Forex loans raised by infrastructure and manufacturing companies can be used to retire rupee loans. Now, hotel companies too could do the same. This facility of replacing expensive rupee loans with cheap foreign exchange loans was extended to hotel companies as well.
Vivek Nair, vice chairman & MD, Hotel Leela, says that the company has plans to reduce debt by Rs 2,750 crore in near future and transaction of Leela Business Park in Chennai will be completed soon.
Below is the edited transcript of his interview to CNBC-TV18.
Q: Will you use the facility of replacing expensive rupee loan with forex loans that is now available?
A: Yes, we have been clamoring for this for last several years. We have been asking RBI to include infrastructure lending in the list. To a certain degree it was passed in March 1, Cabinet Committee on Infrastructure meeting but only hotels in the rural areas outside city limits of 10 lakh are benefitted. They are still working to extend it throughout the country because currently only 95 percent of the hotel projects are in infrastructure.
The benefit of being under infrastructure lending list is that one could replace existing rupee debt by ECBs. Hotels earn foreign exchange between 20-50 percent depending on the location because the food and beverages and other banquet income normally is in rupees.
We put forth that argument and even though the infrastructure lending list has not been extended throughout the country, thanks to the initiative that we have taken through our federation, the government has agreed to replace the rupee debt by foreign currency loans, which are at the lower level. We have a natural hedge that we earn in dollars so we can repay in dollars.
Q: How will you react to it for Hotel Leela itself? You have Rs 3,000 crore debt, immediately what are the plans?
A: A cap is placed that we can only avail ECBs to the extent of 50 percent of the last three years earnings, which is disappointing. All along we told them that do not apply to us because only 15-20 percent of the total debt exposure on books of an average hotel company whether it is Leela or any other would be covered under this and that does not make it meaningful. We are in talks with them to enhance the limit because the current ceiling only affects 20 percent and 80 percent continues in rupee debt.
The same applies to our company too, only 20 percent of our debt would be eligible under this present qualifier. However, I am sure we can convince them to make it meaningful to increase the criterion. So in our case, it will be around Rs 400-500 crore. I am sure we can convince the ministry of finance and RBI to change the criteria to make it more meaningful.
Q: With this facility, how much borrowing costs will fall and particularly for Hotel Leela, you received approval for corporate debt restructuring (CDR) in October-September, would this facility be applicable to you at present or would it only be after your CDR is over etc?
A: We can always go back to the consortium and tell them what the government has made available to us. As long as we can demonstrate that, whatever we are eligible for is much lower interest cost than what the consortium has agreed to give us, then I am sure we will be able to convince them.
However, we should increase the quantum by having the government change the criteria and then go back to them. This is the case with at least 8-9 other companies in the hotel sector that have undertaken CDR primarily because the rupee loans given by institutions and banks are for only 8-10 years. It takes one year to get the permissions, three years to construct and it is impossible to have a capital intensive projects that will repay the entire loans in five years.
Q: How much will you be able to reduce the interest costs for FY14? Considering that you also were looking to selloff some of your land near the Mumbai project, in some given all the initiatives that you have outlined so far how much might your interest burden go down by?
A: Immediately, we are about to complete the transaction for our Leela Business Park in Chennai worth around Rs 175 crore followed by a joint venture development with Prestige and with another firm in Pune.
We have land in Hyderabad, Agra and Asthamudi. In Agra and Asthamudi, we are setting up projects with co-investors, but all the non-core assets which I mentioned will bring down debt by Rs 750 crore.
We have already realized Rs 500 crore by spinning off Kovalam property into a Special Purpose Vehicle (SPV), where our name continues and we have a long-term admin contract.
If you look at the business plans of most of the hotels like Hyatt and Marriott around the world, they have one or two marquee properties and the rest are operated by them through management contracts, they do not even have stake holding. We plan to keep 26-30 percent stake in the projects which we will disinvest and we hope to reduce debt by Rs 2,700 crore in near future through this process.
Q: There was an approval of fund raising of around Rs 1,100 crore which was approved and then the promoters themselves had to bring in around Rs 200 crore. Can you highlight these two parameters? Where does the fundraising stand at and where is the promoter infusion?
A: The promoters already brought Rs 100 crore which they were supposed to bring in by March 2013 and we also plan to bring in the balance Rs 100 crore as per our commitment to the consortium. Around Rs 1,100 crore should come in the next five years as and when the market improves. Market is improving a bit but we are not sure whether international market is right now ready to accept Qualified Institutional Placements (QIPs) or right issues. So once money is bought through other methods like disinvestments of non-core assets, debt would come down to about Rs 2,750 crore and then we could wait for some more time before the market improves for QIPs, Foreign Currency Convertible Bonds (FCCBs) or rights issues. But we are on plan.
Q: For the first six months how do you expect Average Room Rents (ARRs) to move? How do you expect occupancies to pan out? You would have some forward booking ideas?
A: The industry as a whole has not seen a recovery due to the impact of business sentiment. Even areas like Rajasthan, the Golden Triangle which historically did well have not done as well as expected due to euro crisis in Europe and weak recovery in the US. But on the other hand, our coastal resorts in Goa and Kerala are doing extremely well because foreign tourists are unable to travel to Egypt due to civil disturbance.
Currently, there is requirement of 20,000 rooms but infortunately we cannot cater them due to lack of rooms. So, the government has appointed a high-level committee to commission those rooms in India soon.
The business from the Commonwealth of Independent States (CIS), European and the British tour operators is moving to Malaysia and China who can put up hotels in 18-20 months. So that is a great opportunity we have to increase our foreign tourist rivals. So I would say a mixed bag for the whole country. Good in resorts, but challenge in the business hotels.