Mumbai: Indian hotel chains are raising funds but prefering to use the cash to clean up their balance sheet and complete existing projects than draw new plans.

Indian Hotels, the Tata group firm that owns the Taj chain, and Oberoi brand owner EIH raised funds this month, while Hotel Leelaventure is on course to sell equity and a land parcel.

“Most of the funds they have raised or will raise will be used for debt reduction in the high interest rate scenario," said Rashesh Shah, an analyst with brokerage ICICI Securities.

Most Indian hoteliers have been struggling with mounting debt since the global slowdown of late 2008 that forced a reality check on the exuberance of previous years, when they bought land at astronomical prices and borrowed generously, hoping to recover money quickly in a booming economy.

The hotel industry has slowly recovered since, with occupancy and room rates improving, though still below the peak of 2007/08.

According to brokerage Sharekhan, occupancy rates for the current quarter is about 70-75% in metros against 76-81% the same quarter in FY08. Similarly, average room rates are about 15% lower now.

ICICI securities’ Shah said companies would start considering significant expansion only after occupancy and average room rates become really attractive and that is almost a year away.

“Overall demand is growing, but is still not healthy," he said.

Most hotel chains are therefore rationalizing and cleaning up their account books as interest rates soar in the time of high inflation.

“Right now the strategy for hotel companies is to finish projects that were on hold, rather than think of any greenfield projects," said Kaustubh Pawaskare, an analyst with brokerage Sharekhan.

EIH plans to use Rs900 crore of the total Rs1,178 crore raised through a rights issue to reduce its outstanding debt of Rs1,550 crore at December-end.

Hotel Leela is in talks with private equity investors to raise Rs600 crore to slash debt of about Rs3,800 crore rupees.

Indian Hotels unit Roots Corp that runs the Ginger brand of budget hotels has approved the sale of minority stake to raise up to Rs250 crore.

Shares in Indian Hotels, EIH and Leela have lost 20-34 percentage in value in six months.

Rate pressure; foreign connection

The Reserve Bank of India (RBI) raised interest rates earlier this month for the eighth time since last March, signalling to lenders funds needed to be scarce and expensive.

“Interest rates in India are among the highest in the world right now. And that is going to make life difficult for some of the potential projects that were out there," said Manav Thadani, managing director at hospitality consultancy, HVS India.

This, though would not significantly impact capacity addition in the short to medium-term, as some projects underway get completed and many international chains strengthen their presence, analysts say.

The sector is expected to see an incremental demand for 10,000 rooms over the five years to 2014/15, but will still lag supply pegged at 12,000 rooms over the same period, Ajay Dsouza, head of Crisil Research, said.

“We do not expect large investments in the hotel industry from what has already been planned," he said.

However, projects at attractive locations and in 2-3 stars category may still attract investors, said Rajiv Sahni, a partner who oversees transactions in the real estate and hospitality at Ernst &Young.

Besides major hotel chains, India has many realty firms and wealthy individuals owning bunch of properties they are happy to let out to be managed by professional chains.

This is where top international brands such as Marriott, Intercontinental Hotels and Starwood Hotels & Resorts benefit.

International chains, who have been expanding in India and prefer not to own properties and limit themselves to management contracts, get to partner these realty firms and wealthy individuals.

Sahni of Ernst &Young said an association with international chains could ease funding for Indian entrepreneurs.

“Even though we haven’t seen many private equity deals in the Indian hotel industry of late, there are many international funds which have enough cash and are comfortable investing in projects associated with bigger brands," Sahni said.