Leelaventure to expand via management contract route

The Indian hospitality sector has been reeling under the effect of the economic downturn in Europe and in the US as well as the economic slowdown domestically. Costs have gone up while occupancy levels haven’t.

Debt-laden hospitality company Hotel Leelaventure has begun charting a turnaround. As part of its strategy to pare its debt of around Rs 4,750 crore, the company plans to sell many of its non-core assets and enter into management contracts for its hotel projects.

The company sold its IT park in Chennai last fortnight for Rs 170 crore to Reliance Industries Ltd. The group had earlier sold its luxury hotel Leela Kovalam to Travancore Enterprises, owned by B. Ravindran Pillai, for Rs 500 crore, but had continued to manage the five-star property with its own-brand name.

Vivek Nair, Chairman and Managing Director of Hotel Leelaventure, spoke to Business Line about the future plans of the hospitality group.

What has been the impact of the slowdown on the sector?

During the boom phase between 2006 and 2008, we had around 6,000 rooms being added in a year. Now, we have 20,000 rooms coming in. But because it is coming up at a time when there is a global economic downturn, there is a demand-supply imbalance. Like for instance, in Delhi, after the Asian Games, eight or nine hotels sprung up. And thus, occupancy levels came down to 50 per cent.

The city once saw 80 per cent occupancy levels. But the occupancy levels came back to 70 per cent in two years’ time. We expect that trend to continue. In the long-term, there should be a correction.

Every room which is unsold is like an airline seat. Now, the hotels are trying to keep the occupancy levels high at the expense of the room rates till the market picks up. At the macro level, rate of demand is less than the rate of supply.

For instance, in Bangalore during the last two years, the rate of growth of supply has been 38 per cent. But the rate of growth of demand has been only 19 per cent in the five-star hotel category.

For The Leela, the average room rate (ARR) in 2008 in Bangalore was Rs 20,000 which has now come down to Rs 12,000. In Goa, the quantum of fresh supply of rooms has been restricted compared to other places. And this has helped us to remain the market leaders there.

In Goa, we renovated the hotel in the last one year. Our occupancy levels in Goa are 72 per cent at an ARR of Rs 14,000 for the whole year. In Kovalam, our occupancy levels are little less than 70 per cent at ARR of Rs 9,000.

How is the Corporate Debt Restructuring (CDR) progressing?

CDR is well on track. We have put road maps for attaining the goals. These included disinvestments from our non-core assets. We had sold the commercial building (IT Park) next to our Chennai hotel to Reliance Industries Ltd for Rs 170 crore recently. We are selling plots of lands in Hyderabad and Pune. In Pune, we have a joint venture with a local developer for a residential complex. We are expecting Rs 150 crore from this development.

We will get another Rs 150 crore from the joint development for a residential development with Prestige Estates in Bangalore. Also, we will be raising Rs 1,000 crore through QIP or FCCB when the market improves.

What are your expansion plans in India?

Our next cycle of expansion will be through management contracts. We want to grow the Leela Palace brand as much as possible. Right now, we have eight properties, out of which Gurgaon and Kovalam are managed by us.

Going forward, we have inked the management contract for our Noida hotel with Supertech Real Estate Developer. This will be a 250-room hotel. Our hotel in Jaipur will also be under management contract while the hotel in Agra will be through a joint venture. In the case of the management contract, 100 per cent ownership is with the developer and in a joint venture, we have a stake in the project.

Our Delhi property is, however, 100 per cent owned and we don’t plan to go the management contract route for that. We are building a second hotel in Bangalore (235-room) strategically closer to the airport. This will be under management contract with the Bharatiya Group. We recently opened our 326-room Chennai hotel, which is the only sea-facing luxury hotel in the city. We have opened Udaipur in 2009, Delhi in 2011, and Chennai in 2013.

You were evaluating options of entering into the entry-level five-star category. What is the progress?

We are still formulating the plan. We will have an announcement on that once we sign the first deal. We perceive a demand for that segment which will have much lower room rates. For this segment, we are exploring through the management contract route.

Why haven’t you spread your footprint overseas? Any plans for overseas expansion?

We plan to go abroad. But we want to consolidate our position in India first. The gross operating profit margins in India are at least 30 to 40 per cent higher than abroad. And the market is so buoyant here. People are asking us to look at projects abroad. But our aim was to cover the entire country by spreading our presence in the major metro cities.

What is the group’s hiring strategy?

Staff attrition ratio is climbing and is above 25 per cent. There is a paucity of talent and it is a very porous arena. People keep crossing from one brand to another. It is a bit of a revolving door. But, we have our own training schools and customised training modules. Majority of the development of talent is done in-house.

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