hudco Rs 16.85 crore as a fixed price for constructing the basement, apart from the construction and financing costs of the hotel.

Hotel analysts, however, feel that with real estate prices crashing, Rs 201 crore for the Andrews Ganj complex is not the best of investments. We have worked out our finances, says Nair confidently.

Moreover, Delhi with nearly nine five star hotels is a questionable option. Theres The Oberoi, Oberoi Maiden, The Taj Palace, The Taj Mansingh, Le Meridian, Hilton, Hyatt Regency, Maurya Sheraton and now the Park Royale. Further, with the economy becoming more decentralised, Delhi is increasingly losing its value as a political decision making state. Given these factors, the viability of Leelas expansion into Delhi is, again, debatable.

This project apart, Hotel Leelaventure Ltd, which currently has two properties Leela Kempinski and The Leela Beach, Goa has had several plans to expand its reach. In November 1996, it tied up with Canada-based Four Seasons Hotels and Resorts to manage and operate three properties. These include the renovated Leela Beach, Goa; and the new properties in Mumbai and Bangalore.

Among its immediate plans are Four Seasons-The Leela Palace at Bangalore, spread across seven acres of land. But the Leela Palace Mumbai, which is to be located next to The Leela Kempinski, a stones throw from Mumbais Sahar International Airport, has run into trouble. It is alleged that Leela illegally acquired 300 acres of land from the International Airports Authority of India (IAAI), resulting in a loss of about Rs 1000 crore to the IAAI. The CBI was brought in to probe into alleged irregularities, and though the CBI has not been able to trace any irregularities so far, the stay order is yet to be lifted.

But Nair continues to be optimistic. He claims that there is a strong business lobby working against him. How can they accuse of me usurping 300 acres of government land, when all I needed was about four acres of land in total, including one acre of my own land, to build the new hotel? he asks. The Mumbai project, which was supposed to begin operations by early 1999, even before the the inauguration of the Bangalore project scheduled for end 1999, now seems a distant dream. The Mumbai and the Bangalore projects will together require a capital of Rs 425 crore.

Leelas expansion plans have been in the pipeline for several years. Nair, however, dismisses the argument that the plans have taken a long time getting off the ground, saying that 10 years is a very short time compared to the 70-odd years other hotel majors have taken to be where they are today.

Even so, Leela has failed to capitalise on the boom of the early nineties which saw multinationals explore and make inroads into India. Soon after the liberalisation process was initiated, the first wave of foreigners came here for a working knowledge of the lay of the land. Now, those who plan to pursue business here are more likely to look for office space and accommodation which is more permanent in nature. Moreover, the upsurge in business tourist arrivals in those years is unlikely to be repeated again. Growth is likely to be incremental. This might work against Leela which needs to expand rapidly to keep a healthy bottomline.

Hotel Leelas performance was affected in the first half of 1996-97. Though its income had grown in absolute terms to Rs 57 crore compared to the Rs 50 crore for the corresponding period in 1995-96, the growth rate fell from 42 per cent to 14 per cent.

One of the reasons for this slowdown has been the inability of the hotel to sustain high occupancy levels. Also, a slowdown in business/tourist inflow has deterred the hotels from jacking up room tariffs. Nair ascribes the slowdown in growth to political uncertainties and the wait-and-watch attitude of multinationals.

That may be true, but the big question is whether the hotel industry is well past its peak. Other five-star hotels have also reported declining growth rates. East India Hotels, for instance, registered a moderate 18 per cent growth compared to the 47 per cent jump in the corresponding six months the previous year.

Leela, however, has the best margins in the industry. The groups operating margins were 47.43 per cent compared with 37 per cent of EI Hotels. So, effectively, Leela is a high margin company in an industry where the growth rate is declining. Under the circumstances, it is imperative to understand the viability of the proposed expansion projects.

Consider the Bangalore project. Bangalore, which was till some time ago the ideal destination for most software multinationals, is no longer reckoned a businessmans paradise. With six to seven hour power cuts daily and terrible road conditions, multinationals are now looking to Hyderabad as an alternative destination. And with all the major chains like the Taj and the Oberoi already present in the garden city, The Leela Palace Bangalore might just be a wee bit too late, feel industry analysts.

Moreover, the huge investments required for the project will eat into the margins of the group, and given a long break-even time, the gap between income and expenditure might well eat into the companys profits. Posing further problems will be ITC, with major plans to set up a series of budget hotels in Bangalore.

The projects in Bangalore, Mumbai and Goa, where The Goa Beach Resort is undergoing renovation, will require investments to the tune of Rs 500 crore. With such huge investments to be made, how will Leela finance its projects?

Earlier, the company had spelled out plans to raise around Rs 200 crore through a $50 million GDR issue and about Rs 150 crore through private placement of non-convertible debentures. A sum of Rs 100 crore was to be contributed through internal accruals. The rest was to be funded by term loans. But with the recent credit policy pruning interest rates, the company is unlikely to go in for a GDR issue. Nair is not forthcoming on the issue and only ventures to say that he is confident of raising the money through term lendings and internal resources.

The proposed projects will make Leelaventure, which was so long confined to the western region, emerge as a group with a nationwide presence. You must have the spirit to excel and the will to create a new dawn and then nothing is impossible. Within a short span of 10 years, our group has shown tremendous business progress and earned itself an excellent reputation among Indian corporates. What have the so-called professionally-managed groups achieved that we havent? asks Nair. It may be a long haul for Leela, but Nair is confident that his group can stand up to other established hotel chains.

Within a short span of 10 years, our group has shown tremendous business progress and earned itself an excellent reputation among Indian corporates. G P Krishnan Nair, chairman, Hotel Leelaventure Ltd