Debt reduction key to profit growth for Hotel Leelaventure

Debt reduction key to profit growth for Hotel Leelaventure

Hotel Leelaventure Ltd (Leela) has been trying to improve its balance sheet for some time now. Despite an improved operating performance, the luxury hotel chain’s high debt burden and the resultant interest costs have weighed down profits in the past few quarters.

Also See | Debt Burden (PDF)

For example, in the December quarter, while revenue grew by about 11% year-on-year, its net profit fell by 25%, as interest costs quadrupled. The high interest cost is due to the loans availed of by the firm over the last couple of years to fund its new properties at Udaipur, Delhi and Chennai, and to purchase land in Agra, Bangalore, Hyderabad and Pune.

Although this capital expenditure will take up the number of rooms from about 1,200 in fiscal 2010 to 1,800 in fiscal 2012, it has also raised the company’s debt burden from Rs2,800 crore in fiscal 2010 to the present level of Rs3,600 crore. Interest cost as a percentage of sales has increased from 5.4% in the June quarter to 14.3% in the December quarter.

To tackle the debt problem, Leela has decided to sell a part of its commercial property in Chennai and raise about Rs350 crore. Further, the management is scouting for joint development opportunities for its properties at Bangalore and Hyderabad with a view to monetizing assets and improve cash flows. The company has stated that it is confident of raising around Rs950 crore through these measures, which would be used to repay debt.

However, some analysts state that while the Chennai property sale could bring some relief in the first half of fiscal 2011, the positive effect of the other measures could be spread over 12-15 months. Leela also plans to issue fresh equity shares to investors and dilute its equity base by about 15%. At the current price, this should help the firm raise about Rs275 crore.

Meanwhile, its occupancy rates improved to 71% in the December quarter, from about 65% at the beginning of the year. Average room rates, too, have improved by 15% during the period. A report by Angel Broking Ltd estimates that revenue and operating profit will grow at a compounded annual rate of 38% and 64%, respectively, between fiscal 2010 and 2012. How much of that actually trickles down to its net profit hinges on the actual pace of debt reduction.

Graphic by Naveen Kumar Sani /Mint

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