Leela Palaces has filed for an initial public offering (IPO) worth ₹5,000 crore on 20 September. This will add to the luxury hotel stocks available to investors, alongside India Hotels Company (which runs the Taj brand) and EIH, which owns the Oberoi hotels.
According to Kaustabh Pawaskar, deputy vice president of research at Sharekhan by BNP Paribas, “The hotel industry expects room demand to grow by around 10% while supply will increase by 6-7% over the next three to four years. This should keep occupancy rates high and support a steady growth in room rates.”
Experts predict strong interest in Leela’s IPO, which will be the largest in the hospitality sector so far. The IPO will include a fresh issue of shares worth ₹3,000 crore and an offer for sale of ₹2,000 crore from Brookfield Asset Management, the company’s promoter.
Prashant Biyani, vice president of institutional equity research at Elara Capital, noted that “Leela has a strong luxury brand and Brookfield’s backing. The markets are positive, and there’s high demand in the industry right now, so there shouldn’t be any concerns about its IPO.”
Other Hotel Companies Are Thriving Too
Other hotel chains are also benefiting from the growing market. Ventive Hospitality recently announced an IPO worth at least ₹2,000 crore, while Juniper Hotels and Apeejay Surrendra Park Hotels went public in February. However, both Juniper and Apeejay have seen their shares drop by around 13% since their listings.
Investors have shown strong interest in premium hotel companies since the tourism boom following the pandemic, which has coincided with a rise in luxury spending in India. Over the past year, large companies like India Hotels Company (IHC) and EIH have delivered an average return of 72%, compared to about 53% for the Nifty India Consumption Index.
Comparing Leela and Oberoi
Leela currently operates 12 hotels with 3,382 rooms, falling behind EIH, which has 30 hotels under the Oberoi and Trident brands and 4,269 rooms as of FY24. Although neither company expanded its portfolio in the past fiscal year, both have maintained high occupancy levels.
EIH’s occupancy rate was around 74-75% during FY23-FY24, while Leela’s rose by 3% year-on-year to 63% in FY24. The average industry occupancy rate was about 75% during this time. Due to its lower occupancy and smaller size, Leela generated ₹1,172 crore in revenue in FY24, which is less than EIH’s ₹2,511 crore.
While Leela has a good brand reputation, it is not as strong as that of Taj or Oberoi in the luxury market. A fund manager explained that Leela’s smaller and less diverse portfolio makes it more vulnerable to the tourism industry’s seasonal fluctuations. However, Leela’s service quality matches that of its competitors, as seen in its average room rates and profitability margins.
In FY24, Leela’s average room rate was ₹15,213, similar to IHC but almost ₹1,500 less than EIH. Leela also had the highest earnings before interest, taxes, depreciation, and amortisation (EBITDA) margin in the industry, at nearly 50%, indicating better profit generation compared to its rivals.
Debt Challenges
Despite its strengths, Leela reported a net loss of ₹2 crore in FY24 due to interest payments on its loans. In contrast, EIH posted a net profit of ₹678 crore.
Unlike IHC and EIH, which have no debt, Leela has been struggling with a heavy debt load since FY14. The company borrowed ₹5,000 crore to develop new hotels instead of operating under management contracts. After a failed debt restructuring, Leela was taken to insolvency court in 2019, and Brookfield stepped in to rescue it, acquiring four of its five key hotel assets for ₹3,950 crore. This changed Leela’s business model from owning hotels to managing them.
Since then, Leela has reduced its debt to ₹3,775 crore in FY24 and plans to pay off ₹2,700 crore of this with the IPO proceeds. The remaining funds will be used for general business purposes.
A Bright Future for Luxury Tourism
Experts believe Brookfield will help improve Leela’s situation soon. Since the acquisition, Leela has reduced its losses by an impressive 92% annually from FY22 to FY24.
While Brookfield remains a key stakeholder, some concerns exist about the amount of shares that may be sold once Leela goes public. Nevertheless, experts think the strong demand in India’s tourism industry will keep interest high for hotel stocks in the near future. Pawaskar noted that the willingness to pay a premium for unique experiences and wellness will drive demand for luxury and premium rooms in the coming years.
Leela aims to capitalise on this trend by planning to open eight new hotels with about 833 rooms by 2028. This includes modern palace hotels in Agra and Srinagar, resorts in Ranthambore and Bandhavgarh, a hotel in Hyderabad, and serviced apartments near Mumbai’s international airport. Earlier in 2024, Leela announced a joint venture to develop a modern palace hotel in Ayodhya with real estate developer Abhinandan Lodha Group.
Room for Growth
The entire premium hotel sector is expanding. EIH plans to add 50 more hotels with 4,500 rooms by FY30. An IDBI Capital report highlighted that 2,706 new rooms were added in the upscale and premium segment in the first half of this year, with 994 rooms (37%) in the upscale category and the remaining 63% classified as premium.
These factors suggest that luxury tourism in India is still in its early stages and has significant room for growth. Companies like IHC, EIH, and Leela are well-positioned to benefit from this trend.
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