Build it and they will come: that high-on-optimism aphorism could well serve as the corporate philosophy of the Leela Group of hotels, as exemplified by the life of the legendary CP Krishnan Nair, the group’s founder.

Nair took to the hotel business only in his 60s, after having partnered his wife Leela in building a fabric export empire of some repute. Often, his hotel projects were driven by nothing more than blinding ambition and a penchant for extravagance that made no concessions to realistic considerations of capital and cash-flows –– and, on occasion, even the faintest bit of business sense.

And yet, by the sheer force of his personality and his gift for far-sightedness, Nair built great hospitality brands under the Leela marquee, all of which commanded premium rates.

Today, however, it requires optimism of a very high order for the Leela Group to emerge from the debt quagmire it has been dragged into in what is seen as the overreach of the past decade. And it no longer has the business acumen of Krishnan Nair to guide it; the founder passed away in 2014, aged 92.

The turn of the tide

The fortunes of the Leela Group’s hospitality business turned decisively against it during the global financial crisis of 2008. Vivek Nair, Chairman and MD of Hotel Leelaventure, recalled last year that the company’s “debt problem” could be traced to the global stock market crash of that year.

Leelaventure’s decision to ride the anticipated 2010 Commonwealth Games boom in Delhi by buying land too compounded the problem, recalls Vivek Nair.

Most hotel chains are, of course, financed through debt; across the industry, capital cost (primarily, interest and depreciation) account for arguably the biggest heads of accounts and directly impacts profitability.

But in Leelaventure’s case, it was overreach that piled up excessive debt, estimated at ₹4,500 crore.

SBI, the lead banker for Leelaventure, which has an exposure of almost ₹900 crore, has been trying to parcel off these loans to asset reconstruction companies (ARCs); JM Financial Asset Reconstruction has been picking up most of the loans.

“The banks have sold our loans to ARCs and they are working towards divesting some of our properties,” said Vivek Nair.

Longer gestation

Vivek Nair argues that the peculiarities of the hospitality business merited that it be given a bit more elbow room in the repayment of debt.

“Once the hospitality industry was given infrastructure status, we hoped the older stressed hotels would be given a longer horizon to repay the debt,” he argued. Instead, banks “are treating us as regular corporate borrowers with a maximum tenure of 8 to 10 years. This leaves us with just 4-5 years to repay the entire debt, which is impossible given the high project costs and the long gestation periods,” he adds.

For the newer properties, however, the build-up of debt has been relatively low; access to infrastructure companies such as IL&FS effectively lowered the interest cost, explains Nair.

Assets on the block

Last September, JM Financial Asset Reconstruction sold Leela’s Goa property for ₹725 crore to Ceres Hotels, a unit of MetTube, Malaysia.

Earlier, in 2011, Leela had sold its luxury hotel, Leela Kovalam in Kerala, for ₹500 crore to Travancore Enterprises. In 2013, its IT Park Building in Chennai was sold to Reliance Industries for ₹170 crore.

But even after losing some of its prime assets to retire a bit of its debt, the company's revenues from operations are inadequate to service the interest payment on its ₹ 4,500 crore debt.

Indicatively, in FY 2015, Leelaventure’s operating profit was ₹151 crore, while its interest cost stood at ₹197.5 crore.

Today its Chennai property is also up for sale as part of its strategy to restructure debt. The sale of the Chennai and Goa properties is expected to halve the company's debt to ₹2,500 crore.

Derisking the business

Interestingly, the company is planning to switch to an ‘asset light’ model under which it will manage hotels rather than own them.

It is a derisking model that hotel chains in the West –– from the Accors to the Starwoods to the Marriotts –– have embraced for long. But the trend is relatively new in India. Most of the Indian chains, from Oberoi, to Taj to Leela have tended to own their hotels, perhaps because they were particular about the brand equity.

Comes at a price

Industry watchers point out that this imposes a burden on hotel chains, already groaning under high borrowing costs and shorter loan tenures.

“Unlike in other countries, interest rates here are on the higher side –– 12-15 per cent –– and the repayment schedules are shorter,” observes Vijay Thacker, Director, Crowe Horwath, International, a consultancy firm.

“This makes it difficult for big Indian chains like Leela to create an asset. For the Leela Group, servicing this debt burden has become a challenge. But global chains do not believe in owing their hotels unlike the big Indian chains,’’ he adds.

Preserving the brand

But despite this wrenching debt restructuring process, including the sale of some of its premium properties, the Leela brand has not taken a beating, largely because it has bounced back by signing management contracts at both the properties it sold –– in Goa and Kovalam.

“Independent of its debt situation, the Leela Group always had plans to take the management route,” says Achin Khanna, Management Director, HVS, a hospitality consultancy. “To that extent the brand has been unaffected.”

All this represents a dramatic scaling back of the Group’s ambitions, which was particularly manifest in Krishnan Nair’s over-the-top extravagance. But changed circumstances merit changed responses. Leelaventure may yet soar again, but for now it has to hunker down and ride out the debt storm.

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